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

Thank you for standing by, and welcome to the Insignia Financial Limited FY '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, and good morning, everyone. Welcome to Insignia Financial's FY '22 Results for the Year ended 30 June 2022. On behalf of Insignia Financial and in the spirit of reconciliation, I respectfully acknowledge the traditional custodians of the lands across the country on which we meet today and I pay our respects to the elders, both past and present. Presenting our results today are Insignia Financial's Chief Executive Officer, Renato Mota; and Chief Financial Officer, David Chalmers. I'll hand you over to Renato.

Thanks, David, and welcome everyone to our full year results and our first full year results as Insignia Financial. Before diving into the presentation, it's worth reflecting on the significance of this. And becoming Insignia Financial is more than just simply a name change. It reflects the creation of a new organization, freeing together IOOF and MLC with a shared focus, a shared purpose and a shared culture. As Insignia Financial, we're driven by our ambition to create financial well-being of Australians. And as we stand here today, we're confident we've got the necessary capabilities, economic diversity and scale to deliver on that ambition. We've been clear in our strategic intent. And as we review the results, you'll see that, firstly, we've delivered on our commitments, doing what we said we would do across platforms, Advice and Asset Management. And secondly, our strategic decisions have driven a significant turnaround in our flows. Surprisingly, through the disciplined execution of our strategic priorities during the year that we've delivered a strong result and also established solid foundations for future growth. It's worthwhile seeing the scene also strategically as Insignia Financial -- as a diversified financial well-being company, setting the context of one of the world's largest and growing retirement savings pools. As we know, the superannuation system exists to support an aging population and one that represents one of the wealthiest per capita populations in the world. Super is expected to double over the next 10 years and nearly triple in size over the next 20 years. Alongside that, we also know the majority of Australians have unmet advice needs. In fact, the unmet need dwarfs the current size of the existing industry and presents a significant opportunity. Against this backdrop, Insignia Financial represents a business with economic exposure to the 2 -- the 3 main drivers of financial well-being value chain being Advice, Platforms, and Asset Management with a diverse range of channels to market across the industry. This economic and channel diversity translates both to business resilience and competitive advantage. We see a real competitive advantage in the network effect of running these 3 businesses side-by-side. Insights and knowledge developed in 1 segment shared across the other 2, providing us with an ability to get closer to our clients. For example, it's the Insights and interactions with advisers as a licensee that helps inform our platform and asset management development. While there's value in this network effect, it's also pivotal that each segment has a value proposition in its own right and a sustainable economic model to match. As we walk through the results, you'll see 3 businesses with clear strategies, providing collective benefit to the organization as a whole. Reflecting on the last 12 months, it's evident that the MLC acquisition has provided a strong foundation for competitive advantage and positive momentum. And we've delivered a strong result across the board, and that's translated through to an underlying net profit after tax increase of 59%. This result was supported by strong synergy realization with $78 million of in-year synergies for the '22 financial year. As well as that, we've delivered on the breakeven goal for the ex-ANZ Aligned Licensees. We integrated the MLC Advice and the Bridges with a fresh brand unifying, the culture and common technology. And really, this represents the first steps towards our goal of advice sustainability for the MLC business. We've delivered a significant turnaround in platform flows alongside an ambitious platform simplification agenda, where we've delivered 2 system migrations during the year. In Asset Management, we've delivered strong performance in '22, which is really pleasing, adding to the already strong long-term performance as well as integrating the 2 investment capabilities into one, and that's certainly well underway now. As we announced earlier in the week, we also delivered on the sale of AET, and this provides further focus and simplification benefits. And as David will touch on briefly, the groups also completed the debt refinancing during the year. We achieved carbon-neutral status for Insignia Financial, and this really is a clear sign of our environmental intent and our commitment to uplifting our ESG capabilities across the organization. So in summary, not only have we delivered a strong financial outcome for the year, we've made significant progress to underwrite the future success of this business in years to come. If we turn to our segments and kicking off with Platforms. We've been able to simultaneously deliver on simplification and growth, and this has been largely achieved through enhancing our client experience. It's worth focusing on the breadth of our Platform business, which is 3 main pillars. Firstly, we have a competitive presence in the advisory space via our Wrap platforms. In addition