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

Thank you for standing by, and welcome to the IOOF Holdings Limited Full Year Results 2020 Conference Call. I would now like to hand the conference over to Rachel Scully. Please go ahead.

Thank you, Amanda, and good morning, everybody. As Amanda said, welcome to IOOF's 2020 full year results and also our announcement of the acquisition of MLC. Before I hand over to Renato Mota, our CEO; and David Chalmers, our CFO, to take us through the key slides from the results presentation and also the acquisition presentation, a couple of admin items just to cover off. First, this is a conference call for shareholders and analysts. Media can request comments or an interview via myself or Louise Watson, both of whom are on the bottom of the ASX announcement for our contact details. [Operator Instructions] And questions will be answered once the presentation has concluded. So I'll now hand over to Renato to begin the presentation.

Thanks, Rachel, and good morning, everyone, and really appreciate you taking the time to hear about what we really see as being a series of transformational announcements in relation to IOOF today. And in our opinion, not only transforming IOOF, but we sincerely believe that this is also transforming the shape of the industry going forward. So a very exciting time. It would be remiss of me not to welcome our new Chief Financial Officer, David Chalmers. And clearly, he's had a very busy few months since he's arrived, but it's great to have Dave on board. I might just skip relatively quickly through some of these slides, because I am conscious that we've got a lot to cover and certainly happy to always come back after this presentation and talk further about any of these points. But just skipping into the sort of the introductory slide. As we announced in our business update a month or so ago, underlying net profit after tax from continuing operations of $124 million was in line with previous guidance and really reflects the significant impact that COVID had on our revenues as a result of the dislocations in markets. It has been an incredibly challenging period in that respect, but not only for ourselves, but clearly, the whole community. And from a pleasing perspective, the operational resilience that we've been able to demonstrate during that period in how we've served clients, in how we've looked after our staff has been really a positive feature despite, obviously, the negative impact on the economics of the business. From a FUMA perspective or funds under management and administration, up 46%. That's largely a result of the inclusion of the P&I business, so the business that we acquired from ANZ. So it was pleasing to complete that transaction in February this year and have not only the clients and the members come across, but clearly also the staff, and I think we've made great headway in terms of bringing those businesses together. Net inflows of $779 million, again, a positive feature. I think throughout everything the business has gone through in the last 18 months, I think our net flows and the continued organic momentum has been a real feature of that period and has demonstrated quite a high level of resilience. Much of that, I think, has come from the ongoing and continual development we are making in our products and services, our technologies, the launch of the Shadforth portfolio of service, the expansion of our client first operating model. And more recently, the launch of what we call eXpand and Essential. So these are platforms on the new technology, which have been launched. And over the coming period, we actually see them starting to increase penetration into the IFA market. Finally there at the bottom, we're declaring a $0.115 per share dividend, which is a 60% payout ratio. Again, despite everything, despite the challenges we've gone through in COVID, I think to be paying out within our range and at the bottom end of our range, I think, is a testament to the strength of the business, but equally, recognizes the importance that management places on rewarding our shareholders with dividends. Just moving to the strategic priorities. And I think it's worth reflecting on the year that's been and where we were as an organization this time 12 months ago. I mean if you think about this time 12 months ago, we still had quite a lot to do to meet regulators' expectations and to demonstrate to regulators in the community that we're an organization that was worthy of being trusted with people's money. At the same time, we set upon an agenda that was built around simplifying our platform and upgrading our technology to market-leading, to transforming the advice industry and in fact, also completing P&I, which at that stage was yet to be completed, and we've been working on the APRA approvals. On top of that, we've actually dealt with all the things to do with COVID as well, and that was clearly a challenge for everyone. And I'm really pleased and proud of how the business responded to COVID, not only internally, operationally, but more importantly, how we've been able to look after and support our clients has been a real feature. At the same time, we've also taken the opportunity to create some more strategic clarity for the business and focus through divestment of noncore subsidiaries. That's resulted in about $105 million in consideration, be it from the sale of Ord Minnett, Perennial. More recently, the sale of our stake in Australian Ethical. And it's also worth mentioning here that over the recent period, we've also received a number of expressions of interest in relation to AET. And while these conversations are ongoing, there's no assurance that there will be a sale of AET. But certainly, that strategic clarity is something that we're certainly keen to develop, particularly now in the context of the MLC transaction. And if you put that all in context, I think it's been an incredible year for the organization. And I think we're coming out of that year with far more confidence in ourselves and our ability. And the key message I'll take away from this slide is that as an organization, we are delivering on our commitments, and we pride ourselves in making sure that whatever commitments we set for ourselves, we deliver on. And that's certainly particularly important when we go to talk about the MLC transaction following these results slides. So just skipping forward and touching on the P&I transaction and just to provide a little bit of an update. We're very conscious that this is the first time that we are talking to the P&I business or the business we've acquired. It's the first time we've reported on the business since acquiring it. And I think it's worthy just touching on some of our commitments, as I said. So as you would all know, we committed to $68 million in synergies from the P&I transaction as after FY '20. So as of end of the financial year, we delivered $18 million of that on a run rate basis. And what we're committing to in the current