Insignia Financial Ltd. (IFL) Earnings Call Transcript & Summary

Good morning all and welcome to IOOF's 2020 Half Year Results Presentation. My name is Rachel Scully. I'm the Head of Corporate Affairs here at IOOF. Today, we'll hear from our CEO, Renato Mota, who will give an overview of the first half's results. Our CFO, David Coulter, will then take you through the results and some further detail before Renato provides some comments on our outlook and priorities for the second half and for the years ahead. We'll finish the presentation with the usual Q&A session. [Operator Instructions] I'll now hand over to our CEO, Renato Mota.

Thank you, Rachel, and welcome, everyone. I'm conscious it's a busy day, so I appreciate you making time. Just before delving into the last 6-month period, I think it's worth reflecting on the position of the business today versus the position this business was in 12 months ago. And I think by any measure, there's been a tremendous amount of reshaping of IOOF, and I'm confident in saying that it positions us really well for the future opportunities and the disruption that's currently existing in the marketplace. Personally, I'm pleased with the pace and the direction of the change. And it's important that I recognize everyone's effort over the past 12 months within IOOF in embracing this opportunity for change and the transformation agenda ahead. Moving to the financial summary. And I'd probably best describe the business update as really a solid set of results, and that is on top of an enormous transformation agenda and change agenda. I think to achieve one of these outcomes in any period is a good outcome. To achieve both of them at the same time, I think, is an outstanding outcome and I think reflective of the culture in the organization. Underlying net profit after tax from continuing operations was $56.6 million largely impacted through the reshaping that has occurred. And there are 2 or 3 key elements as part of this: Firstly was the reduction in the coupon prior to the acquisition of the P&I business. Secondly is the full contribution of the advice licensee losses. And thirdly, there's also some headwinds both in terms of cost and revenues from regulatory change as well as some divestments. The underlying NPAT of $61.4 million reflects the contribution of some of those divestments in discontinued operations. Our FUMA, which is up 5.2%, reflects both positive market movements as well as net inflows across our business. And the key drivers of net inflows was the platform flows in of $756 million along with Advice net inflows of $985 million. Today, we're declaring an interim dividend of $0.16 per share, which returns us to our traditional payout ratio and represents a 92% payout ratio. I think the highlight for me has certainly been the progress on the strategic priorities for the group. And during the year -- or for the period ending 31 December '19, I'm pleased to say that all APRA license conditions have been met and attested to by the independent expert. Pleasingly one of those being the RE/RES split, which has been a significant undertaking and has been completed. It's worth noting that the draft legislation is requiring all licensees to have an RSE or all RSEs not to perform any other function by 30 June of 2020. So I certainly think this represents a challenge for any other dual-regulated entities. In addition, we've recently been notified by ASIC that in relation to IOOF's referral from the Royal Commission, there is no other -- no further action to be taken. In terms of the Advice review, I'll spend a little bit of time talking a little further about this. But in summary, there is no further changes to our current provision in relation to Advice remediation. In terms of strengthening our governance capability, our Office of the Superannuation Trustee is 12 months old now. And we're currently working on the establishment of the Office of the Responsible Entity, or RE, in support of our investments business. Probably most pleasing deliverable and, I think, achievement for us as a business has been the change in our people and culture generally. Our people within the business have really embraced the opportunity to reimagine our culture that puts a different lens on our obligations to stakeholders but importantly remaining agile and responsive. Moving to the right-hand side of the chart there. The opportunity for growth has been really capitalized or crystallized with the acquisition or completion of the P&I acquisition earlier this month, which was completed at a reduced -- or purchase price reduced by $125 million from the original purchase price. It's really important to recognize the step changes, creating scale and reach for the IOOF Group. We've also revised upwards our synergy target to $68 million pretax, up from the original $65 million target. For us to capitalize on the potential of this acquisition, it's really important that we remain focused as an organization, focused on core businesses. Or in other words continue to divest ourselves our noncore businesses whilst at the same time remaining focused on the transformation of Advice, which is a key deliverable as we go forward. I'm -- also on the record is reinforcing the importance of simplification in this operational environment. Simplification will continue to drive down our cost of operating and ensure that we can continue to deliver better outcomes to clients while at the same time also delivering a return to shareholders. With respect to our Project Evolve, which is our -- the key deliverable over the next couple of years, we remain on track. Looking at our highlights on a business segment basis. The most pleasing part here is the growth in the fundamental business metrics that underpin the business despite some regulatory and financial headwinds. In our Advice segment, we continue to attract advisers and more recently have attracted some particularly large advisers from other institutions largely off the back of our Advice-led strategy and our position as an Advice-led business. With respect to our portfolio and the Estate Administration business, the $756 million of net inflows really reflects and is recognition of the reward of some recent product initiatives over the past 2 years, launching badges both in support of Shadforth as well as more recently of our Bridges business with the launch of eXpand. This is on top of the governance change agenda that has occurred in our superannuation business, so a fantastic outcome. In terms of our Investment Management business, the performance and continued investment performance that ranks in the top 10 in the country is a reflection of our performance, culture and process in this space. This has been a quiet achiever in the business, but more and more so for a business that has -- had its origins in Employer Super, we're finding active advisers deploying discretionary dollars into this capability, which has been really pleasing. In terms of the ex ANZ Wealth Management segment, the loss there is made up of 2 key parts: one is the ongoing losses from the ANZ Advice Licensees or ex ANZ licensees; as well as the contribution from the coupon note. It's worth reinforcing and really refreshing the importance of the P&I transaction to the IOOF Group. And as I've already mentioned, it's transformative both in terms of scale and reach. If we fast forward our industry over the next 5 years, it's highly likely that the Australian superannuation landscape is likely to have one or more superannuation funds with over $0.5 trillion in funds under administration. I think in that context, it's critically important to the IOOF Group that we have the size and scale ourselves to ensure we can continue to deliver better outcomes to clients whilst also justifying the continued reinvestment into that capability. So certainly, with the inclusion of P&I, we're circa $93 billion. And I'm confident that with organic growth, we will exceed $100 billion in the short term. In terms of reach, it's worth highlighting that with P&I, we acquired a substantial stake in the Employer Super segment of the industry. This is quite favorable from a demographic perspective, with Employer Super having typically a lower demographic in terms of age cohort as well as bringing with it some digital capabilities in direct-to-consumer primarily through the ANZ Smart Choice capability. Just delving a little bit deeper and looking at the entire ANZ Wealth Management business that was acquired. As you can see from the chart, the 3 segments that we've acquired line up seamlessly with IOOF's existing 3 segments. So this is a hand-in-glove acquisition. The Financial Advice licensees was acquired over 12 months ago, and the integration of the business has gone well to date primarily focusing on the governance integration and creating a new common governance platform. Certainly, our attention also now turns to the P&I transaction both in terms of its portfolio in Estate Administration, or platforms in other words, as well as Investment Management. Both of these generate -- both of these provide significant opportunity for synergies going forward. But the P&I business, in its own right, is a cash-generating business. In addition to IOOF's existing business, this provides a really strong foundation not only for future challenges that may arise but also for continued reinvestment. And now just turning to the Advice review before handing over to David. In August of last year, many of you would be aware that we announced a $223 million provision both in terms of remediation as well as the costs in support of that remediation. Since the August review, we've continued the review, delving deeper and wider across the network primarily focused around Shadforth and Bridges, and there are no new systemic issues that have been identified. As a result, based on the work performed to date, we continue to remain confident with the existing level of provisioning. We continue with the work with Shadforth and Bridges, and we'll shortly begin the work around Lonsdale and Consultum. And we expect to be in a position to be making remediation payments by June of this year, having already established the remediation capability and governance committee in partnership with Deloitte. I'll hand over to David.

