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

Good morning, everyone, and welcome to the IOOF Holdings Limited 2021 Half Year Results Presentation. [Operator Instructions] For opening remarks, I'd like to hand the call over to IOOF CEO, Renato Mota. Please go ahead, Renato.

Thank you, and good morning, everyone. Thanks for your time this morning. Over the next half hour or so, myself and our Chief Financial Officer, David Chalmers, will walk you through some of the highlights for our first 6 months of this financial year before opening up to questions. So starting really with the financial overview. I'm pleased to say we've delivered what is a solid set of results from a financial perspective. And in addition to that, really delivered us a meaningful business transformation and business outcomes. Starting with our profit metrics, so starting with underlying NPAT as well as gross margin, we've seen a significant uplift in both of those with the contribution and inclusion of the P&I business coming across from ANZ. And importantly, this provides a really solid foundation for our continued growth into the future. The same can be reflected in our funds under management and administration, which benefits from the completion of P&I. Interestingly and importantly, in our net flows figures, our proprietary technology offer, it's pleasing to see that delivered $785 million in net inflows for the period. And clearly, the result also reflects some simplification and rationalization as a result of the transformation, which has resulted in one-off net outflows of approximately $4.1 billion. In terms of dividend, and we're conscious -- this is always an important feature of our results for our shareholders. We're reporting a total dividend of $0.115 for the period. Made up of 2 parts. It's made up of a fully franked interim dividend of $0.08 per share as well as a special fully franked dividend of $0.035 per share. David will touch on this a little bit further. But I think importantly, not only does it reflect the recognition of the importance of income to our shareholder base. It's also a reflection of our capital base as a business, both currently and also our confidence in terms of our balance sheet going into the future. Reflecting on our business achievements. I think making these sort of achievements across any 1 of these 3 strategic initiatives would be a great outcome. But I think to be able to demonstrate our ability to execute across all 3 simultaneously, I think, is really a credit to the team and demonstrates our ability to execute. If we focus on our Advice 2.0, so our Advice transformation. We have commenced the changes in September of last year around that transformation and are on track to realize those expected annualized synergies of $10 million per annum. Pleasingly, we've seen the integration now of the ex-ANZ Aligned Licenses with the existing IOOF licensees under 2.0. This has also allowed us to really create the common governance environment. So we're now dealing with one common governance environment, and we've now seen a large number of those advisers go through a full annual cycle under the uplifted governance standards. We -- at our last reporting period, we announced the acquisition of Wealth Central, and it's pleasing to see that -- see some significant take-up of that functionality over the last half. Moving to our Evolve program of work or Evolve 21, as we call it, which is geared around the simplification of 2 operating systems to 1 by December 2021. It's pleasing to report that we're on track and making really strong progress on that front. That system, the Evolve system now is responsible for administering over $14 billion to funds under administration. As I mentioned earlier, we're seeing strong net flow, which is really pleasing. In addition to that, we're also -- surpassed the $1 billion mark in our MDA service, so our managed portfolio service, and so some really pleasing progress on that front. In addition to that, we've taken the opportunity also to simplify our ecosystem in and around above as well, which has been pleasing for the period. From a growth perspective and really pointing to the integration of both P&I and preparation for MLC, it's pleasing to say that we're now reporting a $20 million annualized savings achieved this year towards our target of $25 million for the year. So very much on track to deliver on our commitment with respect to P&I synergies, which is a real credit to the team who've been able to do this alongside preparation to the MLC acquisition