financial year is an additional $25 million of synergy delivery, so against the $43 million by the end of '21 financial year on a run rate basis. So we are very much on track with respect to that transaction. If I reflect on our learnings over the past few months, having owned it since February, I'd say that there have been no surprises. It's exactly as we thought it would be. If anything, I think the one upside or the positive element of the transaction has been, I think the caliber, the people and the mindset of the people. I think that cultural integration has been a positive feature. And I think we've been able to attract and retain and bring with the acquisitions some really talented people who were very passionate and clearly a specialist in the area of wealth management. In terms of the synergy target overall, and I think it's just in terms of the source of those synergies, they are largely people-related synergies. So approximately 85% of people-related synergies. And whilst that in no way, makes them many years to extract, but it does give us a high level of certainty and high level of conviction around the $68 million target number. And equally, we remain committed to our $130 million in integration and separation costs, which, as we've suggested on the slide there, will be spent up to the '22 financial year. On Advice 2.0, and again, the advice transformation that we've been committed to and certainly spoken a lot about for how many moths, a very important milestone in the execution of much of that transformation. It's something we've spoken a lot about conceptually. And I think now we're in a position to talk about this more practically. In the interest of time, I will keep these comments quite short, but certainly, we'll ensure that in due course, we'll dedicate some more time around this transformation because it is now tangible. It is delivering real benefits and will deliver real benefits over the coming months and certainly in the next 12 months. And I do think we're playing a key role in helping transform the industry as a whole over the coming years. In the past, you've heard me talk about the 3 key models that we see there being in the advice industry being employed advice, self-employed advice and out of the licenses or supporting self-licensed advisers. The genesis of our Advice 2.0 program is really to focus on 3 key things: maximizing improvement engagement with advice, maximizing the efficiency of advice delivery and maximizing the sustainability of the licensee and the AFSL. And today here, we are announcing a series of changes to address all 3 of those. If I reflect on the engagement and the efficiency, today we announced that we're acquiring a proprietary technology specialist in advice called Wealth Central. That acquisition is going to create the cornerstone of what will be our proprietary advice technology capability. And certainly, over the coming years, we look forward to enhancing and complementing that. So what we're really looking to do is have our own proprietary advice ecosystem, technology ecosystem that supports not only our own advisers, but any adviser that is looking for solutions in that space. In addition to that, from a sustainability element and sustainability of the AFSL, we're making quite a number of changes, which you can see on the chart there. The first one I'll touch on there is that we've certainly been committed to the expansion, if you like or the growth in our employed salary business models. We think that's a really important way of not only investing into advice, but extracting the economic benefits from that investment through the employed salary business. And we've announced that we are converting bridges into a wholly employed adviser model. So that's a change for that business, which has been typically the hybrid model between employed and self-employed advisers, and that's certainly a key change. And we really look forward to investing into the Bridges brand, the Bridges' capability on behalf of its referral partners and clients. In the remaining self-employed space, where we have 5 businesses -- businesses or 5 brands supporting that business, we're making a couple of really important changes. The first of which is the closure of FSP, that licensee for a couple of different reasons. But certainly FSP was the smaller of the licensees and one that probably failing between some of the other value propositions of the likes of RI Advice and Consultum. So those advisers will be given every opportunity to join one of the other licensees, and we'll certainly be supporting their transition. Of the remaining 4 licensees, self-employed licensees, what we are, in fact, doing is breaking them into 2 business support models. So rather than having 4 business support pillars, we are consolidating those into 2, and what we're calling the specialized models being Lonsdale, who specializes in integrated advice outcomes of advisers and Millennium 3 is really specialized around integrated advice outcomes around insurance. On the other hand, we have RI Advice and Consultum that will -- we're describing as holistic advice business models. The very important element here is that we are -- we remain committed to a multi-brand, multi-AFSL strategy. However, it's really important that those brands and businesses are supported with specialist skills that are contributing to the value creation in those businesses, in the self-employed businesses and ultimately to investors. All of these changes we are representing here do deliver a synergy benefit. So they do sit towards the sustainability of the licensee, and we're suggesting -- we're committing to a $10 million per annum cost saves in the FY '21 year on a run rate basis. Just finally, before handing over to David to touch on COVID and our performance during COVID. Look, as I said, I couldn't be prouder about how the business performed, both in terms of how we've been able to support our people, support our clients and that support the client comes in a physical sense or a financial sense in -- particularly the early release of super is a great example, where I think our systems and process has held up very, very well, as had our portfolio construction, but also in a more -- in an emotional sense, our call centers and our operational model has performed extremely well. Even at the peak of the demands, we had very low call wait times. And all of this adds to building trust and actually creating -- making sure we're there when our clients need us. So that's been of critical importance. Likewise, we're working from home and ensuring our advisers have the technology there that they need to run their businesses and operate effectively. All that being said, we're not blind to the impacts COVID had in our shareholders. And I think as a leadership team and as a Board, it's important that that's -- our actions reflect that also. And certainly, that's being reflected in the changes to remuneration that we put through. With that, I might hand over to David.