to that, we're also one of the country's largest workplace super providers. And it's been pleasing to see the growth across both of these channels, not only in FY '22, but importantly, also with strong pipelines for the current financial year. During the year, we saw $2.8 billion in net funds flow into the Evolve Wrap platform under advisory. And certainly in the workplace business, it's been pleasing to attract 15 new employer plans, which represent over $500 million in FUA opportunity. In addition to these 2 intermediary channels, they give rise to the important and valuable opportunity to directly engage in our personal business, which aligns strongly with our digital financial well-being strategy. This channel represents over $30 billion in funds and nearly 0.5 million members, and we see this as a really important source of future growth going forward. What underpins each of these 3 channels is an enterprise commitment to service and technology. This is in turn amplified through our simplification program and all of which culminates in improving client experience and growth momentum. We turn to Advice. The reshaping of the Advice business is having a meaningful impact on the earnings, the sustainability and the quality of Advice outcomes. We recognize Advice needs to exist on a continuum of different models. And we see tremendous opportunity to improve the financial wellbeing of Australians by extending our reach across this continuum and making Advice more accessible. This needs to involve utilizing technology in support of our advisers across all 3 of employed, self-employed and self-licensed models. While we've seen a reduction in adviser numbers, this reduction has been broadly in line with the reduction in the industry as a whole. So in other words, the reshaping of our business model, the removal of subsidization has been achieved without a significant reduction in market share, all the while improving the quality of our Advice and our advisers. We're focused on expanding our capability of technology in the way we shape client experience and drive personalization. So not only is this important for Advice, it's also important in pursuing the opportunity to reach those people who currently don't interact with the Advice industry or don't have a financial adviser. With the addition of the MLC Advice network, there remains more to be done from a sustainability perspective. However, the track record and experience with the ANZ business gives us real confidence and expertise that we have a clear plan for what is required. In our Asset Management business, we continue to deliver strong performance across multi-asset and direct capabilities. During the year, we had 87% of our funds under management exceed their 5-year objectives. In June of this year, the MLC and IOOF multi-asset teams were integrated under a single Chief Investment Officer. And importantly, all research houses reaffirmed their ratings across retail and corporate product suite. And this really was a vote confidence not only in the people and the capabilities in those teams, but importantly, the change management process that we're working through as a business. With the presence across the multi-asset portfolio construction, single-asset class strategies, real asset capabilities such as private equity, the depth and breadth of this business provides access to new pools of clients and an economic resilience through diversification of earnings. Utilizing technology in new ways to package and distribute investment outcomes remains a key opportunity. And so in many ways technology is a key theme also for Asset Management, both in terms of expanding into the IMA-SMA space as well as through reporting and insights tailoring by our investment central service. As we already touched on, we're particularly pleased with our ability to turn around flows to the flow trajectory, and this certainly bodes well also for the 2023 financial year. In FY '22, we experienced a significant turnaround in flows with a $3 billion improvement on the prior year on a pro forma basis. And this is quite an achievement in the first year of acquisition, particularly considering the other competing priorities that we've been able to execute on in parallel. This improvement in flows was the result of strategic decisions taken to enhance the competitiveness of our offer as well as the improved strategic clarity and focus that comes from being a specialist business. Pleasingly, the improvements have been across all 3 operating models, whether it be continued improvement in the Evolve model and -- sorry, the IOOF model and the Evolve Wrap. The MLC product range, which has benefited from some recent product enhancements or in fact, the one-part suite of products, which benefited from some pricing changes last year. So the uplift is also evident by channel. So whether you're looking at the advisory channel, the workplace channel or in fact, improved retention in the personal book, it's been great to see that there's been a strong contribution across the board. We continue to focus on executing our priorities and anticipate that in the financial year of '23, we'll actually become net funds flow positive, which I think is a great milestone and certainly something we'll look to build upon in years to come. On the Asset Management side of the business, and we've discussed this before, the lumpy nature of institutional flows, masks what are really healthy net funds flow growth in the retail space, and particularly in the on-market product suite, where we've had some strong momentum and we expect this to continue in the coming years. I'll hand over to David.

