Centrepoint Alliance Limited (CAF) Earnings Call Transcript & Summary

We've got Centrepoint Alliance, CEO, John Shuttleworth; and CFO, Brendon Glass. I'll pass you across in a moment to John, who will kick off our discussion of the company's full year results. We'll have a presentation from John and Brendon today, followed by an opportunity for Q&A. [Operator Instructions] So to kick things off, I will now hand over to Centrepoint Alliance CEO, John Shuttleworth. Go ahead, John.

Yes. Thanks, Tim, and good morning, everyone, and thanks for joining us on this call. I was reflecting just prior to dialing in, it was 12 months ago that we held our 2021 annual results, and at that meeting we announced the proposal to acquire Centrepoint Alliance -- sorry, not to Centrepoint Alliance, acquire ClearView's Advice business as part of Centrepoint Alliance and which we completed in November at the AGM. And I think when we present these results, what you'll see is a business that has certainly transformed as a result of that acquisition, that's got really good growth and really good momentum. What we're going to do today, I'm going to run through some of the business results and strategy and just give you a bit of a sense of how we're thinking about the business on top of the results. Brendon is going to run through the financial outcomes. And then I'm going to sweep up at the end and just talk about how we are seeing the business in the momentum in our 2023 outlook. So firstly, just on the results. Look, it's really been a transformational year. We've had strong earnings and profit growth. We've just completed the ClearView Advice acquisition and efficiently integrated it. The acquisition have delivered really good revenue growth and cost synergies. On top of that, we're very proud that we've had strong licensed adviser growth. So we've acquired the business that would help net adviser growth. The self-licensed business has also performed well. And we're going to talk a bit about Lending Solutions and run you through new service that we're launching into the network, because this has been an area that we think has got incredible potential. And we've also started to restructure the asset management business with the sale of the Ventura Funds and are focused on managed accounts. So by and large, it's been a busy year with some really good results. In terms of what that's done, gross revenue $228.5 million, up 64% on prior year. EBITDA $7.2 million, and that's EBITDA, excluding legacy claims LT and one-off, up 112% on prior year. The cash position has strengthened at $14.7 million from last year. Our gross profit, $31.2 million, up 11% on prior year, and we've declared a dividend of -- our fully franked dividend of $0.01 on top of the $0.005 earlier in the year. So a strong result. Importantly, as I said in my first introduction, the ClearView Advice acquisition has really transformed the business, and it's delivered scale and efficiency. We have spoken in other updates that we implemented an organizational structure on day 1. We've strengthened the leadership team, because we've got executives from both sides. So we feel like we've merged 2 very strong cultures. We've had good adviser retention. We've materially expensed synergies. On the right-hand side, we've just called out some metrics to have a look at. And if you look at pre-acquisition, the way to think about that first lighter blue set of bars is, that's what the business would look like if we backed out the ClearView Advice acquisition. And then the darker blue bars on the right is where we've ended up. So we've had strong growth in licensed advisers to 517, up 45%. The self-licensed firms have grown from 151 to 192, up 27%. Pleasingly, a diligent job around managing the organizational structure, operating model, and I'll show you some service numbers because we've maintained service quality, but a very modest growth in headcount. Because of those things, our cost-to-income ratio has declined from 86% to 77% and the gross profit number growing to $31.2 million, which is pleasing. I thought it's worth just reflecting given the industry we operate in on what's happened in the broad market. And what I've done here is map out from the asset data, if you look at 2017 pre-Royal Commission what did this industry look like? And it was just over 25,000 advisers. You had the big 4 banks with 5,700-odd advisers, mainly salaried advisers, some under a license. The 2 big [ install ] players, AMP and IOOF, what is now known as Insignia and then the all other really is made up of the mid-tier licensees, the smaller licensees and self-licensed firms. Obviously, the industry has changed dramatically. We've seen the number of advisers at 30 June, according to the ASIC Register reduced to just over 16,000. The banks are largely out of it. They still send advisers as part of [ NAV ], but -- and any private banks that effectively they're gone, and you can see the install and the all other. The insight here is that you've had a market where 35% of advisers have effectively left the industry. The banks and institutional is down 73%. But what I'm describing is mid-tier self-licensed, really all others is down far less than only 12% of the market. And it just shows how important these independent businesses now are in the whole value chain and sort of providing advice in the industry. If you then think about that and take it to the next level, this is just the top 10 ranking of -- and these are just advisers under license. We obviously have a self-licensed business as well. But we're #4 and pleasingly -- and there's a slight difference in the data, because the other slide have 517. Its internal data, and there's just a slight timing difference using some of this ASIC Wealth data, which compiles the ASIC information. But we've performed well relative to others in the market. There has been some significant declines across different areas. So we're well placed in the industry. Now I wanted to share this slide because it really talks to the work that has been done over several years within Centrepoint to really rebuild the whole advice network. And if you go back to the bar on the left-hand side, we had 325 advisers under a legacy license. Basically between 2016 and now, we've had 388 of those advisers off-boarded. Some have left the industry, some didn't fit with the model around moving to fee for service and the professionalization of the industry. And then we've also recruited advisers. So you can see today, we've got 35 of those original 325 that have stayed with us, and they have better quality firms that are running sustainable businesses that continue to operate effectively. But effectively, they've got what we would describe as the majority of the advisers on contemporary licenses fitting in. The reason this is important, we really have a zero tolerance for core compliance or values that are inconsistent with good client outcomes. And then when we go through some of the financial data and you see the improved claims profile of the business, a lot of this is attributable to our quality advice network that's been rebuilt over several years. Service levels. We are a service business, despite having a 64% increase in the number of advisers, we're -- been able to maintain service quality. We got a massive amount, 31,000 enquiries a year. We track all of these in Salesforce, so we can measure every single query that comes in and respond accordingly. So service quality is something near and dear to us that is on track. Now what I wanted to do now is just shift focus a little bit and -- although we talk -- in various updates, I've talked about the business and where we're heading it, it would be helpful for investors and shareholders to just understand where are we today and where are we going. So a simple way to think about our strategy is there's really 3 core elements. The first is we're trying to build scale and capability in our core licensee businesses. And obviously, the acquisition of ClearView Advice was the first. But we are looking not only around organic growth, but other things to do. The second thing we're looking at doing is, can we build revenue and adjacencies that enhance our offer and improve margin other than straight licensee fees. And we're going to talk a bit about lending. But there are things that advisers need, the services we can provide, that we can kind of build around that core advice community. And the third element is when people say that how does