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

Thank you for standing by, and welcome to the IOOF Holdings Ltd FY '21 Results Briefing [Operator Instructions] I'd now like to hand the call over Mr. Renato Mota, CEO. Please go ahead.

Thank you, and good afternoon, everyone, and welcome. It's great to be here today with our CFO, David Chalmers, to present the full year FY '21 results. Just before getting into the presentation, I do want to acknowledge and recognize that for large parts of Australia, for many people right now, it's a particularly tough environment personally and professionally, juggling lockdowns with dependents on top of work pressures, so I [ thought how is ] everyone. And it's probably also a good segue to take this opportunity to recognize just the amazing efforts from everyone across IOOF and MLC who've done an incredible job in these conditions. And I think much of that is reflected in the results we're presenting today, which I think were a strong set of results achieved against the backdrop of the global pandemic and much uncertainty. Just jumping into the presentation itself, and I'll start off with Slide 2 in the pack. And as we work through the pack today, I think there are really 3 themes that consolidate all of our achievements over the last 12 months. I think, firstly, with the completion of the MLC transaction, we're now at the scale we need to be to support our ambitions and the repositioning of the business as an industry leader. Not only does this translate into position with the industry leadership, it also translates economically into improved growth prospects and net operating margins. In terms of the synergistic commitments we've made, it's pleasing to say that we are well and truly on track. And not only are we delivering on the P&Is, but importantly, we'll also set ourselves up and have a high level of confidence around our MLC commitments. And thirdly and importantly, we've got a clear focus on the deliverables in terms of growth for this business, both in terms of the addressable market, but also in terms of revenue growth for the business. If we jump into the business overview, and starting at Page 4, we really do see today and these results as representing a new IOOF. Looking at the financial highlights, reporting $147.8 million of underlying profit after tax from continuing operations, which is up 19% on previous year. After the nonrecurring, we've reported a net operating loss of $143 million as a result of goodwill write-down as well as some integration costs, and David will touch a little further on this. We've achieved a $56 million in cumulative run rate synergies to date, and we're on track on our commitments, both on P&I and the MLC acquisition. And there's also a $12 million already had been crystallized -- $12 million from the MLC transaction already crystallized in the FY '21 year. Reporting total dividends for the year of $0.23 with the final dividend being made up of the $0.095 ordinary and the $0.02 special dividend. The final comment on the financials, and David will delve into this a little further, is that on a pro forma basis, with the inclusion of MLC, this is a very different business to the business it has been in the past. It translates into an opportunity set that provides significant opportunities from scale and a real competitive advantage in terms of the capability set and our ability to drive down the cost to serve. To the right-hand side of the slide, you'll see some business highlights, and it's pleasing to report that despite the uncertainty of the environment we're in, we've not only delivered on the strategic initiatives, but also completed MLC within 12 months of announcement. And I don't think that's a particularly pleasing achievement relative to other proposed transactions that are currently in the marketplace. We've continued our progress against the Advice 2.0 transformation and the Evolve 21 migration, having completed the first half of the Evolve migration during the FY '21 year and on track to complete that program in December of this year. Alongside this, we continue to build out on our foundation of strong governance and culture centered around the client and our conduct. Whilst it's important to recognize the benefits of the business through this transformation, the ultimate success measure for us as a business and a management team is delivering both growth through efficiencies, but also top line growth. And in this regard, it's pleasing to recognize that the net flows into our contemporary offers, particularly our retail advisory platform, which is really building momentum in the marketplace. Alongside this, we've also seen really strong growth in our financial Advice business in an organic context, alongside the repositioning of this business that sees us be an increasingly important contributor to the economics of the business. If we flip on to Slide 5, it's not only the size and scale that we think is particularly relevant strategically, but it's also the economic diversity of the new group that we take quite a degree of comfort in. I