itself. So -- and we'll touch a little bit further on this. When I reflect on our ability to make the progress and that we're reporting it today, I think part of that comes down to a couple of important factors. And one of those factors is the consistency of our strategic intent, which has now been in place for 2 years. And I think that consistency of strategic intent, including the MLC acquisition, provides real clarity for the business. And that clarity is now translating into agility and speed of execution. So that's really a really pleasing feature for the business. In addition, I think one of the additions to that agility and the pace of change and being able to deliver on our commitments has been a maturing of that capability, both in terms of the addition of some capability from the P&I leadership that has joined the group. But importantly, also, we're now in a position where we have the executive team in place. This time last year, we're in the midst of an executive team reshuffle. But now, having -- had a good 6 months and now leading into the remainder of this year and next, we're seeing that stability of team, increased capability and maturity really translate into business outcomes, which is a real positive for the business. Just before handing over to David, I do want to touch briefly on our 3 strategic initiatives: Advice 2.0, Evolve 21 and transformation through integration. Just starting with Advice 2.0. And this is really about ultimately creating an end-to-end opportunity set with respect to the accessibility and affordability of Advice to Australians. If we reflect on the traditional advice industry as we currently know it, it is very much centered on what I call the latter half, if you like, of the life cycle of Advice relevance. This reflects the need to reinvent Advice as we traditionally have known it to remove any cross subsidization from other parts of the value chain. And from an IOOF perspective, that's about improving the sustainability, the accessibility and the affordability of financial advice. So it's great to see we're making significant progress around that. It's really pleasing to us to see us get greater clarity around the positioning of each of our propositions, particularly with respect to Shadforth and Bridges, which I'll touch on a little bit further. But also, the same applies to our self-employed Advice licensee offer across some of those brands. Whilst there is a lot of focus on reshaping and reinventing what we already have, there's also tremendous effort going into what we call the financial coaching well-being aspect of our Advice offer. And it's this approach to looking at advice and well-being through a different lens, through a very technology-enabled lens that is going to improve the accessibility and the addressable market of advice. As we currently sit here today, Advice is accessible to approximately 1 in 5 Australians, and there's tremendous opportunity to increase that addressable market through finding new ways and better ways to create a customized and relevant experience to other cohorts, many of which are clients of ours today. So when we look at our Advice footprint. We also look at that through the spectrum of Advice Licensee models. And as we've mentioned before, we stratify that across 3 key segments, which is professional services or employed financial advice models, the self-employed segment and the self-licensed segment. Going forward, we see all 3 of these segments has been really key for the IOOF Group and creating a really healthy and vibrant ecosystem across all 3. What I think can be seen from this slide, and I think the really relevant point is the relative contribution of each. And clearly, there's -- I think we can highlight a really stark difference in the economic contribution of the professional services versus a self-employed and the self-licensed. The professional services we see as being a growing segment. It's currently going through a transition, particularly with Bridges towards a wholly employed environment. And this is providing great opportunity to simplify our processes to create greater quality and consistency in Advice experience, which I think will benefit our clients and ultimately benefit the brand as a whole. It's also important to recognize the strong referral model that sits within Bridges that provides significant opportunity for net new clients and growth of that network. We approximately received 10,000 referrals per annum into the Bridges network, a large part of which currently go unserved because the