Centrepoint differentiate itself through others? The first is the quality of advisers in our community. The second is we're a service business, we have to differentiate on service quality. And thirdly, technology is an area that we're really investing in to make sure we can run efficient practices and just bring the best solutions to our advisers. Now what I wanted to do was when you look at a business like ours, and we have gross profit of $31 million, if you think about our network, how much value does it drive? And this isn't the whole value chain, but it gives you a pretty good view. So if you start on the left and you look at the number of licensed advisers -- self-licensed, we've got around [ 800 ] advisers. If each of those have 100 clients, and we've just taken an average balance of $350,000, which I know to be indicative of where many advisers are at. We have -- and these are illustrative sort of assumptions just to kind of demonstrate the point. They have around $45 billion in funds under advice. So then when you say what is the revenue that we would generate through the network we have, take those 130,000 advisers charging advice fee, which is conservative at 3,000, you get around $319 million in advice fees and revenue. Money needs to be administered on platforms. I've taken a conservative view of platform margin at 30 bps, so we're probably generating around $135 million platform revenue. If you look at asset management, you strip out cash, equities and as an estimate, assume, we were making a 60 basis point, which is probably at the lower end asset management fee, then there's $216 million. And home lending, which is a topical area today, 130,000 customers in the network. We know homeownership is 67%. Of that 67%, that's split 35% of the 130,000 have a mortgage, and there's a few more on top of investments. And the internal guide, which is a long-term refinance rate is 17.5%. And you multiply all that out with average loan size in our network, and we're generating sort of approximately $40 million. Now that refinance rate is somewhat conservative because we know in the market, looking at some of the data, it's peaked as high as 50% in some months. So we think that's quite conservative. So some big opportunities there. So if you take all of that and what I wanted to do is sort of help paint a picture of how we think about growth. So the first thing is what we've done. So we've now got through the ClearView acquisition and endeavors of the team, a really strong foundation. We've got sustainable financials. So we're profitable. We've got a strong balance sheet. We don't have debt. The second thing is we've got the right advisers. So they are quality advisers. We've got a strong community, and that's important for sustainable earnings, and we have a low level of claims. Scale. A lot of people talk about scale, but we actually have got scale as we've demonstrated through the transaction. They have to service a number of advisers and leverage some of the infrastructure we have. The diversification of revenue is important. Running a licensee is a skinny margin business. We have opportunities and we are currently deriving revenue from asset management lending and through Enzumo technology services. And importantly, the final thing is we have a team that can execute as is evidenced by what we've put forward today. So if you look at some of the immediate priorities and you take those foundations at the bottom, some of our strategies are as follows. The first is we're trying to continue to grow our licensed advisers, and that's through organic, that's through acquisition, and I'll talk a little bit later on about what we look for, which we think is important for a successful acquisitions. The self-licensed business, important to us. We've got 192 firms. We're really investing in expanding the depth of services. We see that as a strategic priority. There are self-licensees growing in proportion and becoming an increasingly important part of the market. And we've got a very good service with LaVista as well as the AAP service we've had previously. The salaried channel, small, but we are in discussions to acquire some corporatized firms and grow those businesses with the advice fees that I showed on the earlier slide. It's a high-margin, attractive part of the business. I'm going to break out Lending Solutions later because we have not talked about this a great deal, but we have a great little boutique aggregation business, and we're launching a new service, and I'll come to that in a couple of slides. And finally, the asset management portfolio solutions, we've got approximately $370 million in managed accounts through the Ventura managed account portfolios. We're in the process of launching new research-driven SMAs. We're getting a lot of demand to the SMAs due to the efficiency and strong following through the models that we're creating. So that's not everything, but some of the immediate areas of focus. Now when we are considering mergers and acquisitions, and it's probably timely where you put this up. We've spend a lot of time thinking about what is required for success, and we're having done one now that we would say has been highly successful by what other criteria. The first is you've got to have a quality of advisers. Why? Sustainability of earnings, the lower claim risk, better retention and at the end of the day, you have to be very careful about advisers and team getting the bad [ debts ] because you've got to protect reputation for the whole community. The second thing is you need comparable fees. There's no point merging if there's a big spread between licensee fees because you have to bring them together. You can't charge different fees for the same services and that is complex. If you're too far apart, you have issues around margin compression or adviser equities if you're putting these up, et cetera. Realizable synergies, a really important point and are there common operating models, duplication of costs, do you feel comfortable you can get those synergies? Or are there revenue synergies or other capabilities that can be leveraged? Claims risk, a huge area of importance. The last thing you want to do is bring someone on to the network and then end up having to remediate claims. So those background checks and ensuring that there's a quality firm. And finally, the cultural alignment incredibly important as well. So there are a few things that we think through. Now just briefly before I hand over to Brendon, I just wanted to talk about the new lending as a service offer, and we are really excited by this. If you think about our business, we have infrastructure, distribution and capability to grow the lending business. And as a boutique aggregator, if you say, well, what have you got? Well, we have a credit license, we've got lending infrastructure. We've got the tech. We've got lending panel. We do all the compliance, the audits, we run training and we've got a community. And you can see the snapshot today, where 80 brokers in the network, $3 billion loan book, but a strong year of annual settlement. So we have all this infrastructure. What we're doing with leading as a service, we've designed this to think through how do we help given this time of rising interest rates, advisers build a compliant lending business. So we're enabling advisers to build their business by operating as authorized reps under our credit license. Advisers leverage our infrastructure, and they can work with an in-house lending specialist. We manage the end-to-end process. So what we're really doing is tapping into that large network of advisers and providing efficient lending services to them. And we've been working with our advisers and some of the pilot group. Why this makes sense for us is the size of our adviser base and number of customers. We know there's home ownership with a mortgage in large. You multiply out the -- that and you get a huge number of lending opportunities and a large number of loans estimated to be about $5.5 billion each year being refinanced. So we've hired some of our lending specialists. We're in the process of just preparing the final launch plans that will go live in September. And we see -- we're very optimistic about this service that we're launching. So with that, I'll hand over to Brendon, who will run through a bit more of the detailed financials, and then I'll just sweep back through a bit of an outlook on how we're seeing the business, okay? So over to you, Brendon.

