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

Good day, and thank you for standing by. Welcome to the Insignia Financial Ltd. First Half 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Renato Mota, [indiscernible], please go ahead.

Good morning, everyone, and welcome to Insignia Financial's first half 2023 results. It's a pleasure to be here, and I really appreciate you taking the time. I'm here today with Andrew Ehlich, our GM of Corporate Affairs as well as David Chalmers, our CFO. So look forward to spending about half-an-hour or so going through the results itself before opening up to questions. So just to kick it off. And just before we sort of kick into the results in earnest, I think it's worth starting by reflecting on the progress of Insignia Financial since the acquisition of MLC, which was about 18 months ago. And at the time of acquisition, we set ourselves some clear goals. And as we've successfully progressed through these commitments, I think the broader macro opportunities our industry provides are becoming increasingly more tangible for the group. The tailwinds and growth associated with some of the key trends are increasingly clear, whether it's servicing one of the largest retirement savings pools in the world, which continues to compound in size and is supporting one of the richest per capita populations in the world. Whether it's supporting an increasingly complex lives people live, which require ever-increasing levels of expert support and advice and a device that scarce in supply or whether it's, in fact, the compounding of these trends in an aging population, which has more complex needs for longer. So all this reinforces really the unique position that Insignia Financial finds itself in. And it's been one of the few organizations that's got the business diversity to cater for this lifetime financial well-being needs holistically. Our ambition of creating financial well-being is what binds our 3 separate business lines. And it's the unique combination through a client lens of these lines that ensures that we can deliver the right outcomes at the right point in time for the right client, irrespective of client's position in life, age or complexity of needs. As we look to simplify our businesses, these 3 capabilities will be able to leverage off contemporary technology, data platforms and a common purpose to deliver consistently through whole block. Whether it's supporting someone who's joined us through a workplace and seek financial guidance or helping a member access more customized retirement needs, it's the linking of these diverse capabilities in support of financial well-being outcomes that delivers the graph in business. So as we step through today's presentation, really, the key message is that while we continue to build the capabilities for tomorrow, we're delivering on our commitments today and ensuring we continue to translate size into a competitive growth advantage, both short and long term. Moving to the highlights. And whilst it's pleasing to report a 67% increase on NPAT at the $45 million for the half, I think we need to recognize the impact of volatile markets through '22 on our underlying net profit after tax, which is down 17% to $94 million for the half. Whilst there's no doubt the market had an impact, it is pleasing to be able to offset some of this impact through synergy realization with our operating expenses down 7% on PCP to $518 million for the half. We're also declaring an interim dividend of $0.105 per share. Pleasingly, we've met our commitment of completing our integration synergies 18 months ahead of schedule as well as exiting the AZZ TSA or the transitionary [indiscernible] agreement from that acquisition. We continue to increase the focus of our portfolio through [indiscernible] divestments and we saw this in the previous half through the sale of ANZ, which completed in November and more recently, the final divestment of our stake in JANA. Part of building the foundation of the organization is ensuring that we're tuned to the sustainability of our business and there are 2 callouts worth making. The first one there relates to our environmental credentials and pleasing to have received the Climate Active certification for Insignia Financials. And the second one there relates to governance and ensuring governance is embedded in our operating environment and our conduct, which is particularly important given the level of change that we're experiencing in business. We expect this to be -- to continue to be an area of focus and one that will also include making sure we satisfy the [indiscernible] license conditions on our supranation businesses. Switching to the right-hand side of the page and looking at the 3 segments. Financial advice, while we continue to change the business and improve the sustainability of that business, it's really pleasing to see our advisers continue to be recognized, some of the leading financial advisers in the country. In the platform space, again, it's really pleasing to report a nearly a $1 billion improvement on in net flows period-on-period or certainly in comparison to the prior corresponding period. Our focus in enhancing continuing to enhance our expanded offer is paying dividends through momentum and generally gives us confidence in our goal to position ourselves in the top 2 or 3 platform markets. In terms of asset management, again, off the back of continued strong investment performance and despite investment markets, we've seen this business really deliver strong resilience from an economic perspective. And we're seeing growth in higher-margin business lines offset some weakness in lower-margin business lines, which has been pleasing in a particularly volatile investments specifically. Moving to digging a bit deeper into the fitness and starting with platforms. Certainly, a key feature of our platform segment is the diversity of channels to market and we see that across workplace, personal and advisory. I