would particularly like to call out the diversification that's obtained through the inclusion of the asset management business into IOOF, which is a different business to our traditional asset management or investment management business, as we used to call it. It brings with us real depth of capability and also breadth. And I think it actually provides a diversification in terms of growth opportunities going forward. I'd like to say that it's still relatively early days with respect to the completion of MLC and having only had control of the business for the last 3 months. But the early signs are quite positive, both from a capability perspective and people perspective, but also our ability to deliver on our commitments in terms of synergies and simplifications. It's been pleasing to see much of those assumptions and hypotheses be validated in a relatively early period, and we continue to learn more about the business. I think as an integrated business, what we've built is a really mature approach to supporting change. And once we're going through a lot of changes at the moment, it does give us confidence that we'll be able to meet our commitments with respect to simplification, reaching a cumulative run rate synergy realization of $136 million to $156 million across the combined groups. In terms of our transformation achievements for the year on Slide 6 there. And really focusing on the priorities that we've laid out for ourselves over the past 12 to 18 months, it is pleasing to report that we've made significant progress on all. And in fact, we're on track on all. Having completed everything we thought we wanted to do, it's actually pleasing to see here now we've had a much higher level of conviction around certainty around some of these outcomes, which are laying the foundations for that translation into economic benefit. From an Evolve 21 perspective, beyond the simplification of the current environment, it provides a real opportunity to then continue to work in terms of the product road map more broadly and the continued simplification of the product set that we now find ourselves with not only with the 3 platforms that's come from MLC, but also the 2 to 3 platforms that we've inherited from the ANZ and P&I business. So -- and we'll touch a little bit more on this a little later. The introduction of the MLC asset management business, as I said, does change the nature of the -- our asset management capabilities. And as I've said, I think we've acquired some really impressive capabilities that are complementary and are additive to our growth prospects. And finally, just touching on remediation programs. It's pleasing to see that the rigor and the urgency that's being applied to these means we're making meaningful progress, both across the product and the advice remediations. We expect to largely be complete on advice by the end of FY '22 financial year, the current financial year, and are making good progress on the product remediations. As we've mentioned in the past, there were some matters that have come across with MLC that we'll be remediating as well, and these are being provided for by NAB. And as equally, as we've said in the past, there are no advice-related matters that we've inherited from the MLC transaction. So just touching on synergies before handing over to David. We felt it was an opportune time really to bring together the 2 programs of integration across both the ANZ and P&I transaction, which is more progressed, and obviously the MLC transaction now with the completion of MLC. We've taken the learnings from the ANZ program, which has been running for longer, and we've really looked to adopt this increased size and scale. The observation I'd make is that the complexity of issues are very similar across both. However, there's no doubt that the MLC integration is of a larger scale. And therefore, we're going to support our transformation team and capacity with an increased level of rigor and method. And also, it's been pleasing to be able to incorporate some knowledge and expertise that have come across from MLC. So we're confident we've got the right structure. And I think reporting this through the lens of one integrated program, I think, is more representative of the way we manage going forward. Specifically, I'll call out the FY '22 run rate synergy target of $80 million to $100 million. This is on top of the $12 million that's already been delivered from MLC in the first month or so of ownership. Supporting this is approximately $300 million remaining integration costs. So we feel we're well placed to deliver on our promises and really simplify the business, both to the benefit of shareholders, but importantly also to the benefit of the members. So in terms of synergies, we're on track, which given the context of all the transformation we've undertaken, the context of having worked through another acquisition and in the context of COVID, I think it's a great achievement through this process and look forward to continuing to report against these milestones and targets. So David, I'm going to hand it over to you.

