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

Thank you for standing by, and welcome to the Insignia Financial Ltd. HY '22 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Ehlich, General Manager of Capital Markets. Please go ahead.

Thank you. Good morning, everybody. Welcome to Insignia Financial's 1H '22 results presentation for the 6 months ended 31 December 2021. Presenting today's results are Insignia Financial's Chief Executive Officer, Renato Mota; and Chief Financial Officer, David Chalmers. Today's presentation will take approximately 30 minutes, followed by the opportunity to ask questions. I will now hand over to Renato to begin.

Thanks, Andrew, and I'd like to extend my welcome to everyone on the call. Not only is it our first half for the 2022 financial year, but it's also the first set of results for Insignia Financial following on from our rebrand from IOOF also. It's a pleasure to be here today with David to walk you through the business performance as well as an outlook. In many ways, the renaming of IOOF to Insignia exemplifies our commitment to ensuring we position ourselves for growth. It captures the history and unifies our people in building a stronger future. And it's also part of leaving no stone unturned in ensuring we solidify our position as an industry leader in an industry that continues to have positive fundamental growth dynamics. The role of Insignia Financial is as important internally as it is externally. Internally, it's the bringing together of 2 organizations with proud histories of serving the community, where, historically, there have been different structures, different identities, different ways of doing things. Under Insignia Financial, there will be one. Externally Insignia Financial's ambition is to actively contribute to the financial well-being of Australians, either directly through our products and services or indirectly through our role in the broader industry and communities we serve. This ambition is supported by a single-minded focus on delivering value to our clients, shareholders and our people. And there are really 3 key traits that support this. Firstly, it's our focus on client outcomes. Our products and services are really a means to an end, and that end is the financial well-being of our clients. And this mindset is what we call ClientFirst. We're investing in interactions and capabilities, which allow us to get closer to our clients as never before. Secondly, it's our scale and simplification. We're of a size now where our scale is being used to drive down the cost to serve while continuing to invest in better experiences and functionality. Whether some complexity to source of increasing costs, for us, complexity is actually a source of value because we continue to remove it. And thirdly is our focus on proprietary technology. Technology is both a capability and a mindset. And for Insignia Financial, embracing and leveraging this way of thinking will continue to drive our agility and innovation. So while we marked the beginning of Insignia Financial, today's results really are a demonstration of our progress on this journey and our ability to deliver against our commitments. Our focus is on continuing this momentum and driving the necessary change to make sure we realize the potential of the business. So turning to the first half highlights. The performance of the first 6 months of the year is best described as delivering on our commitments, just doing what we said we'd do. And if we consider the 5 key categories of these commitments, starting with synergies and integration. In the first full 6-month period of MLC ownership, we're able to deliver $66 million in annualized synergies in the half against the annual target of $80 million to $100 million. This positive progress has led us to upgrading our full year '22 synergy target for a run rate of $100 million to $120 million for the full year. This has also given us greater confidence in our ability to deliver the entire synergy program 18 months earlier than expected. And we're now targeting completion in this program to be largely executed by the end of this calendar year 2022. Also pleasing is the completion of the Evolve21 program, which saw the transition of $42 billion in assets. The size and scale of this transition really gives us confidence in our ability to successfully manage large-scale transitions and deliver these transitions alongside continuing to deliver better outcomes for our advisers and investors. Having bedded down the MLC acquisition in the earlier part of the half, the second quarter of 2022 really provided some positive signs with respect to net flows. We saw positive progress across most of the business, whether it's the IOOF suite of products, P&I and MLC, both across adviser and workplace. And we've also seen some positive momentum in the retail asset management portfolio, which is then benefiting from the solid investment performance. Advice transformation is really [ attached ] to doing what we said we would do. The ex-ANZ licensees are on track for breakeven by the end of this financial year on a run rate basis. And we're also seeing some initial progress on the MLC Advice. Finally, and importantly, on remediation, we're confident that throughout calendar 2022, we will complete many of the programs currently underway. So with Advice, we expect to be largely complete by June of '22. And with respect to the P&I product remediation, we expect to be complete by December of '22. Looking at the financial highlights, and David will delve into a bit more detail on these, it's clear to see the impact of the MLC acquisition through most of these metrics. Starting with gross margin, now at $778.4 million for the half. Underlying net profit after tax of $117.9 million for the half, up 79%. And net profit of $36.2 million, reflecting the integration and funding costs associated with MLC acquisition. I think what's particularly pleasing with these financial results is this progress, not only on a statutory basis, but more importantly, on a pro forma basis. And when you look at these numbers on a like-for-like basis, what we see is strong growth in earnings, both from growth in gross margin as well as reduction in costs. So this really provides us the evidence that the transaction is really delivering on its commitments. From a business driver perspective, the $325.8 billion is reflective of the scale of the opportunity Insignia Financial now has, benefiting both from MLC as well as positive investment markets. There's clearly more work to be done from a net flow perspective, but we're seeing really positive progress in Q2. And we're also a long way along in terms of the reshaping of our Advice network. On a per share basis, this translates through to $0.182 per share in terms of underlying net profit after tax. And today, we're declaring an $0.118 per share dividend for the half. So it's pleasing to see the strong fundamentals supporting our dividend. And the dividend also recognizes the capital needs of the business with this accelerated synergy profile, and Dave will go into that a little bit further. So in summary, as well as delivering on our strategic commitments, bringing forward future benefits, we're also delivering strong economic results for the half. Just before handing over to David, I thought it's worth highlighting the businesses that make up Insignia Financial. And after a period of acquisitions and bringing together our capabilities, what we've created is a group of diverse and discrete businesses, all of which aligns with a single mindset and focus on financial well-being. Each of these 3 businesses are tasked with ensuring that they're focused on building more meaningful relationships with clients and utilizing ClientFirst system thinking and technology to create simpler, more efficient infrastructure to support the businesses. I think in a lot of ways we're really fortunate to have 3 businesses each with their own independent scale, which is independent of each other. And while there continues to be more to be done in each of these businesses, we've got very clear strategic accountability and a path towards better client and shareholder outcomes. In some cases, these business models look very different today than what they've looked like in the past. And we think this is a necessary part of making sure we're not beholden to previous organizational designs or structures and rather we're setting ourselves up for future success. Ultimately, we're also in the privileged position of looking after over 2 million Australians with a commitment to see this number grow. So I'd like to hand over to David to walk us through the results before closing up with some commentary on outlook.