think pleasingly, each of these individually have a clear market opportunity and clear strategic intent. And we're seeing that translate through funds flow profile for each of these businesses. Importantly, though, collectively, they also provide business resilience to that diversity, which we think is a real feature of our business model in the platform space. As I've already touched on, we've seen nearly a $1 billion improvement in net fund flow compared to prior comparative period, which really underwrites our confidence in our targets for FY '23 of reaching net funds flow positive for the full financial year. Also, just to put the scale of our business into context, we've highlighted the reported $10 billion in gross flows for the half, which again demonstrates the strength of the franchise, but also recognizes the work yet to be done to make sure that we improve the retention of our funds flow and making sure that we're continuing to challenge ourselves from a service perspective, from a product offering perspective to improve retention and ultimately, how that translates through to improved net fund flow. From an Advised segment, and I think for Advised more than ever, the delineation and strategic intent in each of our segments and each of our businesses is clearer than it's ever been. And really, I think Advised really is a tale of 3 stories at the moment. I think if you start with Shadforth in our professional services channel, a really mature business, a really strong business that's getting back into focusing on growth, which is probably the first time in a number of years. So it's really pleasing to see the momentum that business has been building. In Bridges, again, in our Professional Services segment, we're really working through the establishment of a new business model, bringing together the MLC Advice businesses in the former Bridges model to create a new model and one that I think is a really compelling proposition into that mass market arena. And the third real area of focus, which we've spent some time discussing in the past is that self-employed model, where there remains some work to be done around ensuring we can meet our commitments around the sustainability of this business model, which is also a key focus. Probably lastly and importantly, our focus on remediation, I think is really imperative and it's pleasing to see this work sort of enter its final stages of the program for a couple of reasons. One is it's a pivotal piece of work from a reputational perspective and making sure we deal with any issues of the past. But importantly, putting this behind us also allows us to put more focus on the future. So I think finalizing this piece of work, I think, will be a real catalyst for us, putting more effort into the opportunities in Advice going forward. Turning to asset management. And as we all know, asset management lives and dies by investment performance and it's pleasing to see the depth of capability and the team shine throughout investment performance in our key flagship products and portfolios. This is certainly underpinning the growth in our retail channels and our managed account program as well as our multi-asset capability, which is really pleasing. And as I've already mentioned, I think the growth in retail and particularly given the higher margins here is providing strong business resilience in the face of volatile markets. Also we're touching the resetting of the relationship with JANA, which included the divestment, the final divestment of our stake in that business. The sell-down of equity to management is something that has begun prior to our acquisition was certainly in train well before our acquisition of MLC. And the recent announcement really represents the completion of that process. I think it's really important to recognize that for all parties, it's important that the partnership with JANA continues, is a strong one on a range of activities and we've got a lot of respect for the team at JANA. Turning to Flows and focusing in on platforms. To begin with, again, really pleasing to report a positive trajectory there on funds flow, particularly in comparison to PCPs. And I think specifically mentioned here, the workplace team that is clearly building some very strong momentum and has done for the last couple of years. This is on the back of a real focus around client proposition, service, the right product offering as well as investment performance. And I think it's through the combination of both new client wins and strong retention that we're seeing momentum build in the business. Pleasingly, however, it's also great to see improvement in net fund flow on PCP, both in personal and the advisory channels. I think particularly in advisory, it's great to see momentum build in the expand offer in our Wrap offer, contemporary Wrap offer on our proprietary technology. I think this gives us real confidence for the future. And also confidence that once we get through the transitions of our other Wrap offer, our flagship offer, albeit on legacy technology in MLC Wrap, it will give this evolving ecosystem in our Wrap ecosystem, a real dedicated focus on growth going forward. And turning to the asset management flows. Again, it's a really pleasing story and positive story, again, underpinning our confidence on our commitments around flows. I think the top right-hand chart there really tells the story and the shifting momentum, particularly from retail, which, again, pleasing not only because it's building some momentum, but also the higher-margin nature of this is a really attractive feature for us. This is coming from renewed work with our advisory channel, some increasing momentum around our managed accounts program and we expect that to continue going forward. It is worth highlighting that our flows, we're presenting the flows out of here excluding the JANA flows given the divestment of business and really looking to create an appropriate baseline. I'll hand over to David.