Thanks, Renato, and good afternoon to everyone on the call. So I'm starting on Slide 9 with an overview of the FY '21 financial summary. As Renato mentioned, the year represents a significant transformation period for IOOF with the inclusion for the first time of the full 12 months' contribution of the P&I business and 1 month of MLC's financial results, the combination of which helped drive the increase -- helped to drive a 31% increase in revenue to $769.9 million for the period. Adding in these 2 businesses also saw a similar percentage increase in the expense base, although [ BAU ] expenses were tightly controlled during the year, aided by delivering the $16 million of in-year cost synergies from the P&I acquisition. As Renato mentioned, these cost synergies will deliver a run rate of $26 million of full year savings, taking the cumulative cost synergies from the P&I acquisition to $44 million over the last 2 years. And that's from the reference of the $68 million that we committed to over 3 years at the initial time of the acquisition of P&I. Moving down through UNPAT. UNPAT increased by 19% to $147.8 million with a statutory loss of $143.5 million. The net product result was impacted by the write-down of $200 million of noncash intangible assets, as we announced in our Q4 business update on 28th of July and approximately $50 million of integration costs relating to MLC acquisition. But despite this increase in UNPAT, UNPAT earnings per share fell by 29% to $0.251 per share, reflecting the capital raise in August and September 2020 to support the MLC acquisition, but with that transaction not completing until the 31st of May 2021. Moving over the slide to an overview of our business units, and I'll step through each one of these in turn. If you look at Advice, Advice EBITDA of $20.8 million, with a reduction of gross margin of $37.8 million on FY '20. The majority of that coming from legacy open architecture arrangements that are counted inside our Advice segment. And there was also a $6.7 million margin impact from the end of grandfathered commissions, which we've been talking about for some time. It's important to note that this loss -- this result also includes a loss for the ex-ANZ live licensees at around about $19 million, with cost of revenue synergies already in place that will reduce those losses to a run rate breakeven position by the end of FY '22, with a small in-year loss expected for those -- for that part of the business inside FY '22. And that's consistent again with what we've been committing to, which is to get those businesses to a breakeven position within 3 years of acquisition. Moving through now to Portfolio & Estate Management, which delivered $76.3 million of EBITDA with a 5% or $11.3 million reduction in gross margin, principally due to margin contraction in our flagship Employer Super product and also an impact of $4.5 million from the end of grandfathered commissions. The P&I business included 12 months of results for the first time compared to 5 in the previous period. And it's important to note that when we talk about this delivered through the P&I acquisition, most of the benefits of those synergies are counted inside this segment, including also there's an additional $8.7 million of revenue synergies. So they are accounted for in this segment, even though, in effect, that the impact of these synergies has delivered much more broadly across the business. Nevertheless, they're recognized in here from an accounting perspective. MLC. What you see here with MLC is obviously just the 1 month of earnings. And so we provided a couple of different pro forma numbers for the full year. Those are found on Page 32 of the Appendix, which not only gives a pro forma for MLC for FY '21, rebased to a June year-end, but it also compares that to the numbers that we gave you almost 12 months ago, which was our estimate of the full year '20 headline financials for MLC on a stand-alone basis. Finally, Investment Management business achieved EBITDA of $51 million in the period, a 9% reduction on FY '20, with the key drivers of that being some of the reduction in gross margin from cash products and also reduction from some of the capital guaranteed products that we have inside the premises. Moving through to the next slide. The next slide brings together all of those drivers into a consolidated picture, showing the bridge between FY '20 UNPAT of $124 million to FY '21 $147.8 million. You can see there is a positive contribution from higher FUMA balances, which were offset by the decreased margin of $20.5 million, with the majority of this decline coming from reduced margins in the Portfolio & Estate business, which, as I referenced earlier, is mainly the repricing for the Employer Super and grandfathered commissions. There's a $23 million UNPAT movement in the open architecture part of our business, but the majority of this being the termination of the contract that we had with BT that was announced in December 2020. It's important to note, there's also a net cash settlement in respect to that contract of $52 million when the contract was terminated. But this amount is not included in our UNPAT. It's normalized out from that result. Moving through to the 3 key drivers of increased UNPAT. We've got the synergies, which we've talked about before, and then also the additional in-year contributions from both P&I and MLC. Turning over the slide, there's a similar bridge on the expense side of things. And you can see there that particularly on the labor cost side, it was a very modest year in terms of labor cost increases. We did make some further investment in IT and in overall governance side of things. But it's worth noting that within there, we did not apply any general salary increases in the FY '21 year due to the uncertain operating environment, but we are returning those to normal for FY '22. And so you should expect to see those return to a more normalized level of increases as we get back to a more normal level of operating. And then again, you see the offsetting impact there of the cost synergies as well. Moving on to Slide 13, which focuses on remediation. We've reorganized the way that we manage this internally, and we now run 2 distinct programs: advice remediation, which includes IOOF remediation advice and remediation for the former ANZ live licensees; and product remediation, which covers P&I and now also includes MLC. Probably, I think, the most important achievement with regard to remediation for FY '22 was that we made $144.4 million of