Thanks for that, and good morning, everyone. In the interest of time, I will move through the financial slides relatively quickly, touch on a couple of points around the balance sheet remediation, so that we can move to cover off on the transaction. So as Renato has mentioned, the FY '20 results are characterized by 2 significant events. The first of those being the completion of the P&I acquisition from ANZ on the 31st of January, which means adding in 5 months of gross margin and OpEx contributions of the P&I business, and that's being offset by initially a reduction and then ceasing the coupon income associated with the $800 million debt note. The same impact, of course, is COVID-19, which has significantly impacted the gross margin of the business in the second half of FY '20. As the result of that is in line with the earnings update we provided in our Q4 FUMA announcement on the 30th of August (sic) [ July ], where we forecast NPAT in continuing operations of between $123 million and $125 million. And you can see there that we've come in at $124 million, which is a reduction of $59.3 million year-on-year. Next slide, please. Let's just skip through the next slide, and one more please. Skip one more. Skipping through -- thank you. The point I wanted to spend a couple of moments commenting on were in relation to the remediation provisions. Now again, we made some comments on these when we gave our Q4 FUMA update, where we said that we anticipated that we did not see any significant material changes to the IOOF provision of $223 million, and we expect approximately an $80 million increase in the provision related to the ex-ANZ licensees. You can see on this slide how that sort of breaks down in terms of those changes. And indeed, that's been the final position, the one that we put forward in the Q4 FUMA update. It's important also that there are -- the different remediation programs are understood in relation to the way that they're funded. So the IOOF remediation provision of $217 million is required to be funded by cash. The ANZ, the ex-ADG licensees are funded through a receivable to ANZ, and the P&I remediation provision is funded through a combination of a receivable, a deferred tax asset and $59 million of cash. What that means is across the next couple of years, we anticipate a total cash need on remediation -- of nonremediation of $276 million. Moving to the next slide gives you an overview of our balance sheet or at least our cash position as at the 30th of June. Thank you -- as at the 30th of June -- and you can see there that as at June 30, adjusted for the sell-down of our shares in Australian Ethical, we have a pro forma cash of around about $297 million on the balance sheet at the moment relative to senior drawn debt of $460 million. So this has been an important part of the work that we're focused on in terms of making sure that our leverage allows us to both withstand market volatility over the coming months and also that we're well positioned and well-funded in relation to remediation going forward. That probably covers quickly the points I wanted to make on the financials. Renato, I might hand back to you to cover through the transaction announcement.