Thanks, Renato, and good morning to everyone on the call. Let's start with an overview of the financial results for the 6 months ended 31 December, 2022. The first half '23 including discontinued operations, was $98.6 million. The result net revenue of $691.3 million and operating expenses of $517.7 million. Net profit after tax for the period was $45.1 million with a series of items adjusted between NPAT and UNPAT set out in the appendices. The most significant of these being the $48.4 million profit from the sale of AET and transformation costs of $57.6 million. As Renato mentioned, the performance of financial markets during first half '23 was a significant factor in the period's performance with average FUMA down 7.1% compared to the previous corresponding period. Closing FUMA was down 10.4%, but it should be noted that this includes the removal of $7.6 billion of FUM associated with JANA. When comparing first half '23 to first half '22, net revenue or gross margin is down 8.9%, mainly driven by this decline in average FUMA. OpEx pleasingly fell by 7.3% as the benefits from annualized synergies continues to translate into actual P&L benefit. And together, these led to a 13.3% decline in EBITDA and a 17.6% decline in UNPAT. In terms of our key ratios, net revenue margin fell from 47.9 basis points to 47 and EBITDA margins from 12.6 to 11.8 basis points. Looking now at the segment contribution on the next slide, we see some differences between the drivers of results between the 2 of our segments where income is directly related to the performance of investment markets, that being Asset Management platforms and our Advise segment, which is fairly exposed to investment market volatility. Platform saw a 16.4% fall on UNPAT, with falls in gross margin, partially offset by OpEx reduction. The main driver of gross margin decline platform with the impact of lower FUA as a result of investment market declines over the period and also contributing with the price reductions that we flagged at last year's results back in August. The impact of these was offset by initiatives focused on some of the cost and fees that sit between the gross margin and net margin line and the impact of some small provision releases. OpEx in the Platform segment fell by more than $15 million thanks to the synergy benefits being realized. Moving to Advice. Advice grow UNPAT by 22% despite seeing a $10.5 million fall in net revenue, largely caused by the integration of MLC Advice to Bridges, which resulted in some of the lower value clients being off-boarded. Offsetting this fall was a 16.7% reduction in OpEx with the Advice business continuing to make progress towards the elimination of losses from the acquired MLC Advice business. The $48 million of MLC Advice that was noted in FY '22 will now be tracked as part of an overall property improvement target in our Advice segment, given the integration of this business and the details of that is noted in the appendix on the Advice segment slide. Asset Management NPAT was down 8.9% year-on-year, albeit with actually quite strong underlying performance given most of the $9 million net revenue decrease can be attributed to the significant PE performance fees in first half of '22 and the lower revenue of $3 million following the sale of Presima. So effectively delivering flat underlying revenue despite lower fund with the result of improved fund mix with outflows from lower margin products and positive inflows into higher-margin products. The Corporate segment saw UNPAT broadly in line and improving by 1.9%. Here a decrease in operating expenses due to synergy benefits and offsetting the annual rem increases and CPI increases. At the UNPAT line, this reflects an increase in funding costs, partially offset by lower impairment charges, again, based on the previous corresponding period. It's worth calling out borrowing costs decreased by $9.3 million due to increased base rates, the higher margin of the new facility and a high drawn average balance. Turning back to the group result again on the next slide. We see here a bridge between first half '22 UNPAT and first half '23 UNPAT. And this chart highlights the impact of the lower FUMA performance again, mainly due to the decline in investment markets with $45.2 million of net revenue attributable to lower FUMA and a further $27.3 million linked into pricing. Offsetting these declines was the $40.8 million we mentioned before, with revenue synergies of $5 million in UNPAT generating $94.4 million with AAT's contribution of $4.2 million in the first half, called out as discontinued operations. And based on the last slide on the highlights of the first half '23 result was the improvement in OpEx with costs reduced by net $40.8 million. The way this is made up is effectively, we have salaries and other cost increases of $15.2 million and cost reductions [indiscernible] with synergies from the P&I and MLC acquisitions of $56 million. As we committed at the time of the full year '22 results, we've managed salary inflation through additional cost reductions beyond the committed synergies, resulting in a net salary increase of $10.7 million, which is in line with our usual historic wage inflation. Continuing on talking synergies, management committed to achieve a run rate of $218 million of savings from these 2 acquisitions by the end of December 2022. Pleased to hit this target that we achieved at the end of the year, with MLC synergies realized over 18 months rather than the originally committed 3-year period. We will continue to track the flow through the annualized synergies into in-period synergies to ensure the benefits are fully realized and we expect $96 million of synergy benefits to be delivered in FY '23, including those already delivered in the first half, and that will lead to further $10 million to flow into FY '24, which is a slightly faster pace of synergy realization than we expected at the full year where we expected $20 million to come through in '24 and about $85 million in '23. So a slight putting forward in terms of those benefits. We do see continued cost opportunities beyond these targets, but rather than reporting these synergies, they will form the business cases for the remaining phase of simplification as we embark through that process. On to our 2 remediation programs, which continued to progress well with over $100 million of payments made to impacted clients over the period, mainly in the Advice remediation work stream. Advice provisions increased by net $17.9 million. That's being an increase of $25.9 million, offset by insurance receivable of $8.4 million. The increase in the Advice provision raised relates to Fees for No Service program to the ex-ANZ licensees, the work on which is concluded, subject to final assurance. The remainder of the Advice we're focused on quality of advice, which we expect to be completed by the end of FY '24. The remaining product remediation provision mainly relates to MLC Advice, again, which we expect to complete by the end of this calendar year. And this program saw a release of a provision of $22.2 million following a couple of issues that's typically there being run to ground over the half. Moving now on to corporate cash and debt facilities. Senior leverage at the end of the period came in at 1.2x net debt-to-EBITDA. And following the paydown in debt from the proceeds of the AET divestment, we now expect to remain inside our target 1 to 1.3 target leverage ratio for the remainder of FY '23. And one aspect on the balance sheet we've been highlighting for some time is the buildup of the deferred tax asset associated with the remediation program. And at the 31st of December, the current tax asset and the deferred tax assets specifically related to remediation stood at $136 million, a balance that will be used to offset future tax payments and improve free cash flow. The deferred tax asset is transferred our current tax asset once the client has been remediated and so the increase in remediation payments over the last 18 months is what has led to the increase in the current tax assets. Moving through to the dividend. As Renato mentioned, directors have declared a dividend of $0.105 for the first half of '23, amounted to $0.093 per share ordinary dividend at $0.012 per share special dividend. The dividend is 50% franked from the DRP continues with a 1.5% discount. It is in the first period of sometime will be paid a partially franked dividend. And we've noted here that we do not expect the franked either the second half '23 dividend or the FY '24 dividend. I just wanted to touch on 2 of the main drivers of this. The first is that our dividend policy is based on UNPAT, which has been higher than NPAT sometime due to transformation activities. We've continued to pay 100% franked dividend through this period due to our franking credit reserve, with the decline in that reserve as they used up, we're now reliant on franking credits and taxable earnings generated in each period. The second factor relates back to the current tax asset dimension before generated through -- largely through remediation payments. And adjusted by this tax asset, our outlook for tax payments is nil to minimal over the next 2 years. Now this reduces our ability to generate franking credits, but as mentioned, does give us the benefit of improved cash flow and we'll continue to keep investors updated with the timing of returning to the franking of dividends. Lastly, I just wanted to comment on outlook. The FY '22 results back in August, we provided guidance to the market you see there on the left-hand column and we provided an update on a bit of a checkpoint on where we are at first half '23. There are 2 changes that we're making the guidance. Firstly, in relation to group net operating margin, we're now expecting a decline of 0.5 to 1.5 basis points. Now the reason that this decline is lower than the original guidance relates to some of those offsets I mentioned before in terms of some of the cost lines that's hit between gross margin and net margin, but also due to the fact that with that former being lower than anticipated across the period, having a lower denominator and some of those fixed fees or tiered pricing means that in times we now include the declines, the net margin percentage actually goes up. We've also updated our group EBITDA margin expectation from broadly in line to a decline of 0 to 0.5 basis points. And again, this is based largely on the lower FUMA that we've seen over the period. I'll pass back to you, Renato.