Thanks, Renato, and good morning, everyone. Before I step through the financial summary, it's worth noting that the comparison of the statutory prior periods is heavily shaped by the inclusion of contributions from MLC, which is acquired on the 31st of May 2021. Specifically, this means that in the first half '21 results, there were 0 months of MLC; in the second half '21 results, there is 1 month of MLC contributions; and in the first half '22, there were 6 months of contributions from MLC. Therefore, in order to provide more insight into the underlying financial performance, we've included a first half '21 pro forma set of financials, adding in the actual MLC results for the period. For the prior -- for the period ending 31 December 2021, we [ recorded ] $778.4 million of gross margin with OpEx of $569.2 million. Net profit after tax was $36.2 million with UNPAT of $117.9 million. The UNPAT adjustments of $81.7 million for the period, as set out in the appendices, with 70 -- approximately $75 million of this amount due to transformation integration costs and an increase in remediation provisions as we invest in additional resources to speed up the process. Perhaps the better indicator of financial performance is comparing these pro formas, which shows gross margin up 5%, thanks to an 8.5% increase in pro forma FUMA, while at the same time OpEx being reduced by 3.7% as the early benefits of acquisition synergies are realized. [indiscernible] EBITDA versus pro forma is up 39%, while UNPAT is up on a pro forma basis by 21.4% with a 2 basis point increase in net operating margin compared to a pro forma gross margin reduction of 1 basis point. And this reflects our overall strategy of ensuring that any diminution of gross margin is at least matched by cost reductions to ensure growing net operating margin over time. It's also worth noting that in line with the advice given at the FY '21 full year results, we've implemented a tighter approach to making adjustments to UNPAT to deliver our underlying number. Had the old approach to UNPAT being taken during the period, but then first half '22 UNPAT would have been approximately $10 million higher. Turning now to segment performance. We've simplified -- we spent a lot of focus over the last 6 months on simplifying the reporting of the business. The first phase was to bring our FUMA reporting with a common set of definitions and a common approach. And then over the last few weeks, we've been working through aligning on segments and making sure that we can present, not only a clarity and a simple message in terms of segments, but also one that reflects the way that we run our business. So we reduced the number of reporting segments from 7 to 4, the 4 being Advice, Platforms, Asset Management and Corporate. The restatement of each segment's historical performance and explanation of these changes was released to the ASX on the 11th of February and can be found on the Insignia Financial website. Starting with the Platform segment, first half '22 UNPAT increased by 18.6% on a pro forma basis, mainly driven by a 9.5% increase in funds under administration and the benefit of changes made to P&I products in April 2021. These benefits were partially offset by repricing down of other products, of which there will be greater impact in the second half. We also had the benefit of synergies in the period helping to reduce OpEx costs in the Platform segment. And again, there's more work going on in the second half in relation to platforms. It's worth noting that the strong funds under administration growth during the period was driven, not only by favorable financial markets, but also a significant improvement in net flows on a pro forma basis. The Advice segment now includes the loss-making former ANZ aligned licensees and the loss-making MLC Advice business on a pro forma basis. Advice UNPAT fell by 3.4% or just under $1 million. However, it's important to recall that the first half '21 pro forma includes $15 million of revenue for the BT contract that was terminated in late 2020, meaning that removing this and looking at it on an underlying basis, there was, in fact, top line growth in the Advice business, thanks to a good performance from Shadforth and growth in revenue from the self-employed channels, thanks to repricing as part of Advice 2.0. Now an important part of Advice is the profit improvement initiatives underway, both of the former ANZ licensees and also MLC Advice, and there was pleasing progress on both fronts during the period. If we turn, first of all, to the ex-ANZ aligned licensees, that improved to [ $8 million ] for the period, an UNPAT loss of just under $6 million. And we're on track for this to reach a breakeven basis by the end of FY '22 as the fee increases that were put through in October flow through over the second half. MLC Advice losses are at a total of $31.3 million of UNPAT for the half, an improvement of $4.2 million for the previous period on an UNPAT basis. Turning now to Asset Management where there was a strong UNPAT growth of 66%, thanks to a 6.1% growth in funds under management from first half '21 pro forma and a $4 million positive benefit from semi-regular private equity fees received in this business. OpEx was down 8% on a pro forma basis, meaning a 4 basis points improvement on net operating margin, again, on a pro forma basis. And finally, the Corporate segment saw a significant increase in costs, again on a pro forma basis, and that's due to both the increased funding costs. As you may recall, the previous period, we had net cash as a result of the capital raise for the MLC acquisition. And so interest costs have increased over the period from just over $3 million to now $13.6 million. And secondly, an increase in amortization, which is kept inside the Corporate segment, mainly due to the addition of MLC leases and also an impairment made during the period. The next slide shows the bridge from reported first half '21 UNPAT to first half '22 UNPAT. And again, as Renato mentioned, highlights the contribution made by the additions of MLC. But importantly, the growth in UNPAT driven by firmer increases at both MLC and then IOOF, ex MLC businesses over the period as well as the impact of the cost management that we've been working through over the last 6 months. Offsetting these gains are reductions in margin, mainly -- and this is mainly the repricing of the MLC platform in early FY '21, the end of the BT agreement that I mentioned earlier and