Thanks, David. So we'll -- I'm conscious that people are probably trying to navigate 2 packs, so we are shifting to the transaction pack. And just starting with sort of introductory slide. It's -- as I said in my opening, that what we're posting today is creation of Australia's leading advice-led wealth management business that's not only transformed IOOF, but in our view, transforms the industry as a whole as the industry itself transforms over the next 5 or so years. And by that, from an industry perspective, we do -- we are seeing -- and certainly, we expect to see convergence in the space between the profit and not-for-profit sector. And I think that convergence is going to result with a handful of very large funds, I mean, the expectation is Australia's largest super funding 5 years as likely about $0.5 trillion. I think there will be a handful of others at $200 billion to $300 billion. And in many ways, it's those funds that will set the scene for the value equation for clients and challenging the rest of the industry to delivering better client outcomes. And to do that, the scale and the economic benefits that come from simplification are critical, not only to deliver outcomes to clients but equally to deliver outcomes to our shareholders. In that construct of 5 or 6 funds at the sort of who are leading the industry, this deal ensures that IOOF is in that 5 or 6 pack. And in fact, we are the advice lead player in that pack. And I think that certainly puts us in a strong place in an environment that not only delivers outcomes, great outcomes to clients and shareholders in the growing superannuation and wealth management space, but is, in fact, delivering great outcomes through advice in what I think will be the reemergence of a new advice industry. So the short way to explain that is that this acquisition is entirely consistent with IOOF's existing strategy and existing business model and priorities. It does present a step change in scale and economic diversification. In terms of the transaction itself, we think it's 7.4x pro forma underlying profit after tax, including the synergies, is a very, very attractive price. You can see the funding structure there, which David touches on. And importantly, very importantly, we've actually taken the opportunity also to strengthen our balance sheet, which we think is critically important, given that no one can really predict what may come in the next year or 2 from COVID. We're building what I'd consider an all-weather balance sheet to ensure that not only can we integrate, not only do we continue to invest, but we can withstand whatever may come next. And at the same time, continue to pay some very strong dividends in line with our dividend policy. There are certainly 2 areas I think I'd want to touch on and maybe just moving to the next slide is there are 2 key issues, I think, here that I want to draw your attention to with respect to the transaction. And clearly, we've only recently completed the transaction with P&I. And as a management team and as a Board, we have to convince ourselves and think very hard about our ability to execute this successfully before embarking on a challenge. And over the last 6 months or so, we have spent a lot of time and a lot of effort in not only understanding the business but understanding what an integration program may look like and ensure that whatever targets we're setting ourselves of, we can -- we have high conviction in committing to and to completing. So in that context, and I'll touch on this a little bit later is, we want to share with people, the way we've thought about the integration along 3 different lines, which is primarily about how do we protect the business today that is there; how do we ensure that we continue to deliver to the services of our clients day in, day out; how do we deal with the -- any remediation or any issues associated with the past in dealing with those in an appropriate manner and in a speedily manner; and then ultimately, how do you integrate the business. So this is a long-term commitment. And certainly, as we walk through the synergies and the expectations, I think what will become evident is that this has been a very thoughtful approach. The other key element here that is worth talking about is we've taken a very deliberate decision to de-risk the transaction from a remediation obligation perspective. And by that, I mean, we have taken the opportunity, and certainly as part of the contractual arrangements, there are a couple of key features that are noteworthy. The first is that we are not acquiring the MLC advice licensees. So the AFSLs that the current advisers operate under and currently have the remediation obligations associated with them are not coming as part of the transaction. We are acquiring the advice business by way of an asset purchase. So the systems, the process and the technologies, the people will all come across to IOOF and the advisers will be joining the IOOF licensees. They are a core part to our business, be they self-employed or employed advisers. We think they're a real addition and a real asset to IOOF. However, it was important to us that we did not expose the IOOF Group to those remediation liabilities. In addition to that, we've also sought and been granted some, what I call broad protections for pre-conduct -- pre-completion conduct, and those protections come in the form of provisions indemnity and warranties, including for funds and penalties and certain regulatory investigations. So we've taken a very, what I call, robust and derisked approach to this transaction as well as in our view, doing the transaction on what are attractive financial and valuation metrics delivering to shareholders, both in terms of EPS accretion and also return on capital. So just moving through to the MLC asset itself. Look, I think what this slide demonstrates is that the -- if you look at the bottom, the bottom there, the orange box, this is a hand in glove acquisition. It's entirely consistent with our strategy. It is entirely consistent with our current business construct. We're acquiring a financial advice capability, portfolio and the state administration capabilities and ultimately investment management. On the -- as I've touched on, on the advice businesses, we're not acquiring the AFSLs. However, we are acquiring the MLC brand. And equally, we also acquired the Godfrey Pembroke Brand. And certainly, we see that as being a feature going forward. The other difference, I think, probably also worth touching on is MLC has had an enviable track record in investment management. They are one of the pioneers of the multi-manager process here in Australia many years ago. And I think in more recent times, we've invested quite heavily in building out a suite of boutiques in the asset management space. Boutique asset management is something that is familiar to IOOF. Certainly, as the founder of Perennial many years ago, it's something that we have some history in, and I'd like to think