It's clear. Thank you very much, Renato. Thank you for your attendance today. I'll concentrate on the financial aspects of the result as befits my status as CFO, of course. Turning firstly to the financial results overview. This is where we disclosed our statutory profit after tax and our underlying profit after tax from continuing operations. Reconciliation of one to the other is contained within the OFR in the 4D in the financial statements but also in an appendix to this pack. So there's a clear number of items that reconcile one to the other, happy to go through those in any level of detail during Q&A. They are nonoperational. They're largely nonrecurring. There is a skew to cash given there has been a high degree of payment at -- to ANZ integration. The first number listed here -- and we're showing 3 halves, I should point out also: the first half 2020, the second half 2019 and also the first half 2019, which is the prior comparative period and the basis for most of the variance, as shown in columns to the right on the slides that I'll be going through today. The statutory profit after tax is up significantly when compared to the second half of 2019 essentially because the remediation provision was taken in that half, but a significant profit on the divestment of Ord Minnett was realized in the first half of this year. So that uplift is quite pleasing but transitory or nonrecurring. It's the underlying profit after tax from continuing operations that we would focus on as the delivery of this half at $56.6 million, it is down reasonably significantly on the prior comparative period and the immediate preceding period. That is not solely but very much largely due to the step-down in the coupon rate on the debt note that we'd engineered with ANZ. So if you recall, the debt note with ANZ was engineered to reflect the economics or substantial portion thereof, being at $800 million over $975 million, a substantial portion of the economics of the P&I business given the delays in completion. The coupon rate step-down in May of last year as a result of ANZ having successfully engineered its successive fund transfer, that was appropriate under the circumstances. And when we get to the detail of the financial results, particularly the pro forma results for the ANZ P&I business, you'll see that this again is a fleeting experience for shareholders only to be -- only to have been incurred in this half. And it's the economic contribution of that business that will get us back to the sort of results you were seeing in previous halves and beyond with the overlay of synergies. Lastly on this page, I'd focus on the dividend per share at $0.16 per share. It is reflective of our underlying earnings. It's a 92% payout ratio, and we expect to pay at the upper end of our 60% to 90% of underlying earnings in successive periods. ANZ P&I, the overall acquisition, remediation provisions are able to be funded from existing resources and also the cap raise and the debt raise that we did in order to facilitate the acquisition. You'd also note the divestment of Ord Minnett and a lower purchase price on ANZ having been negotiated is contributing significantly to the ability to pay good dividends out of recurring earnings on into the future. So in the next slide, we have the profit and loss breakdown. Again, we're showing those 3 halves. What strikes me in having looked at this page as compared to, say, I don't know, the 21 other halves I've been doing this, is how much simpler the business has become. It's not just the divestments. It's the reshaping of the business that Renato referred to earlier overall. Substantially, you've got a gross margin, operating expenditure and tax business. There is a slight bit -- blip, I would call it, on our net noncash. It's probably misnamed that we've called it that just for continuity from prior periods. In that, we've adopted a new leasing standard, AASB 16. So what had previously been recognized as operating expenditure and occupancy cost is now classified as interest charges and the depreciation on the right-of-use asset. It's broadly similar for second half '19, first half '19 into first half '20. It's just that it's been reclassified that way. You'll see that going through a lot of the profit and loss statements for the segments and it having an impact, but we've called out that so that you can -- so that it is distinguished. So I've got a lot more detail to show you but there are some metrics on this slide, legislative impact changes on our gross margin of $7.2 million in this half. Notwithstanding we've been able to lift the gross margin in absolute dollar terms overall, thanks to solid inflows as pointed out by Renato but also to very positive equity markets. Our operating expenditure is up marginally as it is on this slide, but that AASB 16 impact has to be taken into account, and I'll also take you through that detail in successive slides. So this is that underlying profit after tax analysis over the 3 halves that I've nominated, going from $93.1 million in the first half '19 of the prior comparative period to $90.9 million for the second half of 2019 and now down to $56.6 million for the first half of 2020. Now what leaps out from this page is the impact of that step-down in coupon rate at $35.3 million. It is that which is most significantly influencing this result aside from the uplift in cost, which has occurred largely by engineering our most recent round of governance initiatives under the auspices of APRA's managed action plan but also under the auspices of improving the business overall. At a gross margin level, you can see that the impact of growth in volume has only been partly offset by margin decrement, and that margin decrement itself is about 60% due to legislative impact over simple competitive dynamics, let's say. So around $7.2 million. I think of that as protecting your super, which is, say, the remittance of unclaimed super monies and low and dormant accounts into the ATO but also the impact of removing legacy commission arrangements, removing exit fees and removing the insurance admin recovery to the level that had been received in years prior. Governance uplift is shown very starkly on the waterfall showing you the progression of cost. Again, we've shown each of the 3 halves, $137 million going to $129.7 million up to $138.1 million. It's also here you get a sense of the impact of the adoption of that leasing standard by showing the cost categories in their own right and the level to which they've increased in and of themselves. The most significant increase moving from the second half '19 to the first half '20 has been on our labor line, and there's a number of factors at play in having had that lift, $9 million. But what I would say as a thematic overall is that we have traditionally engineered significant efficiencies in each of the halves that we've produced a result for the market. When you have this level of focus on your managed action plan, with your interaction with APRA on governance initiatives overall, it has not been possible to do what we normally do in terms of operational efficiencies. So that's the first point to note. But individually, that $9 million of labor uplift has been due to: Firstly, we wrote back in the second half of last year our incentive schemes for executives and senior managers to the point that it is around a $3 million difference moving from 1 half to the next. Because we haven't had any FTE reductions, which is normally what we're able to engineer, we're working from around a $92 million cost base on continuing operations and a 2% wage inflation uplift. So that gives you another $1.8 million in cost uplift. We have incurred a further $1.4 million in salaries due to the acquisition of Bendigo Financial Planning. Now that acquisition is a very strong indicator of the strength of our partnership with Bendigo Bank, but it has not produced an offsetting revenue increment in this half. So it's borne purely as a cost. We are at a point where we're having clients of the Bendigo Financial Planning network opt into our service progressively. We're accruing that revenue but not able to bring it to account in this half. So we would expect that match off to occur in successive periods but it is a slow process. Lastly, we've incurred an additional $2.7 million in costs, establishing our Office of the Superannuation Trustee and in lifting the FTE complement in our risk and compliance areas. So that's not simply under auspices of the [ map ] but it's also as a voluntary measure to ensure the strengthening of our governance overall. So governance writ large is having an impact on our cost. In the other 2 categories shown, IT is roughly $700,000, I would say. On governance strengthening initiatives, we've implemented a new procurement system and we've implemented a new risk management