traditional advice model simply does not cater for many of the needs that we're currently receiving through that network. So tremendous opportunity to, as I said, extend that addressable market. In terms of the self-employed advice model, and as we've spoken many times before, this is a segment of the industry and a segment of the market that needs to be reinvented, particularly with respect to sustainability. So clearly, as you can see from that figures in a relative context, it is responsible for the vast bulk of our financial advisers, but yet represents a much smaller part of our gross margin from the segment. And this points to the sustainability challenge, which cannot continue. There are 2 aspects of this that we're really looking to address. One is the cost structure that we currently incur in supporting this advice network. And as we've said in the past and have said today, we're targeting $10 million annualized benefit there. But equally, we need to be really disciplined in which advisers do we choose to partner with. And certainly, to the extent that historically, we've supported or cross subsidized advisers that are not economically sustainable in their own right. This is not something that we will continue to do going forward. I think the other overlay here is one of governance, governance and higher standards that we've now rolled out through our network. So between the high governance standards, in addition to the sustainability equation, we do expect Advice 2.0 is likely to see us reduce our adviser numbers in this segment by approximately another 140 advisers over the coming 6 to 12 months. This itself is actually allowing us to replatform and reinvent this business. So adviser numbers of themselves are not a key metric of success. It's actually ensuring that we have the right advisers, and we have a business that is attracting like-minded advisers into our network. With respect to alliances or IOOF Alliances, this is a business that we think has tremendous potential. It is a business that we are currently repositioning for the future and for our future model. So whilst the small part of our business, I think, over the coming years, we'll see this is a growing part of our business. For Evolve 21, I think we're reaching a really exciting phase of Evolve 21. Not only are we rationalizing and simplifying our system, which allows us to have more resources dedicated to the go forward, experience and service. It's also really pleasing to see the growth that we're now experiencing, particularly in the external market or what we would call the IFA market, the Independent Financial Adviser market. We're seeing increasing levels of licensee usage, increasing levels of active adviser numbers. And I think that's a really pleasing sign and demonstrating some real green shoots in terms of what we can expect going forward. As we've said, we're on track to deliver to our commitment to December 31, having the 2 ecosystems rationalized to 1. In terms of our transformation through integration, as we've touched on, it's pleasing to be here today reporting an annualized cost figure of $20 million for the 6 months in terms of our cost achievement and very much on track to achieve a $25 million annualized for the year, which will take us to $43 million on a cumulative basis in terms of cost out and very much well on track towards a $68 million target. It hasn't been -- it is a complex integration, particularly as a result of the TSA, but it's pleasing to see us meet our milestones and our objectives. And talking of milestones and objectives, it's particularly pleasing to see us do the same with MLC. I think the team have been very disciplined, methodical in their approach. And I think part of the credit must also go to National Australia Bank and MLC for their approach to this process. Of note, particularly of late, the ACCC outcome in terms of the no opposition to the acquisition, I think, was a real positive and welcome. And more recently, we've had the MLC trustee or NULIS confirmed that the transaction is in members' interest. And this will be a key input into APRA's own opining on the transaction, which we expect to occur over the coming months to allow us to reach a conclusion or completion by June (sic) [ June 30 ] this year, by no later than June this year. So a tremendous amount of progress is being made and alongside meeting our commitments on P&I. So I think it's been a very productive period of time over the last 6 months and that positions us well for the coming year ahead. I'll hand over to David.