payments to clients during the year. And when you look at the pace of the program, payments in the first half of '21 were $28.5 million. So the second half had more than $115 million of payments and shows the increasing pace of the program as we're moving through and getting towards completion. We did have an increase in remediation provisions across both programs in total of $70.6 million. This is a result of updating, I guess, our sort of assumptions and assumed rates to sort of actual experience. Also in -- we've had a couple of months of delays in one of the programs, which has increased interest costs and also some change to the WACC as well. And while these provisions have increased, it's important to note that the further we progress the process, what we're actually doing is turning a set of assumptions around past metrics into actual data, which gives us greater confidence overall in terms of the overall provision number. Renato mentioned that we expect to have the advice remediation largely complete by the end of FY '22, with product remediation program extending further. We're targeting to complete the P&I aspects by the end of calendar 2022, and the MLC program will go further into FY '23. And speaking of MLC, it's important to note that the product remediation provisions, including the MLC remediation provisions, will [ fund on ] the balance sheet as at completion, although are subject to usual purchase price adjustment process. Turning to Slide 14, which sets out our corporate cash and debt facilities. Following the completion of the acquisition on the 31st of May, we've got drawn senior debt of $475 million, which represents a senior leverage ratio of 0.6x net debt-to-EBITDA. That's slightly below our estimate when we announced the transaction where we thought we're going to be at around about 1x net debt-to-EBITDA. The difference between that is largely timing. I mentioned before that some of the remediation programs have slipped a couple of months, still inside the delivery windows we talked about, about 6 months ago, and I've just talked about now. But nevertheless, there is a timing aspect in terms of that leverage. And so we do expect leverage to increase over the coming 12 months as those payments are made, peaking towards the top end of our 1x to 1.3x sort of target range before declining as cash flow grows from normal business operations and also the delivery of synergies. We've also set out some of the medium-term funding commitments, including a remediation and also the integration investment that we're making, which obviously will deliver some of those returns in terms of synergies. And then looking out further to FY '26, we've got the subordinated loan notes that were issued to NAB as part of the MLC acquisition. Those had a face value of $200 million of issue. We've reviewed those, and it will be in each accounting period. So the current fair value as at 30 June was $205 million for those subordinated loan notes. And important to note that from a debt facility point of view, those are excluded from the definition of senior debt. Moving on to Slide 15, where we talk through the dividends. Consistent with the first half of '21, we declared an $0.115 dividend, made up of an ordinary dividend of $0.095 and a special of $0.02 per share. And that special dividend, just as it was in the first half, is there to reflect the fact that the capital raise that was completed last August and September, but there was only one period of additional MLC earnings in the period. And as we have freed up some cash from divesting a couple of noncore assets, there was a capability to extend special dividend to smooth out those overall dividend to investors over the period. The ordinary dividend per share for the second half '21 and the final dividend represents 75% of UNPAT. So midway through -- or at the midpoint of our overall dividend payout policy, which is at 60% to 90%. Turning to the next slide, which sets out a bit of a pro forma for the new IOOF. So this represents IOOF for FY '21 ex the 1 month of MLC contribution on the left-hand side. We've then done a pro forma for MLC June to June for FY '21 to produce an overall group pro forma for FY '21. And it does really talk to the scale of the business with revenues of close to $1.5 billion and UNPAT of $213.3 million. Importantly, we're also flagging there some changes to our reporting that we will work through in FY '22. The main ones there are really around reviewing our operating segments to consolidate down to 4 segments, which will be: Advice, Platforms, Investment Management and Corporate. So full integration of both MLC and P&I into those segments. We're also working to review our FUMA methodology for October, which is when our Q1 FY '22 FUMA report will be out, just to make sure there's consistency in the methodologies that are used between IOOF and MLC. There have been some historic differences there in the past, and also updating our cost allocation model as well. The last one I'd draw your attention to there is in relation to the way that we calculate UNPAT. We've introduced and reviewed the way that we adjust from in between NPAT and UNPAT. We've introduced a minimum threshold for adjustments and made other changes to sort of really tighten that up. And the net impact of that will be that there will be fewer items that we normalize in between those 2 lines going forward. Moving to Slide 17. We also want to just set out some selected key financial drivers and targets as we look out across the period. Now I won't step through each of these in detail. But the first few relates specifically to earnings drivers over the period, with the net result of those being that we're targeting growth in net operating margin despite an anticipated decline in gross margin due to the benefit of synergies being realized across the period. I talked before about the change in the UNPAT methodology. If we applied that approach to FY '21, UNPAT would have been approximately 3% lower, but it's important to note that none of this does anything to change statutory NPAT or cash flow. It's simply fewer items being adjusted in the UNPAT number, but important to take into account as we go forward. And finally, when we look at all of these factors combined, we're targeting increasing EPS through full year's contribution from MLC, in addition to the benefit of synergies coming through, which we looked at within light of our dividend payout ratio, will help to drive future ordinary dividends. I'll hand it back to you now, Renato.