and monitoring system, and they've come at some cost. Other costs at $4.2 million. $2.2 million of that is a conference spend, which is matched by an increment in Other revenue. But we've had additional legal and professional costs, additional travel costs, which we'd associate again with our governance initiatives. They'd total around $1.6 million in an increase from that immediate preceding period. Let's see the offset from AASB 16. I'd also just note that the way this page has to be interpreted, $26.1 million is the sum total of the ex ANZ Wealth Management cost. So that doesn't include P&I. That is simply the aligned licensee businesses. When we get into the segment results for that business, you'll see that, that's got a regularity to it. So turning to those segments, now the first of which is Financial Advice. The commentary on each of these slides refers to the prior comparative period but I'll not have comments that go across each. This segment has benefited somewhat from an ability to shift costs up to the ex ANZ at aligned licensees, where the bulk of our dealership management resides. That said, there has been an increment in cost for governance that's occurred within this segment if you take into account the impact of AASB 16. As just said, it will be that reclassification out. What's more noticeable here is we've had a significant growth in funds under advice but not a significant growth in our gross margin. And essentially, there has been a bit of a substitution impact here, where previously, we had a heavy reliance on third-party administrators and would recognize the margin earned on that business in this segment. Our Shadforth business, in particular, has been able to transition clients to a bespoke portfolio service within our portfolio in the Estate Administration segment. Now that has taken margin or margin recognition out of the Advice segment and into portfolio and Estate Administration. I'll show you that on the next slide. So this, you might otherwise refer to as platforms. Again, gross margin has been impacted, and we can talk about that, but this segment is the one that is bearing the bulk of the uplift in governance in terms of what happens to the operating expenses line. But it's also bearing the bulk of what's happening in terms of legislative and competitive dynamics on the gross margin line. Notwithstanding, gross margins are holding up significantly thanks to the growth in volume overall, meaning the growth in equity markets, meaning the significant pipeline created by flows into this segment. Our Investment Management segment remains a very strong and healthy contributor. It, amongst all the segments, is probably the best illustrative of the value to be derived from the ANZ P&I acquisition. So if you look here, the improvement has actually come largely from a management downwards of the direct cost line. And that's again when you compare significantly to the immediate preceding period, both the revenue and the direct cost lines increasing as they were just with volume growth overall. The direct cost line has been able to be managed by impressing upon fund managers who'd work through this manager -- or managers' business about the impending P&I acquisition, the scale that's going to be delivered by that, the value inherent in that for them in having those strong relationships with the multi-manager business, which, if you look at the pro formas, will have around $50 billion in funds under management. So the pro forma is coming in 2 slides but I'll get to that in a minute. But that's the most significant uplift here and it speaks to a very healthy financial future. Ex ANZ Wealth Management is the aligned licensee businesses. The 3 halves are of greatest value here really because we only owned it for 3 months in the first half 2019 or the prior comparative period. It's been relatively stable at both revenue and at operating expenditure. Probably the only anomaly is in the Other revenue and the operating expenditure from the immediate preceding period, the second half '19. This business has its conference season in a different half from our existing IOOF businesses. It's the simple explanation there. So an uplift in conference costs is matched by other revenue in this instance. What's most striking outside of the normal business operations, and I do want to emphasize this, is this is where the coupon reset actually impacts the P&L in this segment. So you can see $43.5 million going down to $8.2 million in net interest. And it's that, that's having the stark effect. Having acquired the P&I business in January, here's what you can expect to see as an economic contribution. So for the first time, these are the P&I historical unaudited pro formas. So this is the business we've acquired as at the 31st of January, and this is the economic contribution we would reasonably expect it to make under normal operating conditions. What you're looking at here as an equivalent to what I've just shown you from IOOF is actually a blended portfolio and Investment Management business. When we look at those businesses at IOOF together, you can see that the metrics at the top line, gross margin, 43 basis points as opposed to 40 basis points in this business, are not dissimilar. That speaks to that hand-in-glove acquisition that Renato referred to earlier, that complementary nature of the business, that overlay of the segments. What is more noticeable perhaps is that a net operating margin of 16 basis points compares to our own equivalent of 24 basis points on an annualized basis, and a cost-to-income ratio of 61.4% as opposed to 44% for the similar businesses in our own stable. For overlay, the $55 million annual synergies, meaning take $27.5 million out is a very simple piece of arithmetic. You start to see the power inherent in those synergies, but not only that, the achievability of them. It is remarkable how closely aligned that profit and loss statement becomes or closely aligned to our own it is when you take the synergies into account. And that gives me great confidence that those synergies are imminently achievable because we run 2 complementary -- or sorry, 2 overlaid businesses of the same nature to those metrics right now. So the pro forma on a line-by-line basis, more to assist with modeling than anything else, on a 6-month fee take-up, just takes you from a $250 million gross margin to a $401 million gross margin. Operating expenses, of course, have a similar uplift -- or a $93 million uplift, I should say. And our underlying profit after tax would be $98.9 million. Now that's on a continuing-items basis, which is close to $10 million more than it was for the prior comparative period and close to $10 million on the immediate preceding period. So absence of the debt note coupon absolutely offset by adding P&I economics to our business in future periods. You put synergies on top of that, you can see the power of the transaction. Lastly for me before handing back to Renato, I just want to talk about how we will not only fund our dividends but how we generate our cash. This is cash flows, starting with $97.4 million in corporate cash as at 30 June 2018 (sic) [ 30 June 2019 ], down to $69 million in corporate cash as at the end of 31 December 2019. Generated around $67 million of pretax operating cash flows, that's around $12 million short of our underlying PBT. So we've had some working capital outflow largely to do with the timing of payments out of the ANZ aligned licensees, which is managed back in weeks after the period end. $105 million is the net proceeds on divestment largely to do with Ord Minnett divestment of subsidiaries before paying tax of $39 million. Tax is also running well ahead of recognition in the P&L, and that's because you pay your tax based on installments -- or you pay your tax installments, I should say, based on your prior year's profit. The way I look at that is that it's somewhat a down payment on the increased economics that we'll be receiving from the ANZ business in future months. At $39 million, it's around $15 million ahead of what we'd be recognizing as profit on the underlying business overall. $21 million in other investing and financing speaks to that acquisition and integration cost, largely property, plant, equipment purchases, all to do with ensuring that the ANZ completion is matched by a very seamless integration over the next 2 years. Renato made mention of it as well but we're roughly on track with our $130 million of integration costs on ANZ. We've used the proceeds here to reduce our borrowings, just to reduce our borrowings cost. It's basic treasury management. And then we paid a $66.5 million dividend in that half. And that was the $0.12 and $0.07 per share special that we declared for the full year result, August 2019. So thanks for your time. I'll hand you back to Renato.