Thanks, Renato, and good morning, everyone. Before we jump into the results, I just wanted to point out that over the last few months, we've been reviewing the way that we communicate our financials to the market. And with that in mind, this morning, you'll find that there are additional 2 documents which we've uploaded to our investor site. One of those is an investor pack, it's an Excel file that steps through the numbers providing reconciliations. The second one is an investor book that is aimed at providing greater insight into how we make our money. So really, what we're trying to do there is provide greater transparency, greater detail on profit drivers. There's a lot more detail there. So it's something we look forward to talking about with the investors and analysts over the coming days and perhaps weeks. As Renato said, the first half '21 results represent a solid result in what's been a busy operational period for us on several of those key transformation initiatives. Before we dive into the numbers, it's also probably worth mentioning there are a couple of things to call out when you're looking at the comparisons on this first slide here. The first is that if you look across the 3 halves that we've presented, so first half '21 and 2 comparatory half periods, it's important to note that ANZ P&I is not included at all in first half '21 as the transaction had not yet completed. There are 5 months of P&I included in second half '20 and a full 6 months in first half '21. The second thing that's worth noting, in particular, when you look at the increase in the NPAT line, is a number of material one-offs during the period. Those principally relate to the settlement of our arrangements with BT, which we announced to the market on the 17th of December. And also a legal provision that we took up in relation to an AET case, again, that we disclosed to the market a couple of weeks ago. So the net of those 2 is really what has driven the increase in NPAT both of those items are stripped out of NPAT. Revenue for the period was up -- it was up to $350 million -- $350.7 million, up 38%, largely driven by the inclusion of P&I. And if I step through to the next slide, I'll do a quick reconciliation in terms of NPAT and what's driven those changes there. The first to note is the $11.4 million impact of reduction in FUMA. Now when you look at the FUMA summary, it's true that the closing FUMA For this period compared to the second half of '20 is almost the same. But if we look at the underlying FUMA, so if we strip out the impact of 5 versus 6 months of P&I, and we just look at the IOOF numbers on a like-for-like basis, the FUMA is actually -- average FUMA is actually down over the period, contributing to that $11.4 million reduction. The margin has also taken a hit. That's really driven by a couple of things. Firstly, is the final tranche of some of the regulatory pricing changes, grandfather commissions and things like that. And secondly, and I'll step through this when we come through to our advice business, some margin reductions in terms of some of our third-party platform arrangements. Offsetting, though, these decrements is the contribution of the P&I business, as I said, for a full 6 months in this period here. And then you also note that that's -- that number there is net of the ANZ notes, which were formally a part of our historic results. Expense base, I'll just skip over quickly because essentially, what we're seeing there is the same impact -- most material impact there is the addition of P&I for the period, which has increased the cost base over that time. Renato mentioned the $5.9 million of synergies. Now that is the in half, if you like, impact as against the annualized impact that we see from the $20 million. So it's a translation of annualized into actual. And then we also see a small increase there in labor and also in IT. Now the labor cost, what that represents is principally some of the uplift we've seen with governance. We called that out in the second half of FY '20 that we had an $8.5 million year-on-year uplift in those costs. And so what you see is some of that coming through in the comparison period. Stepping now into a business overview, and we presented these as business overviews rather than segments because we wanted to give you a look at also financial advice inclusive of the former ANZ licensees. Now in the Excel workbook that I mentioned before, that is uploaded to the site, you'll still find all of the segment analysis with both of these separated out individually. As Renato mentioned, there's a lot of work going on here in terms of the transition to the Advice 2.0 model. But the major driver that we see here in terms of the gross margin drop off is actually in relation to the third-party platform arrangements, such as the one that we have with BT, and I'll step through those in a bit more detail at the moment. The other impact there is, as noted before, the impact of the grandfathered commissions also impacting on margin. This slide is a new one. We've put together to try and break down gross margin by channel, and Renato mentioned some of these earlier. You often would have heard us say that funds under advice or adviser numbers is not the best way to think about the Advice business and profitability. This slide is really aimed at addressing that point. And you can see there that despite, for example, representing less than half of our funds under advice and adviser numbers, the professional services channel contributes well north of half of the overall gross margin for the channel. In addition, as we have there, you can see the IOOF licensee holders being self-employed and then self-licensed being the Alliances group. The open architecture, so that is third-party platforms. That's where we recorded the revenue that came through for the BT arrangement. As noted, that terminated as at the end of [ December 17 ]. So that open architectural line is one that will certainly be impacted going forward. We called out at the time of $15 million FY '21 impact to revenue. Moving on now to portfolio and estate administration. This business is more directly linked to changes in funds under administration and of the gross margin fall of $9.4 million, principally due to those lower funds under administration balance, including the impact of early release of super and the last tranche of the Protecting Your Super changes, which have also impacted margin. At the OpEx line, we've also seen a slight increase in the allocation of our client first operational team, again, representing a lot of the work that was involved in terms of processing those ERS applications. If we now look at net flows by solution, we can see that, again, our flagship