Thanks, Renato, and good morning to everyone on the call. Starting with an overview of the statutory result. FY '22 UNPAT, including discontinued operations was $234.5 million. The result of gross margin of $1.48 billion and operating expenses of $1.05 billion. Net profit after tax for the period was $36.8 million with a series of adjustments to arrive at UNPAT and these adjustments are set out in the appendices, the most significant of which are transformation costs of $96 million and remediation costs of $70 million. When comparing FY '22 results of the previous period, we provided both FY '21 actuals and in FY '21 pro forma. And because the acquisition of MLC was completed on the 30th of May 2021, there's only 1 month of MLC financials in the FY '21 statutory result. And so therefore, the FY '21 pro forma is a better basis for comparison as it's been adjusted to include or to assume the full 12 months of MLC's FY '21 performance. So when comparing to the pro forma FY '21, the strength of the FY '22 results shows through with gross margin up 2.6%, OpEx down 3.9%, which taken together have led to a 26% improvement in EBITDA and a 9.9% increase in UNPAT. We also note here the movement in some of our key ratios. We've talked here about group gross margin and group net operating margin or EBITDA margin. Group gross margin was down 2 basis points and net operating margin up 3 points. And I'll step to the drivers for these shortly. One of the other key metrics we look at is our cost-to-income ratio, which improved from almost 79% on a pro forma basis, down to almost 74% and certainly one that we're going to continue to target as we move forward. Moving on to looking at segment performance. It highlights Renato's point about the benefit of our diversified model that we operate with each of our 3 operating segments delivering double-digit UNPAT growth versus FY '21 pro forma. Starting off with platforms versus the pro forma FY '22, so a 1 basis point decline in gross margin from 49% to 48%, but a 1 basis point increase in net operating margin from 18 to 19 basis points. The 10% increase in UNPAT was driven by this reduced OpEx and a 14% increase in average FUA, which more than offset the balance of pricing changes made throughout the year. In Advice, UNPAT grew by 16.2% despite a drop in year-on-year gross margin. And as a reminder, that's really because FY '21 includes $16 million of income from the former BT relationship that ceased at the end of calendar 2020. Costs in Advice were reduced by $31.4 million as part of the Advice 2.0 strategy, which as Renato mentioned, has led to the breakeven of the ANZ or former ex-Allied Licensees. And in fact, over the period, there was effectively a 0 loss for the period and a small run rate profit for those businesses as we head into '23. Finally, Asset Management gross margin increased from 24 basis points to 25, mainly due to the mix of our funds over that time. Net operating margin increased from 8 to 11 basis points due to cost reduction and UNPAT was up 36% when we put these 2 together and in terms of what's been, we think, a really good year for that business. Turning back to the group result. The next slide shows the bridge from FY '21 UNPAT to FY '22 UNPAT. And after adding back the MLC UNPAT contribution, you can see that FY '22 performance is really driven by 2 factors: The increase of almost $80 million in FUMA-related uplifts across both the MLC and IOOF ex-MLC portfolio and the net OpEx reduction of $42.6 million, which I'll cover off on the next slide. Offsetting these gains has been a reduction in product margin due to pricing changes of $34.1 million. Most of these relate to our platform segments and an increase in other costs, which include a full year of funding costs, lease costs and again, also the BT third-party arrangement that I mentioned earlier. Moving on now to look at the cost bridge. This is the breakdown of the $42.6 million. And you can see here how we have the synergies delivered in-year of $73.1 million, being offset by -- mainly by our sort of salary increases of $22 million. That $22 million is pretty typical for what we see in terms of increase in our wage bill. It's typically between $20 million to $25 million. In terms of the way we see that for '23, we do see higher salary costs coming through as we look to '23, but we will offset these inflationary impacts through additional cost savings so that the net salary increase line continues to be in the $20 million to $25 million range as we head into FY '23. Focusing on synergies. FY '22 was a real watershed year for the delivery of the synergy program with $124 million of annualized synergies delivered taking the total annualized amount to $180 million and reducing the amount to be delivered by the end of calendar '22 to $38 million. A bit more pleasing than these annualized numbers was the translation of these annualized synergies into a P&L benefit, where we saw a benefit of $78 million, $73 million from cost and $5 million from revenue synergies. We expect to flow through into FY '23 to be approximately an additional $85 million, principally from initiatives that have already been realized, but that will just be the full year impact that flows into '23, with the balance then expected into FY '24. And while we do think that there will continue to be synergies from the acquisition beyond the $150 million commitment, we will continue to report on synergies through, at a minimum, the first part of FY '23. We will soon move to talk about overall cost reduction initiatives as a single number rather than splitting them into the various initiatives. But we won't do that until we've been able to demonstrate that the full synergies have been delivered through the P&L. Moving on next to remediation. Also a year of significant progress on remediation with our 2 programs paying out more than $300 million to impact to clients. Firstly, the Advice remediation program saw $186 million in payments made with a net provision raise of $62.4 million, leaving a balance of 30 June of $191.8 million. Now we expect a further $48 million in cash payments to be made by the end of September '22, with a Fee For No service element of the Advice program is expected to be concluded, and that will really leave the quality of Advice work left, which relates approximate to 16 advisers that we need to do to wrap that program up. Product remediation also progressed well, particularly on the P&I side with $121 million of payments. The P&I element of that is largely complete, leaving the MLC program that will continue on into calendar 2023. Moving now to corporate cash and debt facilities. The slide sets out here are senior leverage as at 30 June 2022, which was 1.1x net debt-to-EBITDA, slightly lower than we had anticipated. And again, that's mainly due to that delay in remediation. So the remediation payments will continue -- the timing of those will continue to be a significant factor in terms of the timing of our peak in leverage. So we expect that peak now to be pushed back into the first half of '23 before coming back into our target 1 to 1.3 range, that's a senior leverage by FY '24. Renato mentioned also that we've successfully completed a refinancing of our debt facilities across the last few weeks. We've increased the size of the facility marginally from $920 million to $955 million. And importantly, the tenders have been extended from what were 2- to 3-year revolvers in the former facility to now 3 to 4-year revolvers, also with a 4-year term tranche. So the details of those are in the appendices, but we're certainly pleased to have the support from our banking group and the available funding that we need to execute on our business plan. Dividends. Directors have declared a dividend of $0.118 per share for the second half of '22, which represents a 66% payout ratio. This is the same dividend cent per share as the first half, bringing total FY '22 dividends to $0.236. And as with the first half, we're offering shareholders the flexibility of a dividend reinvestment plan and again, continuing the same 1.5% discount as offered in the first half. Lastly, I want to make a few comments on the outlook for '23, which has certainly started with increased volatility in equity markets as evidenced by our 6.7% drop in closing FUMA for FY '22. Renato mentioned, we're targeting positive net funds flow for FY '23, building on the momentum of the last few quarters. Now we do see a contraction in our group gross margin of 1.5 to 2.5 basis points. That's mainly driven by platform repricing and much of which represents the full year impact of pricing reductions and decisions made in FY '22. In terms of our net operating margin and based on a return to more normal market conditions, we see this being broadly in line with FY '22, thanks to the various cost initiatives underway. So in conclusion on the financials, we think it's been a strong set of numbers delivered for FY '22, and we think that these also lay the platform for FY '23 despite what in the early stages has been more challenging market conditions. Back to you, Renato.