Thanks, David. Just touching on the outlook ahead. And as we shared with you in the August results last year, the business has been operating under a strategic roadmap that has 3 discrete phases: firstly, to stabilize, and I'm pleased to say we've made significant progress on that stabilization over the past 12 months; secondly, to transform, and we've identified 3 key areas for this transformation; and executing on the first 2, well, we're confident that we'll build the business with prosperity and a unique and leadership position in the marketplace. Fundamentally, we see 2 key pillars or foundations to this transformation, being our culture and conduct as well as our building a purpose-driven organization. And I want to touch on this a little bit further because as I said already, it's -- I think it's a hallmark of the progress we've made in the last 12 months. And really, I'm pleased to see how the organization has embraced and engaged in its reinvigoration of our culture, our conduct and building a purpose-led organization. The purpose we've defined for ourselves is understand me, look after me, secure my future, and we see that from the lens of our clients and all external stakeholders. We're quite cognizant of the need and the impact of having an acquisition of the size of P&I join IOOF both in terms of clients as well as staff. And in March of this year, so next month, we're pulling together a cross-section of people from across the organization to ensure we start the alignment process to ensure that at the end of this transformation, we have one culture, one set of behavioral expectations that everyone has bought into. We're defining that as Our IOOF as we look to give everyone an opportunity to define what the future of IOOF looks like and I think creating the base that will capitalize on the transformational opportunity. One of the pieces of the -- I think the embracing of the cultural change that we've seen that's really pleased me is the willingness and the desire for people within IOOF to engage with the community, and we've done this through the IOOF Foundation. The IOOF Foundation is a foundation that was established at the demutualization of IOOF in 2002, and it's been really pleasing to see people actively get engaged both in terms of volunteering, in terms of donation but also in terms of creating an expectation of seeing the organization give back to the community. In terms of the most recent grant that the foundation is currently working through, the current grant is for $2.5 million across youth mental illness prevention as well as a grassroots community program including indigenous communities. So it's really pleasing to see IOOF contribute and, most importantly, seeing our staff willing to participate in that process. In December of last year, I completed the executive team review. And certainly, we've seen some new people and new talent join the organization in the form of Mel Walls and Adrianna Bisogni. And over the coming months, we'll see the new CFO and new Chief Legal Officer start in the additions of David Chalmers and Lawrence Hastings. Really looking forward to creating an environment where all these individuals having exciting opportunities to contribute to the future of IOOF, but it would be remiss of me to talk about that exciting opportunity without acknowledging those that have built the foundations over the last decade to creating the IOOF we see here today and particularly those in the form of David Coulter and Gary Riordan. Both of those individuals have been key hallmarks of the strategic transformation of the group over the last decade and have conducted themselves with utmost professionalism and passion throughout the whole period but particularly the last 12 months. I know many of you know David personally. So on behalf of everyone, I'd like to thank you, David, for over 10 years of commitment and 22 results presentations. So -- and we all wish you the best in the future. Moving to the transformation. And as I've already touched on, we see there being 3 key pillars to this transformation effort that I think we'll capitalize on the current dislocation in the markets and create an opportunity for IOOF to position itself as a market leader. Firstly, we need to create an economic platform that can capitalize on future growth, and we firmly believe that the integration of P&I delivers this. Secondly, as I've said many times before, simplifying the operating environment will be key to our future success both in terms of our existing business but also for P&I. And the Evolve 21 program or Project Evolve is certainly delivering to this and remains on track. And thirdly is creating focus around the creation of an economically viable model for Financial Advice, and we're calling this Advice 2.0. I'll touch on these a little bit further, but our intention certainly is to update you in a more fulsome way at an Investor Day in June of this year. So we look forward to that, but in the meantime, I did think it was worth touching each of these briefly. In terms of the P&I business -- and it's fair to say that we've learned a lot more about that business over the last 2 years as we work through completion. But equally, it's helped us identify the complexities and the complex nature of that business particularly being one that is currently embedded into a large banking organization. It's part of that reason that we are currently under a transitional services agreement with the ANZ Bank that allows us to operate the existing business in its current form, and we expect to be working through the process of separation with the bank over the next 2 years, so between now and 2022. In the meantime, we are focused on making sure we deliver some structural alignment and simplification where possible, but really, for us to achieve the full synergy run rate will be post the TSA period. Pleasingly however, in some ways, it