Thank you, John. Taking a look at the financial results summary. The gross revenue of $228.5 million was up $89.3 million in absolute terms. Our gross profit was up 11% on PCP, and this is mainly due to an increase in the annuitized adviser fee revenue, but placing the rebate drop off investment margin runoff. In terms of management expenses, despite the significant increase in the volume that underpins our gross revenue, growth to $228 million. Our management expenses were down 3% on PCP, and that's primarily driven by savings in employment and professional services and somewhat offset by higher subscription and technology costs as a result of ClearView acquisition. Our cost-to-income ratio of 77% is a significant improvement over 88% in the prior year, and it showcases the commercial benefits of managing costs concurrent within revenue scale. Our EBITDA, excluding legacy claims, long-term incentives and one-off transaction costs of $7.2 million was up $3.8 million on PCP, driven by the impact of ClearView Advice acquisition and second half year earnings on the back of that. Now taking a look at the gross profit and expense analysis in a little bit more detail. The key revenue movements to PCP. Our revenue was down $1.6 million due to grandfathered rebates, which were anticipated runoff with the platform rebate cessation in 1 January, 2021. Our investment margin was down $1.9 million due to higher fund custody charges on the back of the subscale operation. And this predicated the sale of the Ventura Fund to Russell Investments, which is affected in July 2022. There was also lower margin platform contributing to that investment margin reduction. Our ClearView Advice acquisition contributed $6.8 million to our overall gross profit increase for the year. Looking at the key expense movements. Excluding the impact of ClearView Advice acquisition, expenses were down $4.1 million to 17% and these are mainly driven by employment costs being down $3.2 million due to the organizational structure changes from ClearView acquisition. The key metric, as John has mentioned, is the headcount increase of just 5% to 104.1% since November. Our professional fees are down $1.1 million or 51% due to the cessation of 9 central contractors, structural changes and outsourcing efficiencies. Now looking at the balance sheet. We're well positioned in terms of John's discussion around future growth strategies. The balance sheet is robust. Our cash was $14.7 million was up $3.6 million on June 2021 primarily due to cash from operations. Our loans receivable was reduced by $1.1 million on the back of the Neos Life repayment in December 2021, which is now fully repaid. Our intangibles increased by $14.7 million with the ClearView Advice acquisition, comprising $6.7 million in goodwill, $8 million in client lists pertaining to the salary planning business and $600,000 in trade name valuation. Now importantly, our claims and fee provision has never been in better shape. At the end of June 2022, we had just one open legacy claim compared to 30 at the end of June 2020 when asked for extension for non-legacy claim submissions was closed. Our net assets increased principally due to $6.5 million net profit generated during the year, $13 million in increased issued capital from the ClearView Advice acquisition and somewhat offset by $3.9 million in dividends paid. Now looking at our cash movement. The key highlight for the year was the strong cash from operations of $6.4 million. We've paid out $0.5 million in claims, which is released from our provision for legacy claims and showcased as the commercial effectiveness of those settlements. In relation to the ClearView acquisition, this is effectively cash neutral. We had $3.2 million in cash funded from ClearView principally working capital, and this offset the $3.2 million in consideration for the transaction. I've mentioned the dividends paid of $3.9 million for the year, $2.1 million being in the first half and $1 million in second half. And the other contribution to cash movement was $1 million, principally $700,000 of that being leased liabilities. So over to you, John.