Thanks, David. Just before addressing the outlook for Insignia, it's important to reflect on where we've come from this business and all that's been achieved over the past 2 years in creating this opportunity for growth. The acquisition of MLC was part of our ambitious strategy to transform IOOF and position us at the forefront of the industry disruption ahead of many of our competitors and also recognized that the industry was at an inflection point. This is all designed to allow us to benefit from the structural industry growth over the coming years. This plan was not without execution risk, and we acknowledged that at the time. However, we've delivered to the milestones we set ourselves, and this gives us greater confidence about the future and our ability to execute on the emerging growth opportunities. For the growth of Insignia Financial, there are 3 pillars which describes our efforts to create the leading financial well-being company in Australia. The first pillar, which we described as becoming Insignia Financial, is really focused on building a culture and reputation, both internally and externally that aligns to and reflects the needs of the communities we serve. This is key to building a culture centered around our clients and a commitment to agile ways of working, bound together by a common purpose and ambition. The second pillar of simplification remains a core part of our strategic opportunity and underwrites our agility, our improvement in client experience, our investment in service excellence and ultimately, our growth prospects. The third pillar is financial wellbeing, which we've traditionally described ourselves as an advice-led business. But in reality, the opportunity is far greater than just the advisory as we know today. Financial wellbeing is about ensuring we've got the right insights, the right tools and partnerships to all Australians at the right point in time, importantly. Whether they have complex intergenerational needs or are simply looking to learn more about their options as they start out in life. Underpinning this financial wellbeing journey is a commitment to technology, data driven insights and a purpose centered around the needs of Australians. It's pleasing to see the progress we've made across the spectrum of environmental, social and governance factors. This recognizes the importance and opportunity for Insignia Financial to better reflect what the needs of the communities we serve and directly contribute to the wellbeing of our society. As a business, our clients are entrusting us on a promise of future benefits, and it's really important that we demonstrate that we understand and place importance on the same things they do. For Insignia Financial, our success begins with our people and clarity around our conduct and purpose. For that reason, that we put a lot of effort into developing and immersing our people in the ClientFirst principles, which provide the foundation of everything we do. Keeping in mind, much of this work is being done during COVID and lockdowns, it's been really pleasing to see our people galvanize around our principles, and this will continue to be an area of focus. We've touched on the work we've done around -- done around and continue to do the environmental space and whilst we think the measuring stickiness arena will continue to be a reset, it's important we remain attuned to societal expectations, ensure our conduct is in line with our standard ambitions for 2030 and 2050 targets. We pride ourselves on being a belonging culture, so diversity and inclusion is a key area of focus for us. In addition to that, the IOOF Foundation has played a pivotal role in supporting people in need for over 20 years, and it continues to play an important role for Insignia Financial today. And finally, on Governance, as our organization evolves, so too does the governance environment that supports it. There's been a renewed focus on ensuring we have a common set of standards and practices to support the business as well as ensure that the fiduciary mindset is embedded in everything we do. Alongside the simplification of the business, we're reviewing a governance model to ensure it adapts to our new size and scale and reflects the risks and opportunities of it changing the operating environment, particularly as we work towards a simplified state. Simplification remains a key feature of our strategic intent and the major source of value and growth for us. As we've stated in the past, our experience having reduced to make systems down to 2 prior to the acquisition of P&I and MLC that the significant improvement in cost to serve as a result of these benefits from scale. And we see the same relationship evident across the industry, which really reinforces our belief that converting size into scale is one of our strategic opportunities. As the chart on the right shows, the bringing together of IOOF and MLC has created size. However, converting this into value from scale is the opportunity that will tackle over the next 3 to 4 years, ahead of -- as part of our simplification program. We're developing a comprehensive program that mapped out the path to our final state of 1 to 2 platforms and simplified operating structure. Our expectation is that this program will take 3 to 4 years, and one of the end results of this will be an organizational cost-to-income ratio in the low to mid-60s. It's important to note that these benefits from simplification were quantified at the time of the MLC acquisition and represent value over and above the acquisition thesis. While we've always pointed to these benefits from a qualitative perspective, it's particularly pleasing to be able to tackle this opportunity ahead of our