actually gives us the bandwidth to ensure that we deliver on Evolve 21. And by the time we complete and extract ourselves from the TSA, we're confident that the Evolve platform will be in a position where not only will we be extracting synergies from our existing business but it also will allow for the continued simplification of the P&I business. So in summary, we expect $68 million cost synergies from the P&I transaction on a full run rate basis in addition to a $10 million savings from the Evolve program of work. That's probably a good segue to Evolve. And as I've said, in what is a scale business where we have an obligation to ensure we're delivering cost efficiencies and benefits to clients as well as shareholders, scale matters. And this has certainly been the hallmark of our development and our growth over the past decade, and I expect that to continue going forward. The team has built fantastic momentum over the past 12 or 18 months, so much so that our current run rate in terms of development releases is about overall -- well, it's over 100 releases a month. In the current quarter, we're releasing our self-managed super fund IDPS account structure and managed account structures, corporate action functionality, as well as enhanced reporting and data feed functionality. So we're well on track with the Evolve 21 program and we'll endeavor to keep you informed of that progress. Just touching on Advice. And as I've mentioned before, much of the focus on the Advice has been around governance uplift and governance integration. The side effect of this, in some ways, has been it's actually created a very strong change capability within the business. And as we move from moving from governance change to business model change, I'm confident that we've got the people and the mindset to help our advisers through that change. A good example of this is if you look at our current population of over 1,400 advisers, our exposure to grandfathered commission is now less than 5%. Whereas this time last year, that was in excess of 10%. So there's been a real shift in the mindset of our advisers and in their willingness to adapt to new ways of working. In addition, as at 1 January of this year, we launched and mandated annual client service agreement updates well in advance of the 30 June legislative requirement for this year. Just before moving on, I thought it would be worth touching on also some industry dynamics, and it's certainly a narrative that there's a shift away from institutionally aligned licensees to the self-employed licensees -- or self-licensed market, I should say. And this isn't necessarily fully supported by the data. And what I mean by that, if you look at the chart on the right-hand side, whilst we have certainly seen a contraction in the number of advisers aligned to institutionally owned advice licensees, what we've seen is an expansion in privately owned aligned licensees or those licenses with 30 -- more than 30 authorized reps. What this is suggesting is advisers are moving -- are in fact moving away from institutions but they're moving to like propositions in the private market with the fundamental difference between those 2 being the private licensees do not have the financial backing that the institutions do. Now that of itself may not be a key factor other than to say that where we've seen periods of financial and economic distress in the past, like the GFC, we have seen a flight to safety and a flight to organizations with substantial financial backing. So in other words, I think there is a hypothesis or a justification that there is certainly a cyclical element to what we're seeing as much as structural. And if you're really focusing on the self-licensed element, which is those -- are those boxes in the gray, whilst there has been an expansion in self-licensed, it's not the core reason that we've seen the contraction in the institutionally aligned licensees. So in summary, before opening up to questions, I think anyone that operates in the wealth management sector -- segment is fortunate to operate in an industry with some very significant tailwinds in terms of macro factors both in terms of system growth, in terms of societal need for Financial Advice. And we're incredibly passionate about this. We've got an aging population with more complex issues to manage and that need more advice in managing them effectively. There is -- there comes an obligation with operating in such an industry, and certainly, that obligation is in the form of ensuring that we're delivering high-quality outcomes to all our clients across all time periods. And that's certainly a focus of our business going forward. And we believe we can do that whilst delivering to shareholders' expectations and delivering value to shareholders. That value comes through scale, and that scale is delivered through the P&I transaction in the context of IOOF, and we're very confident and committed to ensuring this translates both to clients and to shareholders. To do that effectively, our key focus is on simplification, continued simplification of our business and the P&I business we've acquired, and ensuring that simplification translates into better governance and better risk-adjusted outcomes for all stakeholders. And finally, focus, unwavering focus on our strategy with a clear strategic intent, clear strategic deliverables and a transformation process that links to our purpose and to our communities that we serve. We believe we're beneficiaries of a unique market position, and we believe that by acting responsibly and quickly, we can capitalize on the opportunities that will present themselves. And ultimately, this will translate to maximizing the value of the opportunities that present themselves to ourselves and the owners of our business. So with that, I might pause there and open up to questions. So I think we'll start by taking questions from the line.