Thanks, David. And as I've mentioned earlier, and the further beyond the acquisition of MLC, we get the quota we are capitalizing on the medium-term opportunities, the new Insignia Financial has been. While our industry has real scale and capabilities in some aspects of the value chain, lots about investments, access to credit and even financial advice, I think would all agree is that there remains a significant unmet need in how these different elements are brought together in a way that's relevant to today's consumer and needs. The demand and needs of every day trends are well understood. However, they remain largely unmet and part of the reason they remain unmet is that most organizations in the value chain that spend their investment dollars in the scalable and product-oriented part of that value chain. We certainly view that the next frontier and certainly one that Insignia is keen to exploit connecting the financial world being continuum to market-leading products and services. In other words, alongside unlocking the potential of our platforms and asset management business through technology and simplification, in addition to the removal of loss-making subsidization to the traditional advice model, we're also committed to extending our reach into financial coaching and data-driven insights to help connect our clients for the right behaviors, the right products, the right portfolios, which together deliver improved financial well-being and greater financial confidence. Some of these themes have also been identified by Michelle Levy's Quality of Advice report. We look forward to participating in the government's consultation process and believe the report's recommendations will significantly alleviate some of the current pressure points, limiting accessibility and affordability of guidance and advice. Just to recap some of the key data points we presented at the last half around our simplification plans. We remain committed to the milestones we set out in August of '22 and have continued to make real progress towards these goals, including the planning and sequencing of the remaining work. Specifically, we continue to believe that 1 to 2 platforms is a key goal in terms of the final state of the business. And in doing so we will significantly reduce our cost-to-income with a target range of mid- to low 60s. Getting there will involve both a significant reduction in our cost base as well as improved pricing for clients, building both a more competitive and effective organization. Alongside this [indiscernible] platform is a focus on ensuring our government's environment expect to purpose and embedding this into the frameworks and conduct of the organizational law levels. Just delving more specifically into the platform simplification programs. It's worth segmenting this into 2 key streams of work. Firstly, the Wrap program, which we've discussed previously and is due to be delivered in the second half of calendar '23. This will migrate the MLC Wrap across to the evolve system. Not only does this transition one of our key products from a legacy technology and user experience to a more contemporary digital experience and functionality, it also simplifies our business and provides a singular Wrap environment with a clear focus on growth and innovation going forward. The second larger program is the simplification of our Master Fund platforms, of which we've got 4 today. We're currently working through the detailed planning of this. And as we've telegraphed in the business update, we're exploring all options, including partnering externally in the development of a dedicated software solution. It's important that we consciously explore our options to ensure we clearly understand the trade-offs we're making. However, the goal remains ensuring we navigate this process safely and as quickly as possible, maximizing the benefits both to members and to shareholders. Whilst we're still working through the various options, I might ask David to comment briefly on how we think about it from a capital and economic rationale perspective.