expectations from a timing perspective. And while we recognize and certainly believe the scale improves cost to serve through consolidating into newer, more contemporary systems, it also translates to an improved adviser and client experience and ultimately improve their growth prospects. This has certainly been the experience with the Evolve21, which we completed in December, and we expect the same to be the case with the Evolve23, whereby we're taking one of the acquired platforms and consolidating it into our proprietary Evolve platform. This transition provides the Evolve platform significantly more scale, making it one of the largest contemporary adviser Wrap platforms in market with a clear path to continued development, which will be based on agility towards adviser feedback and leveraging proprietary technology for service excellence. So not only to scale improved economics, it also fundamentally improved the experience and therefore, the growth prospects of the business. Our strategic commitment to advisers, I think, been consistent and clear throughout, as has our intent to make Advice more accessible and affordable. And this has meant deliberate changes to our operating model as we adapt to the changing industry. With the foundations of improved governance and economics as a result of the ANZ licensee business is now in place, we have a blueprint for the continued reshaping the MLC Advice business. We also believe we're well placed to capitalizing potential changes to industry settings coming out of the quality of Advice review as well as the increased demand for Advice that emerged over the past few years and continues to emerge. A clear focus on Advice remains improving the productivity of advisers through improved processes and technology deployment, enabling greater focus on client engagement. But as we've touched on, financial wellbeing is more than just advice. It's about the interactions that lead into or complement advice. It's about combining humanistic as well as digital interactions. These well-being interactions are designed to enrich the client experience, whether it's complementing advice or whether it's, in fact, just helping people who may otherwise not sit in front of an adviser, improve their own confidence in decision-making through interactions with us. Advices sometimes been described as a wall garden with high barriers to engagement to clients and our financial wellbeing strategy is really designed to lower those barriers, create more entry points, create complementary technology and insights to support financial wellbeing. So not only will new tools and interactions help non-Advice clients directly, that will also significantly enhance the pipeline of potential Advice clients, expanding it beyond the current 10% of Australians. The one consistent message here is that there's an inherent value in professional financial advice, and we believe that there are community benefits and attractive financial returns by making it more accessible. In the final piece of the puzzle from a financial wellbeing equation is really the delivery of outstanding and reliable investment performance. The Asset Management business is one where people and culture are the driving force, and we're really fortunate to have an incredibly focused and capable team delivering outstanding outcomes both across multi-asset and the single asset classes. And there's no doubt in our mind, there's a strong alignment between this business and our financial wellbeing philosophy, whether it be in support of our superannuation members or for institutional clients, whether they be offshore pension funds or domestic mandates, it's ultimately all about delivering investment outcomes to members according to an agreed strategy and agreed level of risk. And that's entirely at the heart of financial wellbeing. Over the past few months, we brought together the multi-asset teams, which is provided for improved focus and alignment. It's also allowing for product and operational simplification benefits as well as creating scale benefits from our funds under management. Underpinning the investment performance ethos is a business strategy to improve how we leverage technology to new channels such as IMAs, SMAs as well as digital portfolio construction tools for advisers. As part of raising our ESG maturities at corporate, we're increasing our focus and accountability around the responsible investing on behalf of our investors, which we expect to continue to be an area of focus. So to wrap up before opening up to questions. Having successfully executed the key deliverables over the past 2 years, Insignia Financial now finds itself with a really clear path for developing a leading position in the industry and allowing it to capitalize on continued growth across our 3 businesses. It's our upscale presence and expertise across Advice, Platform and Asset Management that gives us confidence around our ability to build a competitive advantage. And we're already seeing that translate into improved fund flows, and we expect that to continue. We're building a foundation of our reputation and branded market through our people and principles and making sure this translates into organizational agility and leading technology and service through our simplification agenda. All of this ultimately goes to support our key competitive advantage of delivering financial wellbeing through a diverse range of channels and capabilities and addressing a basic human need across a broad spectrum of Australians. I'm confident we're creating a business that's relevant, it's resilient and is ready to seize on emerging growth opportunities. So I'll thank you for your time, and happy to take questions.