we've got a very strong understanding of the mindset and the cultural traits required to run those businesses. So in due course, we look forward to engaging those businesses and understanding them in more detail. If we think through what this means for our stakeholders and put a stakeholder lens on, we are committing to this transaction because we are very -- we have a strong level of conviction around the superior outcomes is delivered to all stakeholders. First and foremost, its members and clients. And as I said earlier that one of IOOF's ambitions has been -- certainly, over the last 12 to 24 months that our success going forward, our ability to continue to deliver great outcomes to clients and shareholders comes from our desire and our ambition to be the lowest cost producer, and that is run the business more efficiently than anyone else. And we think our track record around running businesses efficiently whilst differentiating on service and continuing to invest is a feature of the IOOF investment thesis and has been for a very long period of time, and we certainly don't see that changing. So the scale that the MLC creates does, in fact, give us an opportunity to be the leading lowest cost producer, particularly in the administration space, whilst delivering top quartile service. And that's something that we're very confident we can deliver as a result of this. I think the cultural attribute to the group, the agile nature, I think our focus on being purpose-led and governance driven is building quite a unique foundation to deliver to members, to advisers as well as to shareholders. So touching just still a bit detail on MLC itself. And as I said, the -- MLC's business we've really admired from afar for quite a number of years. We've admired, particularly in more recent times, how they've gone about reinvigorating that business. And we saw them as, in a lot of ways, I think, similar in mindset and probably just different in execution. And they certainly had a clear strategy. I think our strategic approach is a little bit nuanced in the sense that we certainly see the role of having proprietary capabilities and technologies in-house has been critical to our success. And I think our desire to build our own technology, build our own platforms in-house has been a feature for the last decade or more. And again, to the extent I was going to -- I would draw parallels with other players in the market, I think that the -- if you look at some of the newer entrants and the ones that are taking market share today, the one common feature they all have is that they own their own technologies. They are technology businesses in wealth management, and I would expect that to be a strong feature of IOOF also going forward. In that context, I think, the core operational environment of MLC is a core asset for our business, remaining that we have people that are close to clients through administration, through technology, through sales capabilities is of critical importance. And I think MLC brings a strong heritage in that space. If you look at the 3 segments, they are very similar to our own segments. We are -- they are obviously headquartered in Sydney. There's a large population of people, over 3,000 people. I think sometimes IOOF gets accused of being a Melbourne-centric organization, but what's probably not realized, particularly post P&I, that we've got more people in Sydney than we do in Melbourne. So we do see ourselves as very much a national business, and we use that as a strength to try and make sure we can attract the best people, irrespective of geography, particularly in a post-COVID environment. So just moving through to the vision and what differentiates IOOF and the new organization, the new IOOF that includes the addition of MLC. I mean there's -- we put some of the key points there that -- and these shouldn't be new to anyone. These are all issuing topics that we've discussed in the context of the IOOF's strategy over the last 12 to 18 months, our ClientFirst culture, putting our client at the center of everything we do. And in fact, creating a new organizational design and operational design that has been stress tested in the COVID environment and in fact, excels in the COVID environment. The first example I can give is that with a 250% increase in demands over the peak COVID period, our call wait time maxed out at 5 minutes, which I think is an exceptional result and a testament to our ability to deliver client outcomes. We're committed to the evolution of advice and the transformation of advice. We've spent a lot of time investing in better governance standards over the last 12 or 18 months, and we're confident we've got the right foundations there, announced about building into the transformation around the efficiency and effectiveness of the industry. We've touched on proprietary technology and the importance of that. That will continue to be a feature, and we continue to be committed to investing in technology and building those capabilities in-house as a key differentiator and something that underwrites our agility going forward. And that's particularly important when we talk about integration and ability to integrate. We are in control of the end-to-end integration process, and that is not something that most other organizations are in control of in these sort of situations. So that is a key feature that actually derisks that integration. Importantly, I think for the long-term sustainability of the business, this business has a high cash flow generation profile and low capital intensity. That ultimately translates to a commitment to high dividend payout ratios for the benefit of our shareholders, who are funding this transformation and who are funding the creation of what I think is going to be one of Australia's leading businesses. As I touched on already, an all-weather balance sheet, I think, hold us in good stead as we navigate through these volatile periods and equally, navigate through these periods where we're investing quite heavily during the integration period. So what does the landscape look like putting this together? And as you can see there, we are, if not the #1, top couple of players by any measure, I think the important point here to make is that this is not scale for scale's sake. This is not about getting deep for deep's sake. This is about creating scale and drive simplification to deliver better outcomes to clients and shareholders. That's the primary driver here. So it's -- I certainly think whether it's an advice, I think in advice, to have a critical mass of advisers, you probably need to be over 1,000. And I think the additional 500 advisers that we will attract through MLC actually improve the economics of the overarching advice business, because we've now built an infrastructure that is scalable. And I think that's a really important message. Likewise in platforms and superannuation, scale matters, simplification matters and simplifying the businesses is critical. I think our track