[Operator Instructions] Your first question comes from the line of Matt Dunger from Bank of America Merrill Lynch.

If I could just start on portfolio and Estate Administration, obviously, a strong decline in the gross margin versus the funds under management growth. We had the legislative impact. Could you just confirm what the impact of that was, also what the impact of those flows that you're saving into SPS are on margins? And how are you comfortable that both flows are revenue-accretive?

Look, they are revenue accretive. I'll start with Shadforth first and then go to the legislative one-offs next. The revenue accretive in as much as if we didn't have a product or a service within our portfolio business for those Shadforth clients, the risk is that they go to a third-party administration solution that would earn us no revenue whatsoever. So in absolute terms, it has cost us in this half around $2 million in revenue, meaning about 4 out in Advice and 2 in to Portfolio Administration. The margins on that business, as you see them as basis points to FUM, or FUA as it is in Portfolio Administration, are not as high as we would normally attain. And it's because the Shadforth clients come with very high balances in an environment where contemporary products generally have fee caps and have very tiered pricing structures. So we're not in the business of saying what our margins are absolutely. And each -- there is a PDS for the Shadforth portfolio service. So you can do the math on what you might imagine is a normal balance, but they are very high balances in this initial transition, simply because that's where the value for client as an adviser says it is. It's not just the value in pricing either. I might point out as well is we believe we offer very much a superior solution as far as a Shadforth client and their advisable experience by moving to our Shadforth portfolio service.

Probably the other thing I'd add on that is that the costs or the operating costs from managing that Shadforth portfolio service is negligible in terms of incremental costs. So it just goes to reinforce the fixed nature or fixed cost-based nature of this business.

Absolutely. Then in terms of protecting a super legacy commission arrangements, unclaimed super monies and exit fees, that's been around a $7 million hit on immediate preceding period. So we haven't helped ourselves any by going to the immediate preceding period, you might notice as well, because that's actually a bigger gap. But what we did want to show very starkly was the impact of these from half year, I guess you'd call it, initiatives from the government. So there is -- out of the $12.6 million margin decrement we were talking, $7.2 million of that is those various impacts on our business. And I'd say if we're looking then at the residual amount, around $5 million as being competitive dynamics, substitution into more contemporary product sets, that's probably, on basis point terms, not as stark as we've seen some of our competitors in the market today, for example, on margin diminution. So you would not expect 8 basis points to be the profile going forward in a half year, I'd say that. We look at it in pretty similar terms to AMP, actually, because if we can constrain it to within 5 business points in an annual period, we've probably done our jobs reasonably well. It's not that we've done our jobs reasonably well either, given the credit I've just given us, it is the natural signal behind some of this substitution. And it will be ongoing for some time to come. Where I'm encouraged is, okay, the net operating margins also declined in the face of this, but it's declined by about the amount of the imposition of those protecting a super and other legislative changes. So the business overall remains robustly healthy. It is certainly a different pricing environment from where we found ourselves 10 years ago, where we found ourselves 5 years ago. What this business has done is always responded very positively and very actively to these sector challenges. And then my -- and the starkest example is the P&I acquisition.