[Operator Instructions] Your first phone question comes from Andrei Stadnik with Morgan Stanley.

Can I just ask 2 questions? Firstly, on the synergies or further cost-out potential, how should investors be thinking about the timing and the size of the opportunity there?

Stadnik, it's David here. I think it's one that, as I said, we've indicated previously that what we'll do is pick those up when we do the business cases for the Platform consolidation opportunities. So that's where we will pick those up. We've given you an indication on Evolve23. And then some of this is just going to form normal cost out. I think what we're keen to do is move away from -- at the moment, we're sort of stratifying our cost savings into various buckets, whether they be synergies, whether they be business cases. A bit like 2 years ago, we sort of brought together the P&I and MLC synergies and said there's one bucket. We'll be looking to do the same thing for cost reduction. So that's where we will see them. And that will principally be inside the business cases for Platform consolidation. But as we've also signaled, you should expect there to be continued focus on cost on a year-on-year basis as well.

And my second question, I want to ask around remediation. So the ANZ cap has been breached. So can you give some color on that perhaps can give investors confidence and comfort that any further breaches will not have a material impact on the balance sheet?

Yes. So where we are is -- the last stages of the ANZ program had higher failure rates than we've seen in the first half. That leads an increase in the provision really late in the financial year, in terms of the work that we've been seeing. That program is one that, as I said, the fee for no service element is one that we do expect to wrap by September. So there's a relatively short period of time there. The remainder of the program is quality of advice. Now quality of advice is more complex than fee for no service because the work you're trying to do is try to replicate what loss a client has suffered, had they not taken certain financial advice. And so recreating that can be complicated. But look, I think we've also got a few different, sort of, potential offsets in there -- if those numbers were to be a little larger. So for example, at the moment, we're basing it on the total number of files, and we're assuming we need to open all of those files. As we go through sampling, it may well be there's an opportunity to open fewer and every fewer file you open has quite a material cost impact. So as I think, I've said now for a couple of years on remediation, unfortunately, until we open the file, see what's there, there's always an element of risk around what we're going to find. But we certainly think that, that sort of risk has been significantly narrowed through the progress that's been made across FY '22.

Your next question comes from Kieren Chidgey with Jarden.

Renato and David, a couple of questions on the outlook statement you went through earlier. Just maybe starting with the gross margin basis point contraction. You flagged of around 2 basis points. That seems to imply around a 4% reduction. Just sort of, keen for you to unpack, sort of, what's really driving that? Is that, sort of, the Advice business revenue coming back again in the '23 year? Or is it, sort of, new platform price changes that are due to flow through? Just noting that the platform gross margin in basis points was actually fairly flat in the second half on first half.