record in platform simplification is second to none in this country, and we've demonstrated that over the past 10 years. And between P&I and MLC, we've now created the opportunity to do the same again over the next 10 years. And we -- in fact, we think we can do that over the next 5 years. So that's the key goal. And I think that the benefits of that will go both to clients and the shareholders. And just touching on the simplification story. Again, interestingly, over the last probably 12 months or so, one of the -- whilst our track record of simplification has been recognized, one of the questions I have been asked is, well, Renato, you're going from 2 to 1, that means that the cost efficiencies disappears we see from there. And I think both with P&I and MLC, I think we can demonstrate where the next leg of cost efficiencies will come and what that means for the business. So with both MLC and P&I, we do end up with more systems across a much, much larger pool of clients. We're talking in excess of 2 million Australians that we're serving. We know we have an operational design model that works, that is scalable. The ClientFirst model is scalable and delivering better services than arguably any other super fund in the country. So our starting position is a very, very strong starting position. Our governance position is a very strong position given the work we've done over the last 12 to 18 months. And the foundation is now how to translate that with the opportunities that both P&I and MLC create. As we've already touched on, technology is key to that. We've invested heavily into technology in the last 5 years to create what we think is the most contemporary platform from a technology perspective, both from an architecture as well as the software and application perspective and continues to evolve. Our retail offer on that new platform has attracted about $3 billion in the last 18 months, and we're now looking to promote that throughout the IFA market. So we're looking to really grow that footprint and grow that penetration. All the while, we continue to build out new features and functionality. So that continues to be a work in progress, but already making great inroads. Turning to integration management before handing over to David, and this is a really important topic and one we spend a lot of time and energy on. It's fair to say that we wouldn't be here talking about this transaction if we hadn't had discussions with regulators and understood the regulators' perspective on where we're at. And it was really important that we create environment, both for the P&I transaction, but importantly now also with the MLC transaction to ensure we can deliver on our commitments, deliver on our promises to clients, both the immediate short term as well as long term and do that in a governance environment that is -- assists all of the trustees, keeping in mind now that we will have 3 different superannuation trustees that we will serve and look to create an alignment that generates better outcomes to members, but equally helps transform the business and deliver better outcomes for the industry as a whole. What we've outlined here is really some staging, if you like, or sequencing of how we see that program occurring. Obviously, we've commenced on the P&I transaction. I think the first few months of that was the protect and serve phase, making sure we've got our hands around the people and make sure that in the most immediate set of circumstances, we can deliver to clients, and we've done that quite well. We now go through the remediate and simplify phase. Equally, you can see there in the dark chart for the MLC business, we will go through a similar process. So this is not about just buying the business and trying to unpick product types or slamming products together. That is not how these programs work. They are long programs of work. And importantly, the -- it's important to note that the $150 million of synergies there from the MLC does not assume any systems integrations. So in fact, we assume that much of the $150 million of synergies that will come in the first 3 years relate to what I'd call more traditional merger and acquisition synergies, duplication of function, a large question of people synergies and consultant synergies really make up the bulk of that $150 million. The benefits that come from simplification, system rationalization, product rationalization, we expect to come in years 4 and 5, and in fact, aren't being quantified in the valuation metrics we're talking about here. So this is a long-term program of work. This is a 5-year commitment. And what we're doing to support that is build that Transformation Integration Management Office there in the middle, which will become effectively a separate business unit that will report through to myself. It will sit on the executive team and ensure that not only are we executing to the integration, we're actually doing that in a way that aligns the broader organization. So this clearly will be the #1 area of focus for the executive team. And I think with the addition of this new executive, we've got the bandwidth to not only integrate, but continues to deliver on our advice and Evolve priorities. So just to probably put some more structure around that. We have created an integration steering committee and management office, which we created, in fact, to support the P&I integration. So much of these capabilities already exist and have been constructed in a very robust manner to support what was already a large acquisition. We are not supporting 2 integrations here. We are supporting a single integration process and program that is now larger but nonetheless has the same outputs, the same inputs, the same challenges and variables. And it's important to us that we build the infrastructure to support that. So we will -- we are going through the process of recruiting an executive to lead this on our behalf. And really, the focus of the executive will be around those strategic teams, the remediation teams, project delivery, organizational design to then work with our executives across the more functional top lines. So the infrastructure is already there. The frameworks are there, the knowledge is there. And this knowledge and structure will be complemented by very, very capable people who will come across and join us from MLC. So as much as possible, we like to build these programs of work with people with knowledge, with working knowledge. These programs of work are not programs that you can go and recruit consultants, in our opinion, to come and do for you. They need to be designed, built and executed with domain expertise, and I'm confident that both -- as was the case with P&I that MLC will come with some very capable people who will add to this integration, and we have every confidence that we're going into this with as good a plan and as comprehensive a plan as we've ever developed. So with that, I'm going to hand over to David to talk through the transaction funding.