Great. And can I just -- just following up on that. Can I check what the exit margin was on the first half? Obviously, we've had an acceleration of the margin decline in the first half. Where is it tracking?

So I'm not sure I follow. Matt?

I'm wondering, when the margin declines happen through the period, so would we expect a roll forward of the -- for the margin?

It has been sustained at that current $7.2 million level, give or take, because it's virtually cliff-edge. It's to cease these phase, cease these arrangements, move these individuals from close to the 1st of July.

Okay, great. And then if I can just ask one final question. Do you have any color on ANZ expenditure on the ex ANZ P&I business in terms of the cost of regulatory uplift? Are you going to need to spend further amounts to get this business up to where you've gotten your business? Or is -- has that been done?

No, it's largely been borne by the business as it's currently structured because they've had to go through the same time period as us without our stewardship or ownership. If you go to that pro forma slide, I think it is Slide 18, you can see a fairly stable cost base at around the high 80s, moving up to $93.3 million. And that's reflective of the impact of governance initiatives on that business as well and having to get the structural change necessary to push through protecting a super legislation and other changes. You can see it in their own gross margin as well, albeit that their funds growth hasn't been as strong as ours.

Your next question comes from the line of Andrei Stadnik from Morgan Stanley.

Can you hear me okay?

Sure.

Fantastic. Look, I wanted to ask, just to follow-up a little bit on the margin compression in the Financial Advice business. What kind of -- what gives you confidence that you can stabilize and make Financial Advice profitable and scalable? And in particular, salaried advisers, more profitable [ by the lift ] than aligned advisers. Is this a path that you could explore?

Certainly. So whilst I didn't delve into significant detail today, I probably touched on it at the August results. But fundamentally, we see there being 3 core elements of our Financial Advice segment going forward and 3 elements that -- all of which require a transformation or require a certain recalibration to ensure that Advice generally as a portfolio is economically viable in its own merit. And you've touched on a couple of those. One is the increase in number of salaried advisers or the corporatized Advice model, where the advisers are salaried. And certainly, we've made some progress already on that front in Bridges. So if you -- the Bendigo Financial Planning acquisition was borne out of that strategic rationale, and I expect that to continue. So we expect salaried Advice to increase. We expect the self-employed licensee model to breakeven. And that's certainly not something that the current ANZ -- ex ANZ licensees do. So certainly, there is a new economic model that must be borne out of that -- certainly, that portfolio, but more generally across the self-employed model. And then the third element of that is what we called our partnership model or IOOF Alliances, and that's providing services to self-licensed adviser groups. So these are groups that may, in fact, have their own license, but still require institutional support or are prepared to pay for institutional support, and generating an economic return there will also be important. So I think each 3 of those need to justify their existence. But the bulk of the economic return we expect to come through at salaried or corporatized Advice model.

And my second question, just thinking about the ANZ ADG business has been quite substantially loss-making. What kind of steps can you take in order to remediate that? And is that turnaround already baked into the ANZ loss synergies?

So there would be an element of synergies baked into the $68 million, but certainly by no means the whole loss-making quotient in that business. The turnaround, in very basic simple terms, is that if we are creating value and we're expanding resources in creating value for those self-employed advisers, we expect to get remunerated for that value. The other element is that I suspect that in a model that has been traditionally owned by product providers who have been happy to cross-subsidize Advice with product, there is actually quite a degree of resources that may not actually be economically viable or economically rational. In other words, there's been a lack of economic accountability in terms of how we've supported these advisers. So both -- I'd expect that position to remediate itself, both in terms of increased revenues, reduced costs. And there's a third element, which is we need to be really clear on whether we are servicing uneconomic advisers and now are there, in fact, advisers that we're supporting and carrying a risk on that may be out of our size, scale or nature that are a right fit for our model.

Your next question comes from the line of Kieren Chidgey from UBS.

Can you hear me?

Yes, loud and clear.

Yes.

I might just start with the question coming back to the dynamics around the SPS growth, which has been very good. The -- David, the numbers you called out, did you say a $4 million impact to Advice revenues from the growth in that FUM offer over the half?

I did. It's actually closer to FUM. I think it's got a 4 in front of it that rounds up to that. And then the offset is around $2.5 million. But yes, that's what I said.

Okay. And how much for -- have you seen come into the SPS product?

A reasonable amount.

I'm just trying to understand what the average revenue margin loss is in the Advice business? I mean it would seem that -- quite in the order of 50 basis points of third-party payment?

No. We've never been earning anywhere near that third-party margin for an outsourced administration arrangement.

Yes, I would have expected something in the order of 15 to 20 basis points.

Yes. So the signal up is there in the FUAdvice in terms of market growth and also significant inflow. And that gets muted by the substitution impact back in the portfolio as Shadforth clients take their money into our portfolio offering.