Thanks, David. And just to spend a few moments in terms of our outlook and priorities going forward. Just worth reflecting on Page 19 some of the industry dynamics that we find ourselves in. And certainly, there's no denying that our industry plays a really important role in supporting the financial wellbeing of Australians, and we find ourselves in a fortunate position and privileged to have been supported by an expanding addressable market by the way of increasing rates of the Super contribution. And whilst it does come with responsibilities, it does also create a vibrant market for competition and continued growth. And that's something certainly we're looking to exploit going forward. Alongside this, we're in a unique place where we're facing an advice market that's never been more dislocated in terms of demand and supply. Now we actually think this creates a really positive tension to be resolved. And it's pleasing to see all the stakeholders in the system, whether it's policymakers, regulators as well as commercial enterprises such as ourselves, looking to solve this tension. And that is how do we increase the supply of advice or advice-like services into a market that is clearly seeking more and more assistance and support in an increasingly complex world. So again, the dynamics for financial advice, we think have never been better, albeit that the starting point does require some reengineering and repositioning of the industry as a whole. And we look forward to working with our other stakeholders to really not only provide a valued service into the community, but importantly, do so in an economically sustainable way where the owners of the business are rewarded for the deployment of capital. So if we move on to Slide 20 and try and contextualize this in terms of what does this mean for IOOF. I think where we find ourselves is on 2 horizons of transformation. And I think the first horizon of transformation, so the 2019 to 2021 horizon, really those initiatives that we have committed the last few years of management attention and resources towards making progress on. And it's pleasing to say that we made considerable progress on all of these, whether it's Advice 2.0 to Evolve. And also, the importance of acquisitions in achieving the scale that we felt was required to ensure we can continue the transformation journey and continue to exploit the market opportunities ahead. Importantly, however, it's also important to look past that first horizon and to the next horizon, which is in an extension of the existing themes. So whereas Advice 2.0, we've got a high degree of confidence around our ability to meet our commitment of net flow positive in relation to the self-employed models, there is a continued opportunity to firstly extend that logic and extend that desire across the MLC Advice businesses, but importantly, also to challenge ourselves to solve the problem of the unaddressed advice market and looking to extend that. And we're really calling that [ our fungible bank ] capabilities and business model. In the Evolve program at work, I think as we see that come to a conclusion later this year, it really opens up and clears the path for our product simplification exercise that really, we think, will release significant value for the business. And having now reached a point where we feel we are at that point of critical mass with respect to scale, I think the acquisition focus now turns into an organic growth focus that revolves around engaging with our clients and building strength in our reputation. So whilst we're not losing sight of the fact that there is work to be done on the first horizon, I think it's really important that we look beyond that, and we look to set ourselves to continue this evolution to ensure that we're optimizing most of the opportunities ahead. If I look to dissect that a little bit further and really focusing on that advice aspect of that transformation. By any measure, and I think the research that we ourselves have done and others have done, there is no doubting the value that the advice industry and advice itself delivers to clients. The challenge is, however, in the reach and the scalability of that advice. I've previously described the advice industry is a binary industry, and that is you pay a significant fee and you receive a holistic personalized proposition or you pay nothing and get nothing. And that is part of the problem. There is no glide path. There is no modularity to advice. And I think that, that is certainly a challenge to be solvable and one that we will commit ourselves to solving. We think there's a significant opportunity in embracing a digital-first mindset and leveraging concepts like cash flow management, life goals planning and financial education to create a more engaging coaching style interaction with our clients, particularly younger demographics that may, in fact, extend that to a more modulated or episodic nature of advice. We've seen similar models emerge offshore and believe that we've got a fantastic opportunity to make ourselves more relevant to our client base and our members through more meaningful experience. And certainly, one data point that brings this to light in our minds is that with the acquisition of MLC, we'll have over 1 million members that are unadvised in our superannuation products. And there's a terrific need, and frankly, an opportunity to build more relevance and build more value into our interactions with them. We're in the process of currently incubating some new capabilities in what we call financial wellbeing sphere. And we think this venture can actually add significant value through improved net funds flow, improved client lifetime value as well as potentially exploring new revenue models. This is on top of our existing and continued commitment in terms of improving the quality and sustainability of the traditional advice model that we've spoken about before. As we've highlighted, we've committed to remaining on track to have the self-employed businesses break even by the end of FY '22. Those that were acquired as part of the ANZ transaction on a run rate basis. And we're also committed to the same outcome for the MLC businesses that have been brought across in the last few months. But just to put