advised products were strong for the half, albeit down on previous corresponding period, principally due to the impact of COVID. And we've also provided there some gross margins by solution in the bottom right. And the key point to note there, particularly when you look at the flagship adviser versus flagship employer is that while there are higher gross margins sitting in the employer channel, it's important to note that the gross margin dollars are quite different. So we've noted there, gross margin dollars approximately $930 million for Advice versus $370 million for Employer. So while the margins are quite different, they're coming off a [indiscernible] base. Investment management, where we saw gross margin down by 11%, principally down to some of the lower margins that we see on cash products. I'll come to talk about that when we look under -- funds under management. And also a moderate increase in cost again to some of those governance-related cost items that I mentioned earlier. You can see here that while flows have been relatively stable over the period, the $1.9 billion that you see on the far right of the top chart there represents the liquidation of the cash management fund, which has been replaced with external cash accounts. Now importantly, income from those cash accounts will be recorded in a different segment, that will be a cross in portfolio and estate administration. So while there'll be a decrement to this reporting segment, across the group, there will be a minimum impact, we think, from that change. Moving through to P&I. And as I mentioned earlier, the result you see there for second half '20 is a 5-month result relative to 6 months first half '21. We saw some hits to gross margin coming from net outflows and again, ERS over the period. But the P&I business was more impacted on a relative basis from early access to super than the heritage IOOF businesses. We also -- and again, this is something we noted last time, that the P&I business tends to be more moved, more in sync with market movements. And the reason for that is that most of the fees there are principally percentage-based whereas across an IOOF there historically been more of caps as sort of -- and sort of set fees, meaning that the percentages -- or the dollar value doesn't change as much relative to movements in the market. We also see some of the synergies coming through here that we've mentioned. Now it's important to note that when we talk about the $5.9 million, not all of that is removed from the P&I segment. Those savings are spread across all of the areas, but you do see here some of the profit improvements being made as a result of the synergies being delivered. I mentioned earlier in terms of the greater relativity of early access to super. You can see that here on the chart. And also worth noting that for the half, there was $519 million of outflows for ERS compared to $180 million for IOOF over the same period. Shifting gears now and just changing to remediation. The remediation programs are coming into now a pretty crucial stage as we work through the program throughout the rest of calendar 2021. By nature, these programs are not linear. There's often a lot of upfront work that needs to go into reviewing particularly complex case files, all of that needs to happen before cash flow actually follows, and we'll see a significant increase in those payments made. Across our 3 different remediation programs, there were some minor changes in terms of increases in provisions. Typically, these were due to modeling. So for example, just updating interest rates and things like that. But taken as a whole, the remediation balances have been pretty much unchanged other than program cost expense during the period and also payments. It is important to note, though, when we look at the completion of the programs, that we are anticipating a significant acceleration of cash payments, particularly in the IOOF remediation program. That program, we expect to be substantially complete by the end of FY 2022, meaning that the cash flows, as I said, we expect to be quite high over the coming months as we work through that program. It's a similar time frame in relation to the ANZ Aligned Licenses remediation and a little bit longer for the -- to wrap up the P&I remediation on the product side of things. Touching on corporate cash and debt facilities. And again, you'll find a reconciliation on the Excel pack as to how we derived corporate cash, But it's important to note at the moment we have a very unusually high cash balance, which, of course, is the result of the equity raise associated with the proposed MLC transaction, that cash is sitting on our balance sheet today. And so we have $865 million of undrawn cash facilities available in addition to corporate cash. The number you see there in green is a pro forma as at December 31. The only adjustment to the pro forma being the inclusion of the BT settlement, which was received in the first few days of January. As a reminder, the funding required for the -- to complete the MLC transaction is $1.44 billion. That will be funded $1.24 billion through the cash and facilities that you see on the left. In addition to that, a $200 million subordinated loan note, which is going to be issued to NAB. So no drawn debt for the moment. But clearly, this picture will change going forward. I did also want to give a quick update in terms of the target leverage that we sort of forecast for the first day of post-MLC and upon completion. We've been talking about net debt-to-EBITDA of less than 1x. Potentially, that could increase to a little higher, potentially up around the 1.1, 1.2. The key factor there will be the pace of remediation. So clearly, if we speed up remediation, that will, in the short term, increase leverage, It won't increase it over the medium term. But clearly, we're looking to move that remediation program as quickly as possible. And finally, as Renato mentioned, in terms of the dividend, it's one where we've set -- we split it into 2 to position the ordinary dividend as being funded in line with our policy of 60% to 90% of NPAT. It's at the higher end of that, it's 79%. And then we were able to fund the $0.035 special dividend on the basis of capital following the divestment of the shares that we held in Australian Ethical Fund and also from the BT settlement as well. So that's the key point, I think. In terms of dividend, we also recognize it's an unusual period where we clearly have an expanded capital base, but not yet the earnings coming through from the MLC acquisition. So that wraps up a summary of the financials. Happy to certainly take any questions after this in terms of going into more detail. So back to you, Renato.