So you're not paying an intragroup fee from platform into the Advice division?

There is a fee, but it's preexisting. So there is an Advice fee paid. And if you look to the segment note, you'll see that increment borne there as well in that -- in the segment eliminations have increased as has the payments front portfolio into. So it's a revenue share borne off, advice -- the client paying an advice fee into an advice business and a portfolio fee to the portfolio business, almost along the lines of the traditional model.

Okay. And related to the rollout of this SPS, which my understanding is fairly premium wrap product offering built off of the new Evolve platform technology, why are you not offering sort of that similar premium wrap product to your other planning group at a comparable price? It seems that they still only have access to -- say, a Bridges client only has access to Pursuit Select, which seems fairly similar from a functionality point of view, but at a much higher margin.

So at the -- so over the half, we also launched a badge for Bridges, of the new technology platform, site called eXpand. So that has been launched, so that process commenced. There are couple of elements here to consider. One is that we are launching offers and products and services off a technology platform as we are building it concurrently. And that's entirely in line with an agile approach to development. But equally, we need to make sure that we are actually methodical and can deliver on the promises we make. So we've taken a very staged approach to that. Over time, I certainly think as we move into 2020 and beyond, that same product and offering will move into the IFL space, and I look forward to seeing that competing quite actively in that space. But we've taken a very methodical approach to the launch of that product. We've started with those advisers that are closest to us in a period that we've gone through a tremendous amount of change outside of just new product initiatives. So we've just chosen to be very methodical in how we've launched the product.

I'd also note that the average balance on a Bridges client as opposed to the average balance on a Shadforth client means the margin comparative there is essentially meaningless. It's not -- and maybe I'm being a bit defensive here, Kieren, and I do apologize. It sounded as though we were prejudicing the interest of some clients over others. And I don't regard it as that. You're paying for a service, you're paying a dollar amount at heart. You're not paying a margin. So there's all sorts of flat admin fees. There's all sorts of tiered pricing that goes into structuring a payment from a client for the service they receive. It's entirely not possible. The outcome is most likely that a Shadforth client for that bespoke, enhanced premium service is paying higher dollars than a Bridges client is for the service that they receive. And that's borne of listening to those 2 networks and understanding what those clients and advisers want and structuring it in accord with those.

Yes. I think there's a really important point also to make, which might be implied, but just for the interest of calling it out. All our licensees operate with an open architecture model. So if Pursuit or any of our products for that matter are -- is not the right product for the client, then I would expect those clients to be placed in a third-party service.

Burt -- I mean the point I was asking, and correct me if I'm wrong, was that my understanding is eXpand, which is a badge version of Evolve Bridges, that seems like the exact same technology as SPS, the exact same product offering, absent the same account balances. So putting aside to the differential account balances, those Bridges clients are paying a higher admin fee than what a Shadforth client would. Is that not correct?

I'd have to double check that. So -- I can't confirm either way, at this point.

All right. And just moving on to ANZ P&I. So are you able to provide an update for what the net for inflows were over the 6 months to December?

No, I haven't got those readily to hand. We haven't disclosed them up to this point, nor has ANZ given their September-March year-ends, half year-ends.

But you're in business now so would you be able?

We do. We do. But we'll make an update on that for the periods over which we have exercised ownership. So that will come in March. We're meeting in the middle of April for the March period-end.

This TSA, the Transitional Services Arrangement, is there any cost payment from you to ANZ whilst [ ANZ's ] still providing technology services back to you?

Yes, there is. Yes.

And how material is that on an annual basis?

Well, it's configured so that it is broadly in line with us bearing our own direct costs and then providing services that would add up to, say, pro forma $93.3 million. And it's highly modular, meaning as a service is no longer required, it's switched off and we bear our own costs. Hence, our confidence in synergies realization. So it's at -- any transitional services are at current run rate as a component of the overall total you see before you.

Okay. The amount you're showing, it's -- the underlying profit for ANZ P&I isn't that you will actually collect. It's not that less some TSA payment going back to ANZ?

That's correct.

Your next question comes from the line of Nigel Pittaway from Citi.

First of all, just refocusing, if I could, back on that portfolio and estate administration revenue margin. I mean you were obviously guiding to 5 basis points reduction in gross margins due to the PYS and repricing. Can we presume that, that $7.2 million you flagged in the first half is basically tracking in line with that because I didn't see it in the guidance reiterated anywhere?

Well, I think if you do the math on that, it's just below that as an impact.

It would be more [ of if they're doing well ].

So I think the competitive dynamics overlaid on that. And to a degree, the investigative process to ensure full and complete adherence to protecting our super and/or other reasonable measures taken to cease contractual arrangements that we would regard as legacy was somewhat harder than we'd envisaged back at the half, but not hugely so. So it's a 5 basis point decrement on second half. It's a 6 basis point decrement this half to the full year experience, or maybe closer to 7. $58 million to $50 million, I think, is still a reasonable return for the funds under administration. And you talk to Renato's last slide, talking about the tailwinds or the structural -- macro structural elements that are positive in this sector, and that's been borne off. Overall, our gross margin increasing in the face of all those headwinds in dollar terms. So it is cliff-edge, and that was to Matt's question. It's happened this time around. We've won it. We've won the cost of the initiatives having to be put through the business. And this is where we see ourselves. There will be a signal in the background, however, that will always put that gross margin line under some sort of pressure, but it won't be to this degree because this contains a $7.2 million one-off.