this opportunity into context, with the inclusion of the loss-making infrastructure of MLC, the combined losses of their subsidiaries in support of self-employed advisers is just shy of $100 million. So it's a significant opportunity. We're certainly confident that the method to capitalize on that opportunity has largely been designed through the thinking we've done in support of the ANZ challenge. And so it's really a case of deploying the same methods and the same strategies across some of the MLC architecture to really achieve a similar sort of outcome and really on a run rate basis, break even by the FY '24 year. So a very similar 3-year horizon. So it is a big opportunity. Our experience with the ANZ transition and deployment to date gives us a really strong sense of confidence that this is achievable. If we move into the simplification agenda and certainly, the extension of the Evolve21 migration. As I've already said, the completion of Evolve21, which we remain on track for, does clear the path for the continued simplification. We are currently in the midst of a product review across the enterprise product suite, which now obviously includes MLC, ANZ and P&I, ensure we can map that out as efficiently as possible, optimizing the various factors that need to be factored in, both from a member lens, from a technology lens, from a client disruption lens and from a feature functionality and pricing perspective as well. Not only in terms of capacity, but I think one of the things that Evolve has done for us and certainly the completion of Evolve give us a highly contemporary, competitive offering in the marketplace as well as having built some real capability in this area of product simplification. It is a relatively technical area and one that IOOF has had and has probably had more experience than most others. So we're sort of entering a phase that Evolve21 is really flexing our muscles and allowing us to build some muscle memory around this capability. And we're confident that, that will serve us really well as we then look into the ANZ and the MLC product sets. Just to summarize the table on the slide there, on top of the completion of the Evolve, we're also forecasting that we would have -- by the end of the FY 2022 year, simplified one other ecosystem out of ANZ by the end of the financial year that will eliminate not only a platform, but also an RSE license and the fund as well. So journey with respect to rationalization or simplification has certainly begun. And finally, in terms of growth and funds flow. It's clear that the addition of P&I and MLC has certainly created a challenge, but also an opportunity in terms of reversing what has been a declining funds flow profile for those businesses. If we reflect on the root cause of that funds flow profile, certainly, it's our view that it's a lack of focus on investment under previous ownership that has resulted in this dynamic. And these are issues that have been certainly reversed with the acquisition of IOOF, being a pure wealth management player whose only focus is in this sphere, I think is the starting point of reversing this trend. It's the ultimate migration to our in-market contemporary product capabilities that will provide an upgrade to members and really significantly improve our net flow profiles in this space. But in the intervening period, there are certainly levers we have available to ourselves to really look to improve the funds profile. And certainly, that work has begun with ANZ and working through that ANZ profile, both in terms of functionality improvements, which we're certainly deploying into Smart Choice, but also price repositioning. And I think that between -- both of these, we're now targeting and expecting that the P&I product range will be net flow-neutral by the second half of FY '23. I think while MLC represents a similar dynamic, there are differences in the actions taken by MLC prior to completion that are quite different to ANZ. So for example, the MLC products have already gone through a significant improvement in terms of pricing, which means there's less legacy pricing exposure. And therefore, we expect there to be a natural gradual improvement of MLC over time, all else being equal. That being said, we're not in a position yet to have completed our price review for MLC. So there's more work to be done by us and by management to really get to a final landing with respect to the options available to us to improve the net funds profile for this business. That being said, it's our full expectation that for both of these businesses that the net funds flow profile does improve. And as I said, I think having had more time with the ANZ products than the MLC products, we further progressed on the ANZ likely path forward than MLC. But certainly, the MLC will come into focus and has already come into focus over the past few months. So just to close out, and on the final slide on Slide 24 before opening up to questions. There are really 3 key messages I'd like to leave you with. And firstly is that with the completion of MLC, we're now at the scale we need to support our ambitions and the repositioning of the business that we're well on our way with respect to synergies. And not only does that allow us to expand our net operating margin, it also provides significant simplification benefits both culturally and from a governance perspective. We've got a really clear focus on the deliverables in terms of growth, both in terms of addressable market and revenue. And ultimately, our success is going to come from serving more Australians through a business model that deploys market-leading technology in a way that delivers lowest cost to serve and in supporting the financial well-being of all Australians. So really, in this chart here, all we look to provide you with is a scorecard against the progress, against our key initiatives that we've discussed today and we've touched on today. And clearly, as I said, I think those that are on the first horizon, I think it's really pleasing to say we've made real progress in. And we're now really starting to focus in on the next horizon and of the key drivers to meet our ambitions. So with that, I might thank you in advance for your time and pause there for any questions.