So the way that we think about the simplification program is that with the intention to remain both within our target dividend policy throughout the period, so 60% to 90% of UNPAT and also within our target senior leverage range of 1 to 1.3. So I mentioned earlier on that leverage has come down, again, due to the sort of [Technical Difficulty], what we intend to do as we move through these periods of simplification.

Thanks, Dave. Just moving into Asset Management. As I mentioned previously, the asset management business is one that despite market and despite its leverage to market has been despite real economic resilience. And I think that that's the reward for the -- in the retail sector and the momentum that's built around the portfolio construction capabilities generally. We've seen that shine through, both in terms of some new product launches in private equity, managed accounts as well as that continued strong performance through the multi-manager capabilities, including supporting our marked reference. We expect this to be a similar theme continuing to 2024 -- sorry, yes, 2024, as we continue to look for opportunities to create greater collaboration between some of our platform channels, particularly the advisory channel and our asset management businesses. Whilst we've experienced some outflows in the lower margin institutional capabilities, we remain focused to make sure we continue to support these high-quality businesses and there remains significant economic leverage from economies of scale in those businesses. That's something that we're keen to continue to explore and support through time. And maybe just some final observations before we close out and open to questions. Firstly, our strategy has been clearly consistent since the acquisition of MLC and we continue to deliver on that strategy. Clearly, there's more to do. However, the more we get through and the more we deliver on our commitments, the closer we are to unlocking the longer-term potential of the franchise we've built. This potential will be unlocked through clear focus on 3 key areas. The first one is continuing to create Insignia Financial. We've come a long way in the last 18 months. However, as we emerge out of the COVID pandemic, we continue to build one way of working, one unified bit of norms, where they previously were 2 offer. This ultimately is what will build our culture and our reputation. The second area of focus is to simplify and simplification continues to drive our operating leverage, improve client outcomes and improve governance and this is really the core of setting the stage for future growth. And thirdly and finally, is that focus on financial well-being. While there are plenty of proof points that this represents a material area of value-adds, both for our Advice business as well as in support of Platform and Asset Management, there still remains more to do. However, I think there will be a few others that will dedicate themselves to this challenge in a holistic way as Insignia Financial world. [indiscernible] will play an important role in this as well continue to improve our engagement methods both through the platforms and asset management part of the business. So in conclusion, that's really putting together these key drivers, creating financial simplification and financial well-being that we'll look to reach more strains and drive sustainable growth through the business. So with that, I'll thank you for your time in advance and open up to questions.

[Operator Instructions] Our first question comes from the line of Andrei Stadnik with MS.

I wanted to ask 2 questions, please. Firstly, in terms of the slide that talks about the target and state and splits it into these 3 buckets, can you just give us a bit of a feel between the RSE licenses and super funds and the platforms, which one of those 3 is likely to get to target end date first and which ones will take a bit longer to get to the target and state?

Andrei, you're referring to Slide 22 there?

Correct. Yes. Yes.

Yes. So there is -- there are absolute dependencies and sequencing across these. I think what is probably more relevant, some might -- certainly economically as well, where -- which aspect of these actually delivers the economic benefit. And I'd say to you that the bulk of the economic benefit comes from reaching the platform in state. Now in getting there, there will certainly be a rationalization of RSE licensees, the super funds themselves. Some of this need to be sequenced in a way that the actual -- the final trigger is actually on the consolidation and the movement of members' money as well. So I would say to you that the most pivotal on this category of these 4 categories is the platform one. So moving to the 1 to 2 because with that when you rationalize a platform environment, you remove hardware, you remove software, administration, people, products. So there is quite a lot of this that is dependent on each other. However, I'd say that's the one that I'd probably focus on. There may be some rationalization of RSEs and super funds in advance of that, but that's not where the big economic payback is.