other cost increases, including interest costs and impairments. And because these impairments are below our threshold, the impairment of $8 million are not adjusted out of UNPAT. Similarly, we can also look at expenses in the same way, again, highlighting the impact of the inclusion of MLC and the benefit of the tight cost controls across the period, including incremental synergies of $22 million and tight control over other cost lines. Next slide with the full year '21 results. Employee expenses have returned to a more normalized level of growth following a freeze on salaries increases in FY '21. Renato mentioned it upfront and one of the really pleasing aspects of performance over the last half was the delivery of significant synergies, which has allowed us to both increase our expectations for FY '22 annualized synergies and to materially accelerate the time frame for delivery of the full program. The commitment we made at the FY '21 results was to deliver $80 million to $100 million of incremental annualized synergies in FY '22. And as noted in the first half of '22, we delivered $66 million, of which $56 million were cost synergies and $10 million were revenue synergies. Based on the pipeline we see, we've increased our FY '22 target from $80 to $100 million of annualized synergies to $100 million to $120 million of synergies, although the FY '22 in-year benefit have been -- of this increase is modest due to the timing. The total target for the synergy program, as a reminder, is $218 million, being $68 million from the acquisition of P&I and $150 million from the acquisition of MLC, the latter of which we committed to deliver after full 3 years of ownership, so by May 2024. We now believe this target will be largely achieved by the end of calendar 2022, 18 months ahead of schedule. It's important to note, with this acceleration of the synergy program, it also means an acceleration of spend associated with the delivery of synergies, the impact of which I'll cover shortly. The last 6 months also saw a positive progress on remediation with total payments to clients of $86.4 million. Starting with advice remediation, we did find the payments for the first half slow as the focus was on completing assessment of case files. Pleasingly, we've seen a significant increase in the rate of payments to clients in the early part of calendar 2022, and we remain on track to largely complete the program by the end of FY '22. It has been a challenging period. We have experienced some COVID-related delays, and so we've increased the resources to work towards this timing. In terms of what we think will be remaining at the end of FY '22, it's likely to be some elements of the IOOF program that commenced after the original program design and a small number of files related to the former ANZ aligned licensees. And these will be concluded in the first part of FY '23. Turning to product remediation. There was great progress on the P&I program with payments of more than $50 million for the half, and we continue to expect P&I under the program to conclude by the end of first half '23 or the end of calendar '22. The MLC program as we planned will take longer and extend into FY '23. Turning now to corporate cash and debt facilities. We've updated this for the period. Senior leverage for the period closed at around about 1x net debt to EBITDA, but we expect this to increase across the calendar year, peaking at around about 1.5x net debt to EBITDA before returning to our stated target range of 1.1 to 1.3 by mid-FY '23. Now the reason for this increase in peak leverage is twofold. Firstly, the acceleration of the synergy program to be largely complete by the end of calendar year '22 brings forward the timing of integration budget spend. Although to be clear, there are still elements of that spend that will extend into FY '23 and '24, specifically some of the amount set aside for IT spend. The second element is that, as Renato will cover shortly, we're commencing the next program of platform simplification. And as we flagged earlier, the platform simplification comes at an incremental cost, but one that delivers incremental benefits, and we'll cover that shortly. And it's this increase in expected leverage across FY '23 that has helped to shape our thinking on the dividend. While we see good short-term payback to the increase spend over the coming months, we're mindful about the potential for increased market volatility. And therefore, we're cautious around allowing leverage to increase too significantly. And as a result, our dividend payout ratio we've reduced to 65%, with directors declaring a fully franked dividend of $0.118, an increase of $0.03 above the first half and second half '21 dividends, both of which were comprised of an ordinary and a special dividend. While this is still inside the 60% to 90% dividend target range, we are mindful of the importance of dividends to our shareholders and believe that these initiatives, combined with the acceleration of the synergy program, offer good prospects for future dividend growth. We also came to ensure ongoing flexibility for our investors. And so we're pleased to announce the introduction of a dividend reinvestment plan with a 1.5% discount for FY '22 interim dividend, the details of which can be found this afternoon on our website. Finally, at the FY '21 full year results, we set out some of the key financial drivers and targets that will shape the business over the medium term. The majority of these remain on track, but I just want to call out 2 changes. The first one on synergies, I've talked about in terms of what we're expecting on the acceleration of synergies, even though we will be seeing an increase in our transitional service fee during the period. Again, we expect that to be sort of normalized out again by the end of calendar year '22, but certainly an acceleration on the synergy front. The other point that's worth calling out is the third one down in terms of P&I product pricing changes. We made the comment at the full year that we expected the impact of the Smart Choice reprice and the OneAnswer reprice to broadly offset on an annualized basis. That's still our expectation. But to be more specific, what we mean about that, we think that the OneAnswer revenue reduction will be around about $8 million in the second half of '22. That covers all I wanted to in terms of summary of the financials. And very happy to take any questions after Renato has concluded. Back to you, Renato.