[Operator Instructions] Our first question is from Kieren Chidgey of Jarden.

Just 2 areas I wanted to ask about. Firstly, in terms of the advice breakeven targets, both for the ANZ licensees and MLC. Just keen to get a sense of the contribution from cost-out driving those outcomes. You lost sort of, I think, $90 million from ANZ this year and about $70 million from MLC, and you're targeting breakeven in '22 and '24, respectively. Is that largely from cost-out? Or are there other factors we should think about contributing to that? And specifically, just wanting to get a sense of how much, I guess, of the cost-out programs, particularly the MLC $150 million relates to advice as opposed to wealth.

Kieren, it's David here. If we go back and look over the changes that we've put through on the P&I business, that path to breakeven is approximately half revenue, half synergies. So our expectation at the moment is that there would be a -- it won't be exactly the same for MLC, but it will be similar. And it's an important point you raised because Renato talked about that $100 million cost improvement. That's not $100 million plus $150 million of synergies because, as you say, some of those cost improvements that will help get the business to breakeven, let's call it approximately half, are also cost synergies. So there is an element of doubling up there.

Okay. So I mean just for Renato. For example, the $70 million full run rate in MLC Advice of losses at the moment, we should think about half of that $70 million improvement by '24 coming from cost-out, so around 35 of 350 is taken. Yes. And then, secondly, just keen to talk about platform pricing. There's a number of significant changes across, I guess, the 3 different sort of corporate groups, historically, platforms. The Employer Super repricing, you highlighted is a $6 million impact. I think I saw somewhere mentioned that was fully backdated to the start of the financial year. Was that all booked, however, in the second half? Was there a heightened margin impact in the second half from that?

That's correct. Correct. So all booked in the second half, but you're right that it was backdated to the start of the financial year.

Okay. All right. And then secondly, around the Evolve transition. The impacts you called out, I think, is sort of $9 million for Phase 1 and $17 million for sort of once Phase 2 is complete. How do we think about sort of when that $17 million run rate is actually effective?

So what we've talked about there is that we've given you a sort of FY '22 number and then a post run rate. The $17 million is really post the completion of the migration in December 2021. So the majority of that is going to be in the second half of FY '22.

Okay. And then, just thirdly, sort of on the MLC business. I think there was a comment somewhere saying they undertook repricing initiatives prior to completion. I was just wondering if you can elaborate on that. So does that refer to sort of the significant repricing on MLC rev more than a year ago? Or is that something more recent? And if so, what impact will that have into the '22 year?

Yes. Look, it's something, I think, we noted at the time when we talked about the acquisition was that there had been a period of repricing over MLC over the last, well, now 12 to 18 months in terms of some of the key products. We had seen that in terms of the impact in terms of declining EBITDA that was in line with our expectations through due diligence. So I think that when you look out across MLC and think about what FY '22 looks like for MLC, I would more be looking at the pro forma as being the better indicator of the starting point rather than, for example, taking the 1 month of June and multiplying it by 12.

Okay. All right. And then maybe just finally on the ANZ repricing. I know sort of you get to finalize the legacy repricing. But based on sort of the commentary, we should just think about in broad terms that, that will offset the higher repricing in Smart Choice. So we shouldn't see any material net impacts from a gross margin point of view as that flows through?

Yes, that's our expectation on a full year basis. The Smart Choice reprice went through on the 1st of April. OneAnswer will be later on this year. So there will be a small benefit in the first half of FY '22. But if we look at it on an annualized basis, those 2, obviously, depending on flows and how those sorts of things evolve, we think they'll broadly neutralize each other.

Our next question is from Anthony Hoo of CLSA.

Just a couple of questions for me. Firstly, you mentioned that -- looking at revenue synergies in the P&I business, you mentioned a number of about $9 million. Just wondering if you can give us some more insight on this and how this was achieved the way it came from. And then, do you expect further revenue synergies from here?

So those synergies, yes, there's $8.7 million of revenue synergies in the period. Those -- a lot of those came through sort of consolidation of scale, if you like, and renegotiating with some of our external partners is where that sort of came through. Look, we do think there are additional revenue synergy opportunities. There is a small amount of revenue synergies included in what we talked about for next year in that $80 million to $100 million. Now that's always been the case. If you go back to last year when we talked about $150 million of synergies, there was an element of -- a small element, about $10 million of revenue synergies in there. So we certainly think that they're there. I guess our focus has always been principally to talk about and focus on the cost side of things, given that those are probably more tangible in the long term. But we're certainly very much looking at what we can do to combine the scale and breadth of the business to negotiate better terms of some of those external suppliers. So there is an element of that -- inside that $80 million to $100 million.

So that -- the number that you mentioned, roughly $10 million within the $80 million to $100 million, is that $10 million from MLC or P&I?

Well, the $8.7 million was delivered in FY '21. The go-forward basis of $80 million to $100 million, that's an annualized number for FY '22. In terms of where it comes from, look, to be honest, as we bring the businesses together more and more, it's very hard to -- and because what we're doing is really harnessing scale, we can't really attribute that to any one particular part of the business. It's because of the collective scale of P&I and IOOF and MLC together that delivers those outcomes. And that's really why we brought together the synergy programs into a single program. And likewise, with our reporting, we'll talk about segments in a much more consolidated way.