Yes. Thanks, Brendon, and thanks for that detailed update. So just finally, how we're feeling about the business? The short answer is very positive. We've got good momentum. And if you look at the second half performance, we've got a strong run rate, Our July numbers, which we've just looked at, are on track to budget. So that's continuing. We have a pipeline of acquisition opportunities and discussions that are in varying stages. And the message that I want to send is that really as a business, we are constantly looking for ways to drive growth, whether it's organic or inorganic. The strategic initiatives, we're spending a lot of time with our Board looking at what are those initiatives, how do we drive organic growth and -- we're well advanced with several of them. I've only mentioned 2 in this meeting. And as we firm up some of the plans, we'll obviously update the market, but the launch of lending as a service and the managed accounts launch is imminent. I'm also feeling quite positive about -- whilst advisers are still operating under a huge amount of regulation, it feels like some of the change has stabilized and is manageable. We're not sort of immediately facing into huge change programs, I'm hopeful that, that continues. What I'm also very hopeful of is we engaged and did our own submission on the quality of adviser review. We met Michelle Levy, who's running that, and we've been consulting on that whole process. I think for the first time, we can see, if you look at the terms of reference and the nature of the discussions, a real desire for practical regulatory reform, where I think everyone believes the pendulum has swung too far to a very prescriptive level of industry supervision that we certainly believe could move a bit more to principles given the professionalization of the industry. Anyway, that's -- so overall, though, the short summary is, the business has good momentum and we're positive about with what we're doing. There'll be a further update at the November AGM. So we'll hopefully be in a position to provide a trading update. And so that's the end of the actual formal slides. I might stop sharing the screen and I'll just see from Tim whether or not we've had any questions coming in that we could hopefully answer for any of the people on the call.