Thanks, David. And just before taking questions, we'll just spend a few moments just really commenting -- providing some commentary on the outlook. And maybe just starting with the industry context, and it's important, I think, important time to do this given the level of disruption that has occurred in the industry over the past few years. But when you look at some of the key statistics surrounding our industry, it is clear that the fundamental drivers of our industry continue to be incredibly positive. I think the compounding nature of superannuation and rising contribution levels means that Australians have grown increasingly wealthier, and the superannuation pool is expected to grow by 2.5x over the next 20 years. Alongside these increasing levels of wealth, we're seeing an increase in demand for financial advice. And on top of that, we've had an unprecedented contraction in a number of practitioners or advisers that are operating in the space, with fewer people able to access the help that they need and the help that they seek. So putting all this together, this is as clear a picture as I've seen in my career that there's a gap in the market to address the unmet needs of the community, which is supported by rising levels of wealth. And it's those that can solve this equation in providing assistance, whether it's advice or whether it's other forms of assistance, they will be the net beneficiary to the positive dynamics for years to come. And from an Insignia Financial perspective, we think we're very well placed to play to these dynamics and actually meet this unmet need, which currently exists in the marketplace. So to flesh this out a little further, I just want to spend a few moments stepping through some of our key strategic imperatives and deliverables that underpin our belief that we can both build deeper relationships with clients as well as leading -- developing a leading cost to serve. And just starting with platforms and our focus on simplification. We've stated on many occasions that we believe that lower cost of service is a result of disciplined simplification of products and systems. And in many ways, [indiscernible] emerged over the last decade off the back of this discipline. And as the chart shows on the bottom right, we've been able to radically reduce our cost to serve as a result of the simplification effort. That know-how and capability really is part of Insignia Financial's DNA today. And most recently, this has been on show through the Evolve21 program, where we've successfully completed one of the largest migrations in the market over the recent times. With Evolve21 now complete as well as accelerating the profile of the integration synergies, we feel the timing is right to bring forward the next phase of the simplification program associated with the acquired platforms. And whilst these benefits of further simplification have always been the clear objective, prior to today, neither the cost of execution nor the benefits have been accounted for. So what we're showing today is the next major milestone of simplification, which we expect to be the key deliverable over the next 18 to 24 months. We're calling this program Evolve23, which follows on from Evolve21, and we'll see another $40 billion to $50 billion transitions to more modern technology with more contemporary user experience and results in the decommissioning of 1 technology environment and removing approximately 10 products. So we expect there to be significant benefits in terms of reducing our operational cost base as well as benefits to members by way of more contemporary pricing. Importantly, on a net basis, we expect this to contribute to improving our net operating margin. This phase of the program is expected to cost $40 million to $50 million all up. However, it'd be misleading to attribute all of this to Evolve23 as part of this spend is also benefiting the following transitions and simplifications to come. So we're calling this component of the spend as the foundation investment, if you like, that will allow us to realize benefits not only through Evolve23, but future transitions also. I think what's particularly pleasing about this stage of the development is that we're in a position to accelerate this platform simplification as a result of the great progress we've made on the integration today. So ultimately, we expect Evolve23 to lower our cost to serve, provide enhanced functionality for advisers and investors, results in a simpler, more contemporary fee structure and, ultimately, also provide support for our net fund momentum. Just moving on to Advice and reflecting on our Advice journey over the past 2 years, there have really been 3 key deliverables we've been working on. Firstly, we're focused on improving our governance standards and controls; secondly, with the desire to build a more sustainable economic model that recognizes Advice as a stand-alone business; and thirdly, we're focused on building greater efficiency and effectiveness in the Advice process. And it's certainly been pleasing to see the progress across all 3 fronts, but particularly governance and the sustainability of the model. There remains more to do with respect to efficiency of Advice processes, and this continues to be an area of focus. But it's an area of focus building on the foundations of governance and the economic model in place. In relation to the ex-ANZ licensees, we remain on track to see the subsidized nature of this model eliminated and this business to break even by the end of this financial year on a run rate basis. The knowledge and the experience that we've developed through the repositioning of the ANZ licensee model also provides a really strong template for the rightsizing of the MLC Advice business that we're embarking on, both across the professional services model or the employed model as well as the self-employed model. What's particularly exciting, I think, is the combination of the MLC employed advisers into Bridges and that really provides an opportunity to create a leading middle-market professional services advice model over the coming years, which will see us have both Bridges and Shadforth as 2 of the leading advice models in this country. While simplification, lowering cost to serve, enhancing a client offering, they're all fundamental to our strategy, it's all in the interest of growing our business and serving more Australians. And certainly, in that regard, net flows remains a really important measure of that progress. And as we've touched on already, I think it was really pleasing to see the positive trajectory of that across the portfolio and particularly evident in the second quarter. And so it's worth -- I think it's worth breaking down that the latest 6-month period or the latest half into a quarter-on-quarter analysis because it is really a function of a story of 2 quarters within the most recent 6-month period. And I think on reflection, when we think about the 6-month period, it's fair to say that the first quarter was one where we were focused on bedding down the MLC business and the MLC acquisition. Whereas, I'd categorize the second quarter of having greater focus in what I would call more traditional business activity and more proactive engagement with clients or prospective clients. In the P&I book, the first quarter of the year suffered for some one-off transitions. And the revised pricing that David alluded to didn't come into effect until Q2. So it is -- I think that tale of 2 quarters is most evident in that P&I book. I think the performances of the IOOF platform is certainly worth highlighting, and the trajectory there really provides us confidence that we're on the right track with the development of Evolve. We're reaching more advisers. We're having them deal with this more often. And we've also seen some positive interactions post migration and conversations with advisers where we're reactivating relationships that some of which may become dormant. We're seeing similar dynamics across MLC, both in the advised book of business as well as the workplace offer, where we're seeing healthy pipelines and new opportunities and proactive engagement. As we've touched on, on Asset Management, in some ways, the flows here -- the retail flows are camouflaged by the institutional flows, where we've seen some really positive momentum in retail funds flow supported by strong performance. And as we've discussed previously, the lumpy nature of institutional flows is certainly evidenced in some of the outflows in the first half of the calendar year. Having owned MLC for 7 months to December, we've certainly learned a lot about the business in this first period of ownership. And it's with this deeper knowledge comes greater clarity on timing and the totality of the opportunity that we try to illustrate on Page 23 of the deck. What we've outlined here on the left-hand side, what we see is the pools of value that we see ahead over the coming years. And starting with the bottom pool, which is the accelerated completion of our integration synergies. Having achieved $112 million, we've got $96 million remaining to reach our target of $218 million. And we are committing to having that largely complete by calendar 2022. On top of that, you've got the completion of the breakeven target for the ex-ANZ licensees, again by the end of our financial year '22, which represents $17 million annualized on a pretax basis. On top of that, and as discussed previously, we see the MLC advice breakeven opportunity representing $60 million to $70 million in pretax benefit. Again, with a target of reaching that by FY '24 on a run rate basis. And today, we've introduced the net benefit of the first -- or the next phase of platform simplification of $5 million to $10 million, which includes both reduction of operating expenses as well as gross margin adjustments, which resulting on a net improvement or a net benefit of $5 million to $10 million. And in some ways, the size and scale of this opportunity on core business does emphasize the importance of focus and the importance of having a [ dissimilar ] approach to how we manage our portfolio of businesses. In this context, we're today also announcing our intention to commence a sale process for our AET business. And whilst it's not the first time we've considered this, and there is a strong strategic merit in having this capability as part of the financial well-being stable, the specialist nature of this business requires focus and that focus risks diluting our efforts in our core business. So it is something that we'll be commencing in the near term. So just to wrap up before opening up the questions and maybe some final thoughts. As we've discussed this morning, over the last 6 months, alongside delivering strong financial performance, delivering on our commitments at the time of acquisition and accelerating the simplification benefits, we've built a really clear strategy and focus centered around 3 key businesses and a single-minded focus on financial well-being that's powered by purpose-led culture. If I was to leave you with 3 messages today, that would be: one, that our business will grow off the back of delivering outstanding client outcomes that are more personalized, tangible and measurable; second is that we've got the scale and the track record of simplification. This is going to drive our lower cost to serve and improve the competitiveness of our offer; and thirdly, the proprietary technology is the driving force behind our agility and innovation in how we understand and solve our clients' problems. So with that, I'd like to thank you for your time this morning, and I'll hand back to Andrew.