Yes. Yes, Kieren, as we look into '23, it is predominantly Platforms repricing. And so what that is -- is the largest effect is a flow-through from decisions that were taken this year. So take Evolve21, that migration was in -- at the end of December 2021. So there's only 6 months of that impact inside the financial year. Likewise, there was a benefit in FY '22 of the timing of the various changes around OneAnswer and Smart Choice. So Smart Choice provided an increase in revenue. OneAnswer was a decrease in revenue, but there was a timing difference there that gave a benefit in '22. That will reverse inside '23. We'll also see the first stage of price reductions for the Evolve23 program. So again, there's some margin there. So it's principally in Platforms and principally through that, sort of, re-pricing side of things.

Okay, David. And I mean, can you offer, sort of, any guidance as to how significant that is, sort of, within the Platform division compared to its 48 basis points. Is it fairly similar in terms of 2 basis point type reduction?

Yes. Look, if I think about other things impacting gross margin for '23, Asset Management, we would expect -- I talked last time around private equity fees, which we received some private equity performance fees in the first half of '22, nothing in the second half of '22. And at this stage, we're not expecting anything in the second half of -- in '23, just given where, sort of, IPO markets are. So that will impact the Advice -- sorry, the Asset Management gross margin. Other than that, most of that gross margin impact will be inside the Platform segment.

Okay. All right. That's clear. And just moving on to costs, just keen to sort of pick up on your comments earlier, the salary inflation probably still within that $20 million to $25 million range you had this year. But obviously, there's broader CPI pressures as well. So putting aside the incremental synergies to come through, what are you thinking in terms of BAU overall, sort of, cost growth across the organization?

Look, it's reasonably [ miniscule ], because most of our costs are people costs. That's really where we see most of the impact. I think of our $1 billion plus cost base, 760-odd comes through in terms of -- that $700 million comes through in people costs. So that's the majority of the cost base. It's the main area we've been seeing at the moment. And that's really why, given we've got our transformation office up and going and running through synergy programs, that's why we're confident that we can effectively save those overs that inevitably will be there with -- on the salary bill. At this stage, not seeing too many non-labor costs increase. So that's where we see the main pressure.

Okay. And finally, just on the sort of EBITDA margin being flat into next year. Are you taking into account, sort of, the strongest start to markets we've seen post 30th of June into that? Or are you assuming a fairly normal market over the course of '23 in that statement?

Yes. So we assume every year that markets grow by about 5.5%. We, kind of, ignore, I guess, what's happened in between the time we set our budget on the 1st of July through till today because just because they're up today doesn't mean they'll continue up for the full 12 months. So it's based on what I'd call the sort of normal year, which is starting from the 1st of July, a 5.5% increase in markets across the 12 months.

Your next question comes from Anthony Hoo with CLSA.

I just have 2 questions. Firstly, looking at your Advice business, can you talk a bit more around the outlook here? I know previously, you have mentioned that you expected a stabilization in adviser numbers from July this year. Wondering if you can give an update on that. And what that means for the revenue outlook here over the next 2 to 5 years? And then secondly, just a question on your outlook statement for positive net flows next year. I'm wondering if you can give a more granular outlook in terms of -- if you look at the Platforms business, are we expecting positive flows across the P&I MLC platforms as well individually?

Sure, Anthony. I might start with the advice business and advisers. So you're right, we certainly said we expected a more stable adviser number environment. And I think that's still the case. The only caveat I'd put on that is with the extension of the -- or the introduction of a couple more exams for advisers into this financial year, we still have a pocket of advisers, probably 30 advisers are yet to pass the exam. So obviously, if some of those advisers fail the exam, then there'll be departures as they would be in the broader industry. So I would say that we expect the losses to moderate into FY '23. So -- and that's certainly still the case. With respect to the earnings and the growth, sort of, with a medium-term horizon so over the next 3 years, I still think the greatest opportunity is a job to be done around the MLC Advice cost base. So clearly, there is still more to be done there, and that is something that we are tackling right now. So that, I think, will provide an economic return by tackling that current loss position. And I think in many ways, the -- our ability to grow adviser numbers, which we do expect to grow over that period of time, is also a function of the adviser numbers in the industry. And by that, I mean, I think -- I don't expect a significant growth in adviser numbers in the industry over the next 2 to 3 years. I think we will enter a period of a stable number of advisers. And yes, we'll obviously always look to build market share, but I don't think adviser numbers are rocketing back anytime soon. So that's on the advisers. On the net funds flow, look, what I can say, we expect both the platform and the Asset Management segment to be net funds flow positive in their own right, albeit I think we -- I still call it a relatively moderate -- a modest positive net fund flow. But on aggregate, I think it makes a really meaningful contribution to the group as a whole. So I think it's come a long way from where the funds flow were 2 years ago.