And as a quick follow-up and just on that point, what time frame should we be thinking?

We haven't put a time frame on when we're reaching that target in state. I think a lot of that really depends on a lot of the planning we're doing at the moment in that master fund stream that I alluded to. So we're not in a position to do that at this stage. However, clearly, benefits to do that as quickly as possible, but remaining cognizant of the work and the risk associated with that.

And my other question was around the flows. So you remain -- in the outlook slide, remain confident in terms of the flows improving. But the first half of FY '23 actually went backwards in the net flows compared to the second half of '22. So it's actually a more challenging period. So what gives you the confidence that net flows will improve from here?

Yes. So I think it's probably well recognized that there is a degree of seasonality, I think, that occurs during the year. So I think the better comparison point is PCP, the prior corresponding period and that gives us a significant amount of confidence. I think we're reporting it, I think on aggregate sort of point 1 negative. So we're not exactly far away and I think we'll continue to build that momentum.

Our next question comes from the line of Anthony Hoo with CLSA.

Can I just ask 2 questions? Firstly, just asking on your outlook for the EBITDA margin. It looks like it implies a stronger second half margin. Just wondering if you can talk about some of the key assumptions behind this. For example, are you assuming growth in your former balances and also some key assumptions around your cost base as well?

Anthony, it's Dave here. Look, you're right. One of the complications of an EBITDA margin is it's quite heavily impacted by market value of FUMA. It was one of the reasons why that actually came down over the period. We are -- we normally assume each year a 5.4% increase in markets. So we're assuming that markets increased by half of that or 2.7% across the period. So that's probably one of the main drivers in terms of that sort of second half and what we see in terms of the EBITDA margin.

Okay. And then my second question was around the Evolve23 program. Just wondering if you could give us -- could give us a update on that. You told us the cost is expected to be about $53 million investment. Has that increased versus 6 months ago, if my memory is correct? And then also, could you give an update on -- you previously said you're expecting a net benefit at the EBITDA line of $5 million to $10 million. Is that still the case?

Yes. So as we come over time, I think our initial estimate for Evolve23 was $40 million to $50 million. We felt prepared it could be towards the lower end of that. It's now slightly over that. So it's sort of -- it's been moving a little, but broadly consistent with that original guidance of sort of $40 million to $50 million. And yes, the benefits are still the same in terms of what we're targeting.

And -- sorry, we're in the process -- I mean, the success of these largely depends on the change management with your clients, and we're conscious that -- it is changed for our clients in our advisers and their ultimate clients. So we're working through that change management at the moment, concurrently with obviously finishing the development. So it's full steam ahead on Evolve23.

And our next question is going to come from the line of Nigel Pittaway with Citi.

Just a question on sort of the impact of the acquisition on sort of BAU. I mean, to what extent do you think the focus on obtaining the synergies doing the integration, et cetera, is having an impact on BAU flows, operations, et cetera?

It's a great question, Nigel. And it's one that occupies our mind quite a lot on a daily basis and making sure we get that balance right. [indiscernible] point we have for that is the improved flows. So if you think about that flow profile over the last couple of years, it has been improving. So yes, we've delivered our synergies. We've fast-tracked some technology simplification and rationalization, but the flows have been improving alongside this. So I think we're getting the balance more right than wrong in that regard. It's certainly something that's not lost on us. And the piece is particularly pivotal, I think, is not only the simplification, but the change because this change is, as I alluded to earlier, is impacting our clients. So we tend to invest quite heavily in that change management program to support our clients through that. But inevitably, there will be some degree of opportunity costs. And I think what that reinforces is the sooner we get through the simplification and Wrap's probably the best example that by the end of this calendar year, we'll hopefully be through that. Actually, you get more clean air and space to focus on growth. So we think that that opportunity remains ahead of us.

Okay. And obviously, one of the impact seems to have been on the MLC Wrap without moving on to Evolve in another way. I mean, do you think that a hiatus high will last for long or within your sort of expectation that flows improve second half, is there a presumption that MLC Wrap turns back around again or...

Yes. Look, it's -- I think that's part of it, certainly. I think there's an element of the change. I think there's probably likely been an element of maybe stop the markets for advisory net flows more broadly, I think, in that sort of second half of '22. So there's probably a number of different factors. I do think there may be a little bit of, let's call it, overhang until we complete the transition. However, as I said, that's why we're investing pretty heavily on the change management experience.