Thank you, Renato. We'll now hand over to the moderator to take questions from those on the phone lines.

[Operator Instructions] Your first phone question today comes from Kieren Chidgey with Jarden.

A couple of questions, if I could. Maybe just starting on the platform simplification you've talked about today. So this year, you're at 6 platforms at the moment. That sounds like under sort of the revised strategy you're only looking to reduce that by 1. So I'm just sort of wondering whether or not there are going to be further stages to this platform simplification initiative. And also, I guess, what you feel you need to be able to achieve in terms of the OpEx basis points of FUA to compete on a go-forward basis over the next few years, particularly as we see some pretty significant cost-reduction programs coming through some of your larger traditional competitors.

Sure, Kieren. Look, I might have a go at that, and I'll get David to maybe provide some additional commentary. If I were -- so to answer your question, are there further phases beyond this current phase? The answer is yes. And so if I refer to Page 19 of the pack there, our end state is fundamentally a [indiscernible] business that, yes, has ideally 1 licensee, 1 fund, possibly 1 to 2 technology environments and representing approximately 20 products. So there is more to do. I think the key message here today is that we're getting started on this work sooner than we initially would have expected or projected. So that's a positive. We will -- as these phases unfold, we will -- and once we have greater clarity and certainly on the sequencing of this and the impacts, both in terms of OpEx and potentially gross margin, then we will come back to market, and we'll certainly make sure that we're keeping our stakeholders informed. But certainly, today, what we're talking about is that next phase or the first of the acquired platforms in many ways. In terms of where do we need to get to, look, I think where -- we sit here today running a profitable business that's competing with a really strong profile of lowering costs to serve. So I don't see it so much as a need to lower the cost to serve as an opportunity. I think we've got a terrific opportunity. Are others potentially on a similar trajectory? Possibly, but I think that there are probably a few that are sitting here with a proven track record and embarking on this now. I think they're probably, potentially, a year or 2 behind where we are today.

And Kieren, just to add to that, yes, look, I think that we do see those opportunities there that the $150 million in terms of cost-out, we've talked about some incremental cost-out as a result of Evolve23. And I think the key element there for us is that, as we look forward, we see nothing that steps us away from our commitment to increase the operating margin. That is critical over time. We think we've got the levers there. And if you go back, I mean, that's really been the history of the business for a long period of time. So we certainly know that this is a never-ending, if you like, sort of process to make sure that we continue on cost management. But that's why we've been stepping up over the last 2 periods, that emphasis on growing net operating margin. And in a way, Evolve23 shows how that can be done. Despite the expected revenue diminution as we sort of move on to the platform, despite the cost of it, we still see an increase in net operating margin, even taking into account that foundational spend in the first phase.

Okay. And the accounting around this, the $40 million to $50 million additional costs to achieve that, I mean how will you account for that? And also sort of related to that, as you move forward beyond '23 towards the sort of target end state of 1 to 2 platforms, should we also be allowing for additional significant one-off spend to achieve that further narrowing of the platform footprint?

In terms of the accounting, Kieren, are you referring to OpEx, CapEx splits?

Yes, yes, yes.

Yes. Look, it's certainly...

Above the line and below the line as well.