Thanks, David. Just before opening up to questions and wrapping up, I thought it'd just be worth just really refreshing and summarize ourselves on the strategic independent rationale of the organization and really providing an outlook as to where to from here organizationally. And for us at IOOF, it does begin with the value of advice. And over the past 6 months, we've completed what is Australia's largest survey with respect to value of advice, incorporating both clients who are currently in an ongoing advice relationship and those that are not. And that's provided a really valuable set of data and knowledge that really reinforces the value of our strategy and our positioning, which just goes to reinforce that the Advice experience is, in fact, the most valuable part of the value chain when perceived through the lens of our clients. Some of the interesting stats there, which you can see on the slide there but one I think that is particularly topical is that 94% of clients have an understanding of the annual fees they pay for the advice based on several advice documents they've received. So we're now moving into an environment where clients have a very high level of understanding and comprehension of what we expect and what, in fact, they are paying for. And if you look at the right-hand side of the slide there, which really looks to compare clients who are advised and those that are not advised, what you're seeing is what we're calling the Advice dividend. So the benefit as perceived by the clients in terms of the value attributable to the advice, both in terms of their financial well being, their level of financial anxiety, but also their ability to afford a respectable retirement. Interestingly, and I think importantly, this is agnostic as to age, whether you're under or over 50, or net wealth, whether you are high net worth or whether you're, in fact, in the mass market. And this really just goes to reinforce the opportunity to increase the addressable market for financial advice through the end-to-end life journey, but also importantly, to ensure that we are targeting each of our brands to a relevant segment, be it high net worth through Shadforth or mass market through Bridges or, in fact, supporting our self-employed advisers to refine their own target market. Just moving to, again, the simplification rationale, the transaction -- sorry, of the organization and Evolve 21 specifically. Again, this is a slide we've used many times before really to justify and reinforce the value of simplification in terms of operating cost base. And our ambition is absolutely to be -- to create an organization that's lowest cost to serve. I think the pleasing thing for us here is that we are absolutely on track to deliver. But alongside that, we've also been able to deliver to increasing our net flow growth profile from the go-forward technology base. The reason we're able to do this is simply because the technology is a core competency of the group. It has been for a number of years and continues to be an area of investment for us. Being able to focus that competency, both in terms of systems, people and processes into fewer ecosystems or environments will actually increase our speed and pace of change. Whilst we've spoken quite a lot about Evolve 21 and our desires and to simplify 2 [ key ] systems into 1, I think it's also important to note that we're also making progress on the environment we've acquired from the P&I transaction. So if we reflect on our commitment around Evolve 21, which is to have that rationalized by the end of 2021, or in other words, halfway through the FY '22 financial year. What we're committing to here is by the end of the FY '22 financial year, so by June '22, we would have also rationalized another RSE licensee that came across from P&I. We would have rationalized another superannuation fund as well as another technology environment. So in total there, by FY '22, we're saying we're rationalizing 2 technology environments, 1 fund, 1 RSE and in the process, removing just over 50 different products from our range. So again, meaningful progress in terms of rationalization of our environment, which all bodes well very much for the incorporation of MLC and continue with that path over the next 3 to 5 years. So really, just to -- in wrapping up, we have a clear way forward across our 3 years of strategic intent over the coming 6 months and certainly over the coming year. We are holding ourselves to account by measurable deliverables. And certainly really look forward to keeping you up-to-date with respect to those over the coming periods. So finally, just before closing and opening up to questions, I think the transformation the group is going through at the moment is adding significant scale and strength and sustainability to IOOF into a different world, a very different world, one with society's expectations with respect to who they engage with and the technology they use will be very different. We're delivering economic diversity, both in terms of range of and diversity of product, but also diversity of channels. And we do think there's a tremendous opportunity to engage more directly with our members and our communities in an environment where the regulatory environment, settings are also changing. We also should not lose sight of the fact that we will have access to and an opportunity to engage with our existing member base of 2.5 million members. And this is a tremendous opportunity and one that we look forward to exploring further and engaging with them and again, using new ways and new technologies. So with that, I'd like to thank you for your time. We'll pause there, and we will open up to questions.