Okay. And then just -- maybe a question just on the sort of software on the Master Trust. I mean, previously, I think you may have thought that Evolve was going to be okay for that given its modular nature, given you said it's sort of fairly modern tech. So can you just sort of highlight what you're saying there in terms of the reason why you think now it will be quicker and simpler to go externally?

Yes. So Nigel, we've always said 1 to 2. So I think we've always been very clear that whilst there's a world where 1 is better than 2, we want to be -- we're really disciplined around those decisions on those trade-offs. And what we don't want to do is be myopic around having a preferred path without fully understanding the issues at hand. And so that diligence is going into our decision-making. And so I'd say we've always said 1 to 2. We -- there are some strategic benefits to proprietary technology, absolutely. However, there are trade-offs. And those trade-offs may be time, that may be cost and may be opportunity costs between Master Funds and Wraps. These are all the things that we're considering before making a final decision.

Okay. So final decision has not been made. It's just you're sort of…

No.

Thinking about it. Yes?

Yes.

Our next question comes from the line of Lafitani Sotiriou with MST Financial.

Can I start with the Master Trust consolidation or potential future project? And I understand it's still in an elementary stage. But can you give us an idea roughly what the cost budget or band you're currently considering to consolidate the platforms down to the target 1 to 2?

Yes. It's Dave. I think we'd rather hold far on that until we've got a precise number. So because as Renato mentioned, the solution is still moving around, I'm reluctant to put a number out and then have to change it. So we're working on a baseline, but it's not one that we feel comfortable sharing at the moment till it's really nailed down.

Okay. And so can I just clarify as well, is the Evolve23 project specifically Wrap-related or will the Master Trust expense be Evolve23 Phase 2 or how should -- I'm just trying to understand because Evolve23 Phase 1 kind of implies there's another phase coming. So can you just clarify just the language stuff being used?

Yes, sure. So Evolve23 is Wrap. The Phase 2 is Master Trust.

Okay. Got it. Can I just go on to then the group net revenue margin? I noted the comments you made about the slight improvement versus the expectation at financial year '22. But within the sort of group net revenue margin, there's a subcategory of the platform margin. And I think at the last result, you talked to there being some meaningful cuts or resets. I think the MLC that are anticipated I think at the end of this financial year. And so could you just talk to that? And also, all things being equal and just looking at the revenue margin, so excluding sort of mix change from different brackets clients may move into from fund movements, what would you expect at this stage for next financial year to happen with the platform revenue margin?

Yes. So you're right. Some of -- all of the pricing changes that we plan to put in place have been put in place. So there's a couple of things I'd call out in terms of what's happened. One of them relates to -- I talked about some of those -- some of the cost items, but they sit below between gross revenue and net revenue. So there are fees that we would pay, for example, some of our investment management expenses and things like that. We've been able to reduce some of those costs. And that goes to offset some of what we see in terms of those price reductions. The price variance has gone through. The majority of those benefits are occurring. There is a small amount in there, it's about $3 million or $4 million in total of a couple of small provision releases that would be a one-off rather than being one that would continue on. But those have really been the 2 things that have sat there and really offset what we've seen in that first -- in the first half. So second half, we would expect the decline to be a little more marked. And the reason for that would be a full flow through some of the pricing changes were made during the period. So it's not full 6 months in the first half. Second half, we'll see the full impact of that and we wouldn't expect at this stage there to be any offsetting benefit from provisions or anything like that. So that's how I think about as we head into second half '23, which again to sort of a baseline as we head into next financial year.

And just to clarify, are there more price cuts coming around the end of this financial year? Or -- and so if we're looking at the platform margin '24 versus '23, so of the sounds of it, there's going to be a further step-down.

Yes, that's right. So Evolve23 will be in the first half of '24. We took out, if you like, the first amount of those price reductions, albeit quite a small amount has come out inside first half '23, but the majority of Evolve23 cost out will be in the first half '24. And those will be offset by some of the cost reductions that are being delivered in line with that simplification as we migrate Wrap across.

So just -- sorry, just so I'm clear. I'm talking about the revenue margin and the cost that you're charging for the offering that you've got. So just so I understand correctly, is it -- are you anticipating having a smaller net revenue margin for platforms next year versus this financial year?

All being equal, yes.

And can you give us an idea of magnitude based on what you -- so the fee cuts that you've already identified, you've already got in track, all in train broadly speaking?

The only ones I would call out as being new, we've previously quantified Evolve23. I think we've said, Andrew, the cost benefit in past back there is in the order of sort of $15 million, $20 million. So at the net margin line that will come through. So you're right, that's in terms of net margin. If I work down to EBITDA margin, we think the cost will be more than that. But that's all we call out at the moment in terms of the impact of Evolve23. I think we want to get -- happy to talk about what we see in terms of margins for the remainder of FY '23. But I think there's still a lot of moving parts before we start kind of giving '24 outlook.