Yes, yes. There will be more elements in -- yes, historically, as you know, we've typically expensed the vast majority of IT spend. There will be some elements here, particularly physical data -- IT -- data centers and things like that, that will require to be capitalized. But we're not changing our tact in terms of having a preference for -- particularly in terms of software development of those costs continuing to be reflected through the P&L. So I wouldn't say it's really a change from the past. It's more the things we're spending money on over the next 18 months are different to what we've been spending money on in the past. So yes, so you should expect to see a larger proportion of CapEx, but that doesn't reflect the change in policy. It's just a change on what we're investing in over that time.

Okay. And maybe secondly, just on the Advice business. The revenues there, sort of on a pro forma basis, actually up on second half '21 despite sort of the adviser attrition over the half. So just a couple of questions around that. Firstly, what is your current outlook around sort of advice practices and number of advisers? And secondly, can you just, I guess, talk through some of the underlying dynamics that have occurred there beneath the surface in regards to the contribution from some of the repricing as opposed to what looks to be better retention of clients as you've lost advisers?

Yes. Look, I might start more on the contribution side, and then I'll pass to Renato in terms of practices. So you're right. What we saw as part of the Advice 2.0, we increased the fees committing in October. You see a small increase in the half and took the benefit from that. Most of that is what's going to play through in the second half of '22. So when we look at what is it that is going to turn that $5.9 million UNPAT loss to breakeven on a run rate basis is the flow-through of that revenue. However, as you've also correctly noted, we have lost some practices, which was anticipated. Because as we put the prices up, there are some of those practices where it's not economic for us to continue supporting them. So I guess that's the balance of how we see that all fitting together.

Kieren, I think just to add to that, in addition, is you're right, there is a reshaping. And the reshaping is simply that we're ending up with fewer larger practices. So that's a combination of, as David pointed out, smaller practices, a feeling like this economic model just doesn't suit them. But equally, there has been quite a number of practices where they've merged in together. So they've created, as I said, fewer smaller -- sorry, fewer larger businesses. So that sort of, I think, actually plays quite favorably to us as well because the cost of serving a larger practice on a marginal basis is lower than trying to serve a large number of small practices. So all these dynamics, I think -- and they are, I think, indicative of what we're seeing in the industry at large, are that we're seeing the corporatization of financial advisers and the financial advice model. And from our perspective, we're making sure that the licensee model supporting them is sustainable.

Your next question comes from Matt Dunger with Bank of America.

If I could just start on Evolve23 and a follow-up to the previous question. You've previously flagged consolidation from the 7 platforms that you had post MLC. Is there a similar opportunity from platform rationalization to what you've called out on Evolve23?

See if I understand your question correctly. So with Evolve23, we're really flagging the next phase of platform rationalization. So that is the first sort of a number. So -- and when we talk about the rationalization opportunity, we're referring to effectively all of the acquired platforms. So that's -- those that came across from P&I as well as those that came across from MLC. So I'm not sure if I'm answering your question directly or not.

I'm just wondering, is there -- is this the largest incremental benefit from this first platform reduction? Or will subsequent platform reductions also give you similar benefits?

Yes, it certainly isn't the largest. So I might reframe the question. Is it the largest opportunity out of all of those that follow? The answer is no. In some -- we decided to pick the product set that, in some ways, has the least amount of execution risk. There are other more complex product sets that, frankly, have larger opportunities, but also larger complexities. So we're working through that. So no, it isn't the most significant opportunity.

Great. And just on the accelerating the cost savings. You delivered $22 million of synergies in the first half of '22 on costs. What makes you more confident that we can see this run rate continue to rise and the cost acceleration happens?

Yes, yes. So look, you're right. It's always -- you've always got to look very carefully anytime, I think, you put up an annualized number. We spend a lot of time and effort validating that number. Yes, we look at what we see in terms of payrolls in December and January. We look at probably about 400 FTE and contractors that are part of the business in the first half of FY '22. So that gives us good comfort in terms of these savings turning up on the P&L. We talked about the approach that we're taking in terms of synergies with our transformation team. There's a very well-established pipeline of very specific activities over the coming months. We found that the first phases that we delivered in line with our expectations of those, and we will progress on the second one. So it's certainly not a hope. It's that there is a specific set of plans we will execute that gives us confidence we will deliver that number.

Excellent. And if I could just ask a final question around the DRP and the gearing. You're talking about funding the platform consolidation. It seems like FY '23 is the peak of your debt burden. How are you thinking about the DRP beyond that, whether or not you can fund these incremental platform simplifications organically or not?

Yes. Look, we believe so. I think the DRP was something that we'd always planned to introduce to give more flexibility. It's certainly not something that we intend to introduce for 1 period and then remove. So the flexibility will be there in terms of giving shareholders that choice. And you're also right in terms of where we see that sort of peak of gearing. There's a lot of things moving at the moment. We've got acceleration of remediation payments, bringing forward synergy realization. And so we just felt that combined with what looks to be a less certain operating environment in terms of financial markets, and that's why we've, as I said, just slightly reduced our dividend payout ratio to really balance all of those. And we'll continue to balance all of those objectives over the medium term, but I want to make the point that, as I said, we certainly understand the importance of delivering dividends to our shareholders, but we'll always do that with a prudent eye on those other metrics as well.

Your next question comes from Andrei Stadnik with Morgan Stanley.

I wanted to ask around the synergies firstly. The -- your [ final ] synergies going to go above the $218 million target. How much higher it can go? Can you give us any feel for that? And what about the integration costs that will be used to deliver that? Will those go higher?

