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

Good day, and thank you for standing by. Welcome to Insignia Financial Full Year 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to your host today, Mr. Andrew Ehlich. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to Insignia Financial Limited's FY '23 Results Presentation for the year ended 30 June 2023. I'm Andrew Ehlich, General Manager of Capital Markets. Presenting our results today are Renato Mota, Chief Executive Officer; and David Chalmers, Chief Financial Officer. As mentioned, there will be an opportunity to ask questions at the end of today's presentation. I'll now hand you over to Renato.

Thanks, Andrew, and welcome, everyone, to our full year results for 2023. Over the next hour or so, David and myself will step you through the performance of the business for the year just gone. And we'll also spend some time today providing further insights into how we're approaching the next phase of growth for Insignia Financial. Starting with the FY '23 highlights, and for the year, we reported a net profit after tax of $51 million, which was up 39% on the prior year. This was underpinned by the $191 million underlying net profit after tax, which was down 15% on prior year, largely [ on the back ] of investment markets as well as the divestment of JANA. The delivery of synergies drove our cost base 5% lower. And pleasingly, we were able to meet our commitment of a net funds flow positive outcome, reporting net funds flow of $666 (sic) [ 667 ] million for the period. I think it's also worth highlighting that over the past 2 years, since the acquisition of MLC, net funds flow have improved by $5 billion on an annualized basis [ and when year round ], and we think that's a terrific achievement. Finally, we're declaring a final dividend of $0.093 per share for the half. Beyond the financial outcomes, clearly there's been quite a considerable number of milestones also achieved throughout the year, which we see as evidence of our disciplined strategic execution. Starting with synergies and integration, pleasing to have completed our synergy program that was targeting $218 million. And also equally pleasing is the completion of the separation of the P&I, Pensions and Investments business remains [ in ] and glad to be reporting that we're halfway through the separation of the MLC business. Alongside that, we've also made a number of small divestments, which not only provide the strategic clarity and focus, but also go to reinforce our balance sheet. Finally -- and picking up on last month's quarterly business update, we've made 3 key announcements as part of a strategic refresh. Having delivered on the priorities and commitments of the first 2 years of the acquisition, we felt now is the right time to look beyond the acquisition time line and really focus on unlocking the growth potential beyond 2024. Which really leads us to our refresh strategy, you see there on Slide 4. As we've mentioned previously, 2024 represents the last of that 3-year integration window post MLC. And while we remain committed to ensuring we continue to successfully execute on combining our businesses into 1 Insignia Financial, our focus has really sharpened and culminated in this new 3-year strategy, which drives our prioritization and action. And we believe that, that action is really in pursuit of unlocking the growth potential beyond this initial phase. At the same time, it's important to acknowledge that the ambition and strategic intent of the business remains unchanged. We continue to firmly believe we can create Australia's leading financial well-being business and, in turn, help create financial well-being for all Australians. And what we've identified are 4 key pillars in achieving that. And starting from left to right, firstly, improving our clients' financial well-being, which is really the creation of a specialist focus around business-to-consumer, energies and strategies, with an aim of expanding our existing capabilities in this [ space ]. So that is clearly a new and clear focus for the business. Alongside this, we have [ deepening ] our partnerships with advisers and employers. And this has really been the traditional bedrock of this organization, working with our intermediary partners to ensure that we're supporting their propositions. Thirdly, we are simplifying our business, which for I think most on this call will not be a surprise. It's certainly been a key focus of this organization over the past 2 years. And finally, the fourth pillar being building a safe and trusted business together, which really goes to the heart of being a trusted organization and the importance of governance also. We'll spend a bit more time later in today's presentation, focusing on each of these, but it's worth making a couple of points in relation to these 4 areas. Firstly, we're doubling down on existing [ core areas ] of focus, such as partnerships with advisers as well as simplification. And I continue to believe that these remain key tenets of our future success. But in addition to this, we're also now emphasizing greater focus and strategic value in the areas of engagement with end clients and investors and members, as well as ensuring we're applying a strategic lens to governance and risk management. If I turn to each of our segments, and starting with Platforms. It's pleasing to see the positive momentum continuing in the Platforms segment, both in terms of funds flow, but also the execution of simplification. Workplace really stands out as a key highlight, with respect to funds flow having delivered in excess of $2 billion in net flow. We're also being rewarded for the continued improvement in the Expand platform, both in terms of rankings in adviser surveys, but also in awards and in adviser supporters themselves. We now over 3,000 advisers supporting the Expand platform. Also worth highlighting our growth in managed accounts, both across the MDAs and SMAs, with now $6 billion in these structures. Turning to Advice. And the announcements last month about the creation of an independent Advice Services partnership model has really set the scene for a new phase of growth for our Advice division. Not only does the new model align -- better align ourselves with the needs of advisers, we're also confident that it improves the growth prospects of our self-employed business in a sustainable way and in support of high-quality advice businesses and partners. The separation also allows for greater focus for our Professional services business in Shadforth and Bridges, delivering growth through improved client engagement and importantly, also improved efficiency. It also allows us to explore new opportunities that are expected to emerge and are emerging from the recent [ rating ] Quality of Advice review and subsequent reforms that we're now engaging in. And finally, our third business in Asset Management. There's a lot to like in the performance of our Asset Management business, but it's also important to remind ourselves that these businesses live and die by their ability to deliver superior investment outcomes after [ fees ] to members. So in that context, I think that's the most pleasing part of our Asset Management performance has been the investment performance over long time frames. Alongside that, the teams also delivered significant product simplification and consolidation within the portfolios, which I think bodes well for continued strong performance, and delivered in an efficient manner. We're also excited by the growth prospects in the retail space, driven by some relatively unique capability and specifically, the private equity capability is 1 that I think continues to grow momentum, which is pleasing. As does the SMA offer that we're now also distributing in support of our asset management capability. The resetting of the relationship with JANA during the year certainly simplifies our operating environment and goes to the heart of ensuring we're placing maximum effort on our most valuable opportunities as a business. Turning to Flows, and specifically Platforms. It's been terrific to see our emphasis on client relationships and being responsive to feedback, really translating to net flow outcomes. I think there is a tendency to try and assess flows on a quarter-by-quarter or half by half. So we all know the momentum is really important in Flows, and that momentum is built off the back of strong partnerships. So if I reflect on our Flows momentum over the last 2 years, having produced a $3 billion improvement in net funds flow per platform, I think, is an outstanding outcome. As we've touched on, I think particularly strong is the Workplace performance, which whilst not surprising, it is pleasing to see. We know that in MLC, we've got a market-leading offer. And I think that's recognized by appropriate gatekeepers and tender operators as one of the leading offers in market. I think our commitment to continue to grow this and ensure that we really crystallize that position as a market leader will serve us well into the future. And actually reinforces, I think, one of the thematics that we'll touch on today, which is, it's this workplace business that actually allows us to have a, a relatively younger tilt in our demographic. And I think that younger tilt will actually continue to support the ongoing growth of the business. The Advised business momentum has suffered, I think, certainly in the last half, from the upcoming transition and the expectation of the transition of MLC wrap to the Evolve technology. And these disruptions are always a consideration when we're undertaking significant change management exercises. But we do see it as a temporary dynamic, and 1 that we'll rebase once the transition is complete. And finally, touching on Asset Management flow before handing it to David. As already mentioned, off the back of strong investment performance, it's pleased to see this translate into positive momentum on Flow, with particularly good prospects in our high-margin sets around retail and private equity. Our institutional flows, which are the driving force behind some of the direct capabilities, continue to be an important driver. But as we've discussed here before, we know they tend to be lumpier in nature, both in and out. But again, positive to see a trajectory that reflects certainly our intent and the growth of the business. And certainly, I think intimates [ they're ] a key contributor there. And again, just to -- before finishing off and handing to David, just to reiterate that between the Asset Management and the Platform segments, the business has delivered over the last 2 years, a $5 billion improvement in net funds flow annualized, which I think is a really important first step to rebuilding the growth momentum in this business. So with that, I'll hand over to David.