Okay. And then my second question was around MLC. Perhaps just following on from Kieren's questions. But with your MLC numbers, you provided some pro forma numbers on Slide 16. Looking at the revenue base -- I mean the revenue base, in particular, is a little weaker than historical FY '20. Can you give us some more thoughts around do you think that revenue base is a good base going forward? Or should we expect further impact just from pricing gross margins, so there's more impact going forward from here?

Yes. Look, I would say that if I go back and look at our assumptions when we priced the acquisition and when we factored due diligence, while the revenue number has fallen from FY '20, the revenue number is ahead of our expectations when we did the modeling. So we're pleased with the performance of MLC in FY '21. Strong market certainly helped in terms of delivering that revenue number. So yes, look, I think that -- happy with the result. It's in line with our expectations. And yes, I think it is a reasonable base, but it's certainly fair to also mention that some of that outperformance on the revenue side was down to some of the strength we've seen in equity markets over the last 12 months.

Matt Dunger of Bank of America.

Yes. If I could just follow up on MLC, I'm looking at $108.5 million of FY '21 EBITDA, but $22 million almost of EBITDA for 1 month. So June month seems to be annualizing a lot higher than the FY '21 pro forma. And how does this interact with the MLC gross margin falling over the same period?

Look, the best advice I can give for -- when you look at the June 2021 number for MLC, I would not be using that as a basis, as I said earlier, for thinking about FY '22. Very unusual month, obviously, given the first month of a transaction completing, in addition to MLC's traditional year-end has been September. We've moved that year into June. There's a lot of movement in those numbers in the month. And that's really why we would absolutely emphasize the pro forma as being the best baseline. Yes, I would not be taking June and multiplying it by 12.

Okay. And just second question, you're flagging the downward revenue pressure from migration. How much margin pressure are you expecting here? And how are you managing the business to increase the net operating margins from here? Are you able to quantify some of these margin impacts?

I think for those -- we've given the dollar value rather than sort of talking in terms of margin. I think we've given a fair bit of information in terms of some of the dollar drivers and the impact of some of that margin that we expect to see. If I flow through to the second part of your question around net operating margin, a lot of that really comes from the synergies. That's really what is driving that divergence in terms of gross margin -- continued gross margin pressure. But increasing the operating margin comes down to delivery of synergies not only in terms of -- even if you just look at from the P&I side of things, $16 million in the year but an annualized $26 million. So we get that benefit inside '22. We're well advanced in terms of delivering on the first wave of synergies in the MLC acquisition. So those factors will all combine to help sort of enhance the net operating margin.

So the only other thing I'd add is that, as you look forward and as you look to model or to project what happens when you rationalize further systems, what we haven't spoken about in the benefit number or quantified yet is actually the economic benefit of simplifying and rationalizing those systems. So the system rationalization from product simplification isn't included in the $150 million and would be on top of. So it's just important to keep that in mind.

So can I just confirm you're saying that you're managing net operating margins, excluding synergies, to start to increase from here? Is that what that guidance slide is telling me?

Well, sorry, firstly, it's not a guidance slide. So I just want to be cautious on that one. And no, net operating margin does include synergies. So what we're saying is we expect net operating margin to improve. The basis of that, I think what Renato is calling out is that in addition to synergies, there are also some simplification benefits as well.

Our next question comes from Lafitani Sotiriou of MST.

My first question is in relation to Slide 32, the MLC pro forma. Can I just clarify whether financial year '20 and financial year '21 is under the same accounting standard? And if it is, can you explain the $37 million drop-off in EBITDA only translating to minus $8 million-odd in UNPAT, what the difference is?

It's David here. No. Look, at the moment, we've done those. We have not yet harmonized accounting policies. So that is simply taking MLC's existing approach on a 12-month basis and applying that. So no, there hasn't been that sort of similarity there.

And what would you say is attributed to the difference in the trajectory it provides?

Yes. Look, some of it is in relation to what you're seeing in terms of depreciation and some of the different approaches that are taken across the group in there. And then obviously, from an interest point of view as well, there's no interest that sort of sits inside the MLC business, but there is inside IOOF.

Okay. Just moving on to Slide 17, and just a follow-up question in relation to the Evolve 21 $17 million-odd run rate post December. Could you just clarify which legacy businesses are contributing to that $17 million run rate reduction? I think there was a comment by Renato suggesting that you have yet to do the review of MLC's product base, and even though that it had some price cuts that there's still maybe some on the cards.