Yes. So what we're intending to do is once we've completed the $218 million target, we will close off that program. And that's not to say that that's the end of cost-reduction opportunities, but more we will frame them up -- we will frame them up in terms of when we do platform simplification and we talk about the cost and benefits of those phases, we will roll those opportunities into that business case. So yes, we see -- yes, we see amounts beyond the $218 million, but we're not going to keep running, if you like, a sort of synergy program. And the reason for not running those 2 alongside each other is that, practically, when you make a saving, if you're running a synergy program and you're running a simplification program with savings attached, you're faced with this question of, well, I made a saving, which bucket does it go into? And of course, it doesn't really matter so long as it's all captured and all hits the bottom line. So that's the way we're thinking about it, savings beyond $218 million. And as we flagged, yes, they will come at an incremental cost, but they are an incremental benefit. Those will be picked up when we talk about phases of platform simplification as we have done this time.

[Operator Instructions] Your next question comes from Nigel Pittaway with Citi.

Just first of all, talking about synergies and buckets, in terms of sort of the remaining synergies, presumably most of those are going to flow through the Platform division, but is it 100%? And can you give us any guidance on the divisional split of those synergies?

No, look, I wouldn't say that. What I would say is that if I look back over the first half, something like 85% of those synergies were delivered between the Advice and the Platforms part of the business. Now that's not necessarily an indicator of what I would expect going forward, but that was the delivery inside the first half. So I think there will continue to be a broad base of savings in the remaining period. You'll see them in Asset Management, Corporate, in addition to being in those other areas. So I wouldn't call out Platforms ahead of other parts of the business.

Okay. But there's no sort of indication about what we can expect in terms of divisional split. So we just got to work that out, I guess.

No, look, I think we look at this as a fully -- what we are focused on is the total dollars. And so at different times, it may well be it's a bit less here and a bit more there, which is why we're not giving a forecast on segments. I'm happy to talk about it in terms of what's been delivered in the past, but we wouldn't give a forecast for segment splits.

Yes. No, I agree with that. I think the other way I think about it is, the synergies are more likely to appear where the greatest overlap is in terms of businesses between MLC and IOOF. So I think there's a strong overlap in the advisory, in the workplace space, a strong overlap in Advice. So I think that might help you sort of try and sort of pro rata that, if you like, or proportion that across the segments.

Yes. I mean I guess you've got the separate targets for Advice, in any case. So once you've stripped those out, it sounds like a fair amount of the remainder will go into platforms, but...

Yes.

Okay. Just moving on. In terms of the sort of product rationalization, I mean the initial phase of Evolve was meant to sort of bring the product down in legacy IOOF down to sort of a pretty low number. Did it actually do that?

Yes. I think if you look at the sort of the transition platforms remaining in IOOF, it certainly has done that. So I think in our reporting, the transition platforms, for lack of a better term, probably overweight a P&I, for example. And certainly, you'll see far less representation of IOOF. So yes, it has. And the feedback certainly to date post migration has been quite positive. And as I alluded to earlier, there's actually been some opportunities to reengage some relationships there that may have gone to be dormant.

Okay. Just maybe just exploring, I think it's pretty obvious why but –- exploring your comment that adviser numbers will stabilize from 1 July '22. Presumably, that's just a facet of the fee increases having flown through by then and you expect it to settle down. Is that the right interpretation of your commitment there? Or is there something else at play?

There's maybe a couple of other things. So that's certainly one of them, Nigel. The other one is we're still seeing the flow-through of education standards. So that is an external dynamic that's still playing out. And the third dynamic is also, clearly, we're doing a lot of work around MLC Advice. So when you're moving pieces of the business model, and I think we've always got to be a little bit cautious around commitments we make. So I certainly think post 1 July onwards, we'd expect stability. But between now and then, there might be a bit of movement.

All right. Okay. So maybe a little bit more in MLC Advice over the next few months. Okay. And then maybe just finally, I mean, obviously, you've referred to the positive turning flows in the second quarter. I mean does that in any way sort of bring forward your expectations for when outflows might cease from ex-ANZ ex-MLC?

Look, our focus right now is building that momentum. So we're not getting too far ahead of ourselves. Yes, we were pleased with the second quarter. We're spending a lot of time and the team is doing a lot of work making sure we build on that momentum. The pipeline, I think, in some parts of the business, is healthier today than it's been for 4 or 5 years, and that's really pleasing. So our focus is really making sure that Q3, Q4 and beyond, we're delivering some good momentum. And we haven't gone back and tried to forecast when do we think that breakeven point is, other than to recognize this is a momentum business. I think we've got some good momentum now, and it's just building on that.

Your next question comes from Anthony Hoo with CLSA.

Just got a couple of questions. Firstly, looking at Slide 20, with your $40 million to $50 million investment spend, the net benefit is $5 million to $10 million. I'm just wondering -- so to what extent is this investment spend really a catch-up to your competitors given it seems like a small net benefit? What cost savings are there, it's largely offset by revenue impacts?

Yes. Look, it's a good question. I mean I wouldn't describe it as a catch-up per se because if -- what I recognize is that the heritage of these visitors and the success historically means that you inevitably have product sets that are more complex and product sets where pricing may not be at the contemporary level. So certainly, from a functionality perspective, I think we're competing well. This isn't sort of a catch-up in that regard. It does recognize -- some of this spend does recognize that there are nuances around the products that we're looking to migrate that we need to cater for. That could be tax engines. It could be other pieces of functionality. It's a [ May ] functionality, for example, that we need to upgrade, absolutely. But I think, most importantly, if you focus on the OpEx reduction, it's also helping deliver a significant improvement in OpEx. So if you're alluding to the fact that it will -- it feels a little bit underwhelming, I'll go back to the initial point that some of that spend is not just for this program, but the program to follow as well. So I think that's the important point. That foundational spend is not simply for the benefit of the Evolve23. It will benefit further pieces thereafter.