Got it. And can I just move to one final area in relation to JANA. So when you slide the outflows at the quarterly update, I think the language was a bit confusing around whether there's a revenue impact or not. So can you clarify 2 things? For the FUM that's exited the business, broadly, what was the revenue margin or profitability of that for your business? And second, was there much dividend or contribution coming through from your equity stake that you previously had in JANA?

Yes. So if we break it down, the majority of the financial benefits from the JANA relationship came through some of the investment trust that we ran to JANA. If we think about total revenues of JANA being somewhere in the order of about $20 million, $3 million or $4 million of that came through as an equity holding and the balance came through income from the trust. We would expect that $20 million to -- I think we sort of halve as we look at FY '23 and then that will be fully removed by the time we go to FY '24.

And from a profitability perspective?

From a profitability perspective, we still will be buying some services from JANA. So it's not just the remainder of cost. It's actually -- we do acquire some services, they're a service provider. We've been able to renegotiate some of those rates. There's a benefit in terms of cost by a couple of million dollars that offset some of that revenue decline.

So can I just be clear here? So from a profitability perspective, it's about a $20 million overall impact on the outflows and from the lack of dividends being removed. And so there's about a $10 million impact expected in the second half, and then another $10 million in next financial year in terms of the JANA impact, and it offsets a little bit?

Correct. Yes. A little bit less than that because of the offset of the lower cost, but broadly speaking that's in the right direction.

[Operator Instructions] Our next question comes from the line of Kieren Chidgey with Jarden Group.

Just following up on some of the platform restructuring questions this morning. I just want to be clear, you've said that the target cost income in that division is low to mid-60%s, but I note you're already at 62% or 63%. So you've already seen there. So just struggling to sort of tie that in with this net benefit of $5 million to $10 million that you're talking about out of this first phase coming through?

Yes. So that's an overall target, Kieren. So our overall cost of income at the moment is about 74%. It's gone up slightly over the half. So that low to mid-60%s is an overall target. It's not...

It's related to the whole group?

Yes.

Okay. And Renato, just see sort of -- I know you don't want to give specific numbers, but the $5 million to $10 million sort of as you go through this first stage, how should we think about progressive benefits as you move towards that end state? Is the goal to continue, therefore, driving net benefit from further integration through to EBITDA?

Yes. So we have to look at the expected benefit. And as I alluded to on the -- in the presentation, the Wrap 1 in some ways is the smaller program. So we've got sort of 2 going to 1. The month 1 you've got 4 going to 1. So in quantum, it's significantly larger. And I think that translates certainly through into the benefit realization. If you look at the Evolve23, the Wrap 1, there was also some foundational work there that was being done that won't be replicated. So I think our expectation is the Master Fund benefit realization will be significantly larger than the Wrap. However, we're not in a position at this point to give you the cost-to-do or the benefits. So we want to make sure that when we come to market, we can lay that out in a really specific way that allows everyone to sort of understand the dynamics. And that's -- I don't think we're far away from that, but it's just not today.

Okay. So the like expectation around timing, do you expect to be in that position by full year given you're having those discussions as we speak?

Yes, absolutely. We think that will be able to provide people with that level of clarity.

Okay. And from a timing point of view on the implementation of that Mas Trust simplification, if you do go down the sort of outsourced third-party model, does that materially speed up sort of the ability to push through the integration of the simplification on those Mas Trusts relative to sort of doing it yourself?

Yes. Well, that's exactly one of the variables which one is sort of really fleshed out at the moment. So possibly, but we haven't confirmed that that's necessarily the case. So -- but you're right. I mean, there's a trade-off, it's cost, it's time and it's risk, really the things that we're trying to optimize for.

Right. And just final question on the quality of Advice review. Just wondering if you can provide us with some thoughts as to how much benefit you're kind of assuming within the Advice sort of the revised outlook there of $10 million UNPAT [indiscernible]?

It's a good question. I mean, we're not assuming. So those numbers don't assume any benefit necessarily from the Quality Of Advice. That's not to say that we don't expect any or we're not hopeful, but -- because I think there is significant benefit if those recommendations are adopted in part or whole. However, we haven't baked that into our financial forecasting at this stage. So I see that as an added opportunity. But as we all know, obviously, and as I said, we look forward to being part of that consultation process and working through it. And I think it will be a little bit of time before we know exactly where that lands.

And I would like to turn the conference back over to Andrew Ehlich for closing remarks.

If there's no further questions, thank you everyone for your time. Appreciate your interest. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.