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

Yes. If I could just follow-up on the turnaround. You've delivered inflows Renato. I understand you're winning some new business in workplace, but just across the retail and Advice segments, you talked about better net flows. With the adviser numbers down 19% year-on-year, can you talk about where you're winning business or if you're seeing just less outflows?

Great question, Matt. And so the short answer is, we compete in the open market. So I think there's a bit of a misnomer that our fund flow is intricately linked to our adviser numbers, which is certainly not the case. They are a source of net funds flow, but as is the rest of the open market, the IFA market. So we've seen both an improvement in outflows, i.e., fewer outflows, but we've also seen a growth in new advisers using us or existing advisers using us more often. But I think it's really important to recognize that our business, particularly the advisory business, competes in the open market with every other platform.

Fantastic. And just if I could follow up on the new debt facility, raising the capacity. Can you just explain the rationale given the remediation and integration commitments seem to be winding down as you show on Slide 16. Why are you extending the tenor?? Is there something in the business plan that you need optionality around that you're considering?

No, look, I don't think so. I mean it's a very modest uplift. It's up about $35 million. So it's not a significant uplift. That's really just there for enhanced flexibility. The tenor -- look, it was really just 2 to 3 years, particularly the 2-year tranche just felt very short. And so we were just looking for to, sort of, push that out a little bit. So I wouldn't call a substantial change in thinking on the debt. It's really, as I said, a little bit more debt, pretty modest amount. And as I said, pushing out the tenor to give us a bit more security over that long-term funding. You can see there by structuring it with revolvers and also a term facility, it gives us that flexibility to repay the term, keep the revolvers there. So I just feel this is a more flexible facility than we sort of had before.

Your next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. Firstly, just on just the Advice profit trends. Renato, I was wondering if you could just comment on just the second half. The second half EBITDA didn't really seem to improve much from the first half. I was wondering if you could just give some color around why that is given that -- you principally said that you've broken even on the gains in the dealer groups, and you're obviously looking to get closer to breakeven on the MLC dealer groups as well. And also if you could just talk or flesh out what your assumptions are for FY '23 for Advice in your comments around EBITDA margins being flat at a group level?

So it's David here. I might take that, if that's okay, and at least start off. So what you don't see inside the Advice result is that in the second half, there's around about a collective $10 million, $11 million, $12 million of costs that didn't meet the threshold to be UNPATed out, but are nonrecurring. So for example, we've written back a provision that we had there, that was there for a legal case. We've had some sort of write-downs as well. So there's about a see, collectively low double digits in terms of cost sitting in the second half, but back in our old methodology, we would have UNPATed out, but neither of those single items is above $10 million, and therefore, it's not UNPATed out. In terms of what we see in '23, certainly, Advice will continue to be a cost story. We would expect there to be some uptick at the gross margin line, but the real story will continue to be on the cost side of things. And certainly, Advice makes up a healthy portion of what we see coming through the P&L next year.

Okay. And I mean, is it just me or does it seem like there's a de-emphasis in this presentation versus the last one on breakeven on the MLC Dealer Groups? I mean, I saw it was mentioned, but it was quite prominent in the last one. I think it was identified as a clear additional source of savings.

No, look, it's still there. I think what we were trying to get away from was last time we mentioned 6 or 7 different initiatives that you then have to sort of add up to get to an overall number as we were heading into '22. We tried to simplify this time by going top down and saying well, it here's what we see in terms of basis points. There's no change there. As you say, it's mentioned on the slide, I think it's about $48 million of the UNPAT line of losses that we're still looking to remove. So nothing's changed. We're just trying to, I guess, give a simpler explanation for what we see in terms of the net movement across cost lines rather than, if you like, as I said, splitting the commentary up into multiple initiatives.

Yes. And just to add to that Sid, I think -- so just for clarity, we're not walking away from that commitment at all. So that remains a key deliverable. However, our strategic thinking is now moving into, how do we create value-added Advice as well? So I think strategically, we're looking beyond just breakeven, but that's not to detract from absolutely the job that still needs to be done around that.

Okay. And just one final question for me. Just on the -- on your guidance around the EBITDA margin being flat in 2023. It does -- I mean, '23 meant to be the year where you get -- it seems like the maximum amount of synergies hitting your P&L out of all the cost out to date. So as we think forward, I mean, are you basically saying that there's more to do, there's more of this stuff like Advice breaking even, et cetera, that you can hold that, hold that margin flat from here? Like is this the bottom on the EBITDA margins in your view?