Ladies and gentlemen, this is the conference operator. Please continue to hold as we continue to try and get the speakers back online. [Technical Difficulty]

Hi, David. Are you there?

Yes, it's fine.

[indiscernible]

Apologies. I'm not sure why I cut out there. So apologies for that. Look, just a couple of minutes and just to cover. In terms of the way that we set the funding for the transaction, you'll notice it's a very equity-rich component with more than $1 billion of new equity, and then 2 tranches of debt, one being a subordinated loan note of $200 million issued to NAV, the second one being incremental debt of $250 million, which will give us a completion, a total leverage of less than 1x net debt to EBITDA. So that we feel is very important to ensure that we have the right balance sheet for what we expect will continue to be volatile times in the market, continue funding remediation and continue to pay a strong dividend across the period. Moving across to the next slide. Look, the only comment I want to make in terms of the pro formas that we have there are on the returns. So we're expecting to deliver in excess of a 20% EPS accretion on a pro forma basis in FY '21. That includes the $150 million of synergies and targeting return on funds employed of 15% by the third full year of ownership. So we believe that, that's going to give us -- give our shareholders a very attractive return, and that's related to us reiterating our existing dividend payout policy across the period. With that, I'll hand back to the moderator.

[Operator Instructions] Your first question comes from Matt Dunger from Bank of America.

Just looking at the advice business in the second half results. You've seen the revenue decline during COVID. You talked to the shift to fixed fees. Renato, you previously called out the increased demand for advice and adviser supporting clients through COVID. So what's stopping you from monetizing this support that's being given to clients?

Thanks for the question. So if you look at our advice network, the bulk of our advisers of the circa sort of 1,300 advisers, the bulk of that, sort of 1,000 of them would be self-employed advisers. So if you think about the economics of advice, both self-employed advisers, the beneficiaries of that. And the licensees, I think in the AFSLs that we hold has traditionally, I think the industry model that originated out of a very prudent model was relied on subsidization. And hence, why you'll see, for example, in the ADGs from ANZ that they're actually loss-making, and that's unsupportable and unsustainable. That's one of the things we're looking to transform. So what we would expect going forward certainly is that as we increase the demand for financial advice, and we hope more Australians make better decisions that we expect to capture that through the new and emerging model that's coming, including an increased presence of the employed advisers.

Okay. And if I could just follow up with a question on the P&I margin. You've seen some gross margin impression. Can you talk to whether this is repricing outflows? And what's the outlook for margins, both in the P&I business and also in the platforms business?

I might start with just a generic comment on platforms generally, then I'll hand over to David to talk about P&I. I think with respect to the platform sector generally, I think the pleasing thing from our perspective is if you see where the industry is heading, certainly, in the past, there was a platform model where the larger players at times were prepared to cross-subsidize platform with other value creators, for example, cash and other things. So you had an artificial platform pricing market. Now with the removal of subsidies, I think platform providers are creating environment where they are required to generate an economic return based on the services they provide. So in other words, I think the price of a platform will be a function of the cost to deliver that platform. And I think we decide and scale, we are the best place, if not better place, than anyone else to be the lowest cost producer. So I think our position in our pricing equation is very, very strong. With respect to the price movement and activity we've seen, certainly, I saw -- we saw some activity in some repricing downwards for 18 months ago or 2 years ago, but it's been quite stable since then. David, do you want to comment on P&I?

Yes. So the only other comment I'd make is that the P&I business is more highly correlated with the market than our traditional business. We see that indeed in sort of the access to -- early access to super. You can see the numbers there for the P&I business relative to the IOOF business. So that's one of the sort of factors. The second factor is in terms of the way that most of the pricing is structured. So within IOOF, much of our pricing has tiers, meaning that as you move between tiers, it may actually not impact in terms of funds, in terms of gross margin rather for us. The P&I business, though, is much more a percent of FUMA. And so when you put those 2 things together, what it means is that both in market ups and market downs, the P&I business is more heavily correlated with the market. So that's the way that I'd also look at the result in the second half.

Your next question comes from Andrei Stadnik from Morgan Stanley.

I wanted to ask my first question, just around the execution risk of undertaking ANZ and MLC integrations almost similar times. Can you explain a little bit more on how you're going to make sure that you can deliver what will be a fairly large integration? And also in terms of the culture clashes of bringing in 3 different cultures into the one area. And then also just in terms of the staff of -- we've seen -- as I mentioned, this will be a lot of work for a lot of staff for several years. How are you going to make up the key staff can manage through what will be a large body of work?