Okay. And then just a second question as well. On the Advice business, on Slide 21, you're talking about you're still targeting breakeven for both ANZ and MLC self-employed channels. Just thinking beyond that, can you give us a sense of your aspirations for those channels beyond breakeven? I mean -- or do you think the self-employed channel is really, ultimately, more challenging than your corporate or employee channel?

Well, they're certainly very different economically. So in the professional services, we are -- we're extracting value from the provision of advice from giving investors advice. In the self-employed, we're extracting value from the provision of licensing services. So the self-employed adviser is the one that is benefiting from the economics of Advice. So they are quite different. And I think that distinction is really important. If I reframe your question about, what is the profitability of the licensing services? I think in some ways, with the reshaping of the market and the industry that we're currently going through, we're yet to see what that looks like. So clearly, these businesses have gone from being subsidized. We are putting a stake in the ground and saying, we want this as a stand-alone business. How we extract value from those relationships and those licensing services thereafter is, I think, is something that's still emerging. And it's something that we're working very hard to work through ourselves, but we're certainly not alone. I think we're seeing very similar dynamics through the whole market.

Your next question comes from Siddharth Parameswaran with JPMorgan.

Just a couple questions, if I can. I might have missed it, but just -- I was hoping if you could just flesh out just the profit contribution of AET or just the revenue contributions, whatever you can provide on that.

Yes. So AET, let's call it sort of low double-digit millions at the EBITDA line.

Low double-digit EBITDA line, okay. If I could ask a second question just around revenue margin contraction. We're obviously playing some repricing on some of the P&I portfolio before and just -- what were your other products? Are you happy with that there won't need to be any more repricing going forward? And are you seeing some price cuts from some of your peers? I was just hoping you could just give us some idea of where you think you stand and whether we won't see any more reductions from here from the run rate that we saw in the first half.

So I think there are a couple of different perspectives on this. So in the advisory space, the advisory platforms in the go-forward market, look, we're certainly not seeing a lot of pressure there. I think our contemporary offers, our go-forward offers are in market. There is a dynamic of workplace particularly, I think, with the performance testing that is providing some food for thought around the pricing and ensuring that our offers -- on existing performance after fees is where it needs to be. Again, that's different for different product sets. So I can't give you one answer that encompasses the whole book, but they're probably the dynamics. We're not seeing, what I'd say, contemporary pricing pressure. We're not seeing that. We are seeing some dynamics around the performance tests. And obviously, the starting point of some of these product sets and the heritage of these product sets are actually leading to some of these dynamics. So in some ways, some of these dynamics we've seen relate to the age of the products and how long they've been around for.

Okay. I mean could you give any guidance as to what you're expecting in terms of revenue margin contraction on the Platform side?

Well, the best guidance we can give you which relates to the Evolve23, which I think we've stated that, pretty clearly, what we expect as a result of that migration. But outside of that, as I said, I don't think we've got anything at the moment, but that's not to say that, as you work through performance testing, et cetera, that there has been -- there may be -- but I expect that to be at the margins.

Okay. Can I just ask the final question just around -- just -- you're putting up fees for advisers and cutting back some of the services that you're providing. I was just wondering if you could comment whether so far you've seen any actions by the advisers in terms of utilization of any of your other products, just any of your Platform products or do you expect any of that? And also, just the second part to that question, just I think if I'm right, you've held back on raising any fees on MLC advisers. So just wondering if you could comment whether we might see further reductions in adviser numbers in MLC once those prices start rising and you enter breakeven.

So I think there may be 2 different components here. There may be the licensee fees that we charge advisers. And just to be completely clear, we're not removing services. So the removal of cost does not imply removal of services. We're simply delivering those services in a different way. And I think that's a really important point to make. But yes, we have increased licensee fees. As we alluded to, some advisers have left as a result of that. And that is simply a function, more the size of their business and the nature of their business. Keep in my mind that our fee levels are in line with market, so they're typically in line with what you'd pay anywhere else. On some changing behaviors, I'm not sure if you were alluding to some of the repricing of our platform products. So for example, the reprice of the -- what the P&I sets, the frontier product, we have seen improved retention. We've seen improved new account openings. So that has changed adviser behavior with respect to the product or the platform. But more generally in relation to MLC advisers, I think we've bedded them down quite well. I think the conversations are really productive, really positive. So we don't expect an exit associated with an increase in the licensee fees. That's certainly not what we expect.

Your next question is a follow-up from Andrei Stadnik with Morgan Stanley.

Sorry, just got cut off before I got the chance to ask it a prior time. So I wanted to ask, especially coming back to the gross margins. I wanted to ask, were there any product mix benefits because in the platforms, the -- on a pro forma basis, the gross margin pressure was quite limited, just 1 or 2 basis points. And in the Asset Management division, it looks like the gross margins increased. So were there any product mix benefits or anything else assisting that?

I'm sorry. You're looking at the pro formas or you're looking at the actuals?

At the pro formas, yes. So the platform gross margin pressure was very limited compared to, say, some of your core peers. And in the -- so in the Asset Management side, it improved.

Yes. Look, the only thing I'd call out on the Platforms business, which I mentioned earlier, was some fees in relation to our private equity asset management capabilities. Those fees, by nature, tend to be lumpy. They're sort of performance fees based on whether it be on exits or things like that. So that's probably the only element that we'd call out as being semi-regular, if you like, in platforms. Other than that, there's nothing unusual we'd call out.

There are no further questions at this time. I'll now hand back to Andrew Ehlich.

Thank you. We do have a couple questions online, but in the interest of time, we will respond to those individually. So I'd just like to thank everyone for their attendance today and their interest, and we look forward to answering any questions you may have. Thank you, everyone.

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