[Operator Instructions] The first question comes from Andrei Stadnik at Morgan Stanley.

Can you hear me okay?

Yes.

Yes.

Fantastic. I had a question -- 2 questions. First question on the gross margin. The gross margin was stated at about 47 basis points in the portfolio platform division, which seems quite a good outcome given the these 3 headwinds. Can you explain what helped that outcome and how do you see that evolving going forward?

Yes. Look, there are different sort of factors, I think, impacting margin. I talked about some of the things drawing margin down, but we do also see a change in the portfolio mix. And so the positive aspects are principally due to change in portfolio mix. When you look at the slide that sets out the different margins across the different products, you can see how movements in between inside that portfolio will impact the overall gross margin. So that's the main factor.

And one of my -- the second question is around the special dividend and the balance sheet. Just in terms of the cash usage going forward for the integration and some of the other usage such as the remediation costs that you flagged, is -- the fact is paying a special dividend reflecting just the overall confidence in the balance sheet and the cash flow generation built IOOF, notwithstanding some of the short-term cash usage that you've mentioned?

Yes. I think that is right. And as I also mentioned, the sell-down of the shares in Australian Ethical, which we talked about just around, I think, around July or August earlier on, that's also freed up around about $100 million in cash. So that's something -- and that's across both a couple of tranches of sell downs. So that's also given us the flexibility in terms of being able to pay a special, as I said, to recognize that it's an unusual time higher number of shares on issue, but not yet that increased earnings. But you're right, it also reflects, I think, our view that says we're comfortable with the balance sheet. Long term, we've always talked about 1 to 1.3x net debt. The transaction with MLC was always aimed at providing a delevered environment to the bottom end of that range. So yes, certainly, we've got good confidence going forward.

The next question comes from Kieren Chidgey from Jarden.

Just got a couple of questions, maybe starting around the platforms. For your own platforms, I think you're flagging around $5 billion of what we call transition from and seem to be suggesting the Evolve 21 project. We'll see that transition, I guess, to lower cost. So are we broadly talking that, that moves from a 66 basis point level that you talked about to 36 basis points over time? Is that sort of how we should think about that mix pressure as that transition takes pricing?

Look, no, I don't think it's going to be -- if you're asking about the comparison between our transition products and the gross margin percentage there relative to flagship, there are quite a few differences in terms of the makeup. And you can see that in the 2 flagship channels. So there is a mix issue there in terms of what you'll see on that transition.

Okay. So I guess the question is, I mean, where do you anticipate that kind of this transition other than [ growth ]?

Well, we're not going to provide a sort of forecast in terms of sort of margins and where we see them going to at this stage. But it's one that we'll consider giving update on in our next -- at the next half.

I think the other element to note here, and is that we've always said that there is -- the -- let's call it, back book to front book is always [indiscernible], but we do expect that amortization, if you like, of that differential over time. But David is right, we're not in a position to give you a specific number at this stage.

Okay. And I mean related to that, Renato, more specifically around ANZ P&I, where the outflows have been currently persistent. And there's still circa $10 billion sitting in that transition category in that business. You previously said you were sort of considering potential repricing initiatives to help with retention around that components of that business. I'm just wondering, have you completed sort of the strategic review around that and what's your thoughts on it.

We've certainly come up with a plan of action, which we're in the process of implementing at the moment that we think will certainly assist that retention and actually allow us to be more competitive in some key segments. Again, that doesn't necessarily involve a broad-based rebasing of price in a generic sense. I think we've been very targeted around trying to make sure that we act in a way that economically, we will get a good return for those changes. So that's something that's currently underway at the moment. So I'd expect that to be in place over the coming 6 months. And therefore, thereafter, we're confident that we'll see some improvement in those flows.

Okay. And my final question just around sort of some of the adjustments moving from statutory -- NPAT underlying. Obviously, some of them are indeed one-off that the Evolve cost adjustment, the Advice 2.0 adjustments to governance cost adjustments, which we seem to come through fairly consistently are they indeed one-off? And when can we expect those numbers to not repeat?

Yes. Look, it's a fair point. I mean when we talk about the governance uplift, it's important to note that not all of those government uplift costs are put back through NPAT. They're principally the one-off, the separation cost, if you like, at separating out the OST. Those very much less sort of structural changes rather than, for example, increased head count or things like that. Any increased head count in our governance series is not put back through NPAT. Evolve 21 has always gone through those adjustments, and so for consistency, we kept it there. In terms of when we expect to see it finish up at the end of calendar '21. So moving on from there, you wouldn't expect to see that appear anymore in the NPAT adjustments.

Okay. And similar for Advice 2.0, can we [indiscernible]?

Correct. A little bit longer Advice 2.0 than the end of the calendar year. But certainly, those changes, as we said out in the Investor Day late last calendar year, those changes quite transformative, and certainly, in our view, appropriate is being treated as one-offs.

The next question comes from Matt Dunger.

Just following up on the margin impact, I missed a little bit of that. What are you budgeting from the rationalization of over 50 products and 2 platforms. Are you able to give us a sense whether or not best interest duty will impact this rationalization?