No worries. Thanks very much John and Brendon. Excellent presentation. Very apparent how you've been delivering in both organic and inorganic growth over the last 12 months, so hats off to you. [Operator Instructions] One that's come up previously, John, is just to comment to integrating the ClearView Advice business appears to have gone quite well. And it's apparent from the financials that Brendon just outlined that the revenue growth has come through and the -- and management expenses have been down. So I guess just on the synergy side versus what you expected 12 months ago, has the synergy realization has been what you expected? Or do you expect to gain further synergies on cost outs or anywhere from that ClearView Advice acquisition in the forward period?

Yes. Look, the short comment that I would make is it's absolutely on track. And I think this is the case that we delivered what we planned. I might just say to Brendon and see if he's got any detail that he wants to add to that.

Yes. Look, in terms of the nature of the synergies are principally driven by the labor synergies, and we spent considerable time looking at our organization chart and being prepared for trading on November 1 when we went through the shareholder approval and the independent expert report. So we're able to operate effectively to service our clients and customers from day 1 under the organization chart that we devised, and we're, therefore, able to extract those labor synergies from day 1. So all those labor synergies which we can control, we delivered. And the majority of those synergies on an overhead side as well, there's probably some final opportunities in terms of tech leverage and Phase 2 in terms of further efficiencies. But if you can see from the performance for 8 months in terms of the cost-to-income ratio and the growth in gross profit without variable costs rising, then we have delivered to what we expected.

Yes. And the only thing I'd add to that is, there's another element. When you do a transaction, I mentioned earlier, we get some really good high-quality people and we strengthen different parts of the business. So if you look at our self-licensed business, it's a 1 plus 1 equals 3. We've got the AAP self-licensed LaVista, there's capability. And then it's actually around what we then do with it to drive revenue growth and the expense synergies are definable and people can see those. But we're -- we think what we've also done over the next couple of years as we expand some of the businesses we have and leverage the knowledge and the know-how of some of our people. We hope we can get some more revenue synergies out of it as well.

Absolutely. Thanks, gents. Just sticking with the inorganic growth theme, question is coming regarding the recent takeover offer. Could you provide some comments on, I suppose, why the discussions got to the point where they did? And what sort of needs to happen in order for discussions like that to proceed further?

Yes. Look, I think the first thing I'd say is that whenever an [ NBI ] our discussion, it is a discussion, it's taken very seriously by the Board, and there was extensive discussions. Sometimes when you see an ASX announcement, you can think that there's a high-level view and way dismiss it. That certainly wasn't the case. Really, when we looked at it, I think what we've demonstrated today in this call, we have a business that's got really good growth potential, that's got doing a lot of things in growth. And you have to face any potential indicative offer, what does your base business look like around the organic growth and other things you're doing with the strategic initiatives? So when we apply that lens in the discussions with the Board, genuinely, we believe this business is certainly worth more than the offer that was presented. And what sometimes, well, external investors don't see until such times as we disclose it is, well, what are you doing to drive kind of growth and what's next. And as we bring this to market, we think we can demonstrate that we have a very strong growth agenda, and you're obviously weighing up what that looks like compared to the alternative. And so that's probably the best way. So at the end of the day, we spent a lot of time with the board having a discussion. We just felt it was incomplete, didn't reflect the kind of value of the business. And I think that's been pretty clear in the announcement that we've put out to the market reflecting those points.