Thanks for the questions. So look, I might start with -- I might start with maybe the cultural limits actually, which I think, in some ways, are the most important, and both in terms of the cultures of the organizations and equally, ensuring that our people -- we can build a model that actually is sustainable and isn't burning people out. The observation I'll make about culture is that the 3 businesses that we're sort of talking about the IOOF, P&I and MLC, are all specialist wealth management businesses. And in fact, I'd argue that there was a bigger clash in these wealth management businesses being inside of bank, then there will be, by them being owned by IOOF. And our learning and observations of the P&I transaction is that for many people in that business, as much as they enjoyed being part of ANZ, the observation they would make is that they feel like the shackles are off. And you're in an organization to understand what they do, makes decisions quickly and they have the freedom to actually make change and that can more -- they more easily see the progress that they make as an organization. In other words, it's a more satisfying place to work when you feel like you're part of something and contributing to something meaningfully. So I actually -- we're very, very confident that culturally, there is a greater alignment here rather than less. From a cultural perspective and workload, there is no doubt that people have worked incredibly hard in the last couple of months, and we'll continue to work hard. One of the things that we're doing and in setting up that new business unit, we need to ensure, and certainly, all our modeling and integration cost assumptions of $360 million is to ensure that we're resourcing this appropriately, and we're resourcing this in a way that isn't requiring sort of herculean efforts for 3 or 4 or 5 years. What I will say about our organization, however, our organization is an organization that has transformed its governance fittings, is transforming a platform, is transforming advice, has dealt with COVID and has sealed this deal all remotely in 12 months. So the capabilities of our organization, I think, are outstanding. It's a function of our culture, our people, our agile mindset. And I do -- whilst I don't think you can run at that rate indefinitely, I do think we can create the environment, and we're resourcing for an environment that will create the right cultural settings and the right resource settings to execute. That's probably the first part of the question. The second part of the question in terms of how do you do these things side by side? As I said, we are managing this as one program of work. That's really important. And effectively, the goals, the objectives and the ultimate destination of these products, these systems is all uniform in that Evolve program. The synergies that we're pointing to, both in P&I and in this are people-oriented synergies and what I'd call traditional M&A-type synergies. We are not reliant on complex integrations or technology works or product rationalization to hit these numbers. All those synergies, which are significant, and we think, in this case, with existing years 4 and 5 are not being quantified here. So they are over and above what we're quantifying here. And again, the reason for that -- the reason we're giving ourselves 5 years to do that is because of -- we understand this bandwidth. We've -- as part of P&I, we've attracted a large number of very, very capable people and leaders in the business with deep specialist knowledge. So we've got more capabilities as a result of P&I. There will be more capability added to that through the MLC transaction. But ultimately, it goes to that transformation infrastructure that we're building as a business unit. That will be alongside the rest of the business for the next 5 years.

[Operator Instructions] Your next question comes from Michelle Wigglesworth from Milton Corporation.

My questions will be very quick. I just wanted to understand how -- what you've budgeted for outflows in -- with the MLC platform component and it's been in outflows for the last few years, if that's in your synergy or in your numbers when you're forecasting that. And the second question was also on platforms and whether the platform is very similar to ANZ, and that's also one that's going to be -- where it was more heavily skewed to the market.

So Michelle, so on the net flow assumptions. So clearly, that business has been in an outflow. There's no doubt. I would also say though the management and MLC have made some decisions in the last year or 2, probably like that in month around pricing. So they took some steps around pricing and bringing prices to market on those products. From our analysis as part of the due diligence, we've seen that pricing have an impact on that outflows. And so we've seen the cause and effect, if you like, with some of the recent decisions, which probably aren't evident in the sort of what I'd say, industry data yet. However, we're not -- our assumptions aren't assuming any sort of massive V recovery in flow. So I think we're taking a very prudent position on our position on flows. In terms of the -- what type of product they are, so within the 3 key products that they have in MLC, MLC Wrap, which was the old Navigator business from Aviva. It looks very similar to our current construct. There was quite a lot of commonality between a master key and some of the products in P&I, which are more unitized structure. And then the workplace product in Plum is again, very similar to our own workplace. So there's a high degree of commonality around those product suite.

Your next question comes from Brendan Carrig from Macquarie.

So just a question on advice. So you just talked about the shift to fixed fee. And on this slide, I note that we -- we're now saying that the gross margin -- or the margins aren't the way of managing the performance of this -- or assessing the performance of this business anymore. I just wanted to get your comments on to how you're assessing the performance of this business going forward as I would expect the mix shift towards fixed fee would continue. So how should we be thinking about profitability of this business going forward?

Well, yes, that's a great question. I think profitability is best measured by profitability, if that makes sense. And so I think the point we're making there is that the industry has its -- a tendency to measure success of the advice businesses by fund that is administered or sorry, funded managed. We think there's a disconnect between that and what we see the outcome of advice being, which is advice is exactly that its advice [ prospect ] to make better decisions and people should be prepared to pay for that whether there's a pool of assets there or not. So the kind of metrics that we would look at would be either EBIT margins, revenue per adviser, number of active clients per adviser. They're the sort of metrics that internally, we've started to look at more and more. And to be fair, that's sort of metrics that we'll want to be sharing with you in future.

Thank you. That does conclude our question-and-answer session at this time. Any callers who requested but did not get to ask a question, the company will follow up during the day. I will now hand back to Mr. Mota for closing remarks.

Yes. Thank you. And again, look, conscious that we've had to cover a lot today, and there's a lot more we can cover and really look forward to following up with everyone over the coming days around that. My final remark would be, I think we've got a fantastic opportunity here to create a new wealth management organization that leads the industry, and that's actually going to lead with it as well a new and renewed advice industry, I think, for the benefit of everyone. So it's a very exciting time. There's a lot to do. But we've done it before, and we're certainly going in, I think, with a mature mindset and really to commit to deliver to our commitments. So thank you again to everyone, and I'm sure we'll speak shortly.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.