Thanks, Renato, and good afternoon to everyone on the call. I will start today with the summary of the financial results for the 12 months ended 30 June 2023. FY '23 net revenue was $1.379 billion, a fall of 7% from FY '22 and driven by 2 key factors. The first of these was the lower average FUMA from a combination of first half '23 investment market declines and the divestment and restructuring of our relationships with JANA and Presima. The second of these was a reduction in margin from pricing changes implemented throughout the year, mainly in our Platform segment. It should be noticed that consistent with the first half of '23, the only of the divestments categorized as a discontinued operation is AET, the sale of which was completed in November 2022. Moving now to operating expenses. These fell by 5.5%, thanks to the delivery of acquisition synergies being the product of -- and with the resulting product of both revenue decline and OpEx improvement, generated EBITDA of $344 million on a continuing basis, a fall of 11.5% from FY '22. As Renato mentioned, FY '23 UNPAT on a continuing basis was $190.7 million, a 14.9% decline from FY '22 and in line with Visible Alpha broker consensus. Turning over to the key metrics. Our net revenue margin held up well to decline by 0.5 bps. That was at the low end of our guidance for decline. We were expecting between 0.5 and 1.5 basis points decline throughout the year. And we obviously came in, as I said, at the lower end of that. And despite the full year cost declining, our cost-to-income ratio, however, did increase given costs reduced by 5.5% less than the revenue decline of 7%. And finally, average FUMA across the year fell by 6%, with the strong investment market performances in the final quarter of FY '23 not making up enough ground to cover the sharp decline in first half '23 markets. Looking now at segment contribution. We see differences in the drivers of the results between the 2 of our segments where income is directly related to the performance of investment markets, being Asset Management, Platforms, and our Advice segment, which is less exposed to investment market volatility other than in the Shadforth Advice business. Platforms saw a 14.7% fall in UNPAT, with falls in gross margin partially offset by OpEx reduction. The driver of gross margin decline in Platforms was the impact of lower FUA, again relating back to those investment market declines as well as the contribution from the price reductions we flagged at full year results last August, and again in February, the impact of which continues to be offset by some of the costs and fees that sit between the gross and net margin line and the impact of provision releases that benefited first half '23. OpEx in the Platforms segment fell by more than $4.4 million thanks to synergy benefits, although it should be noted that costs in the second half were higher than first half due to some one-off costs in terms of investment in marketing. And also some governance and legal costs that impacted the Platforms segment in the second half of FY '23. Advice grew UNPAT by 38 (sic) [ 38.7 ]% despite a $17.8 million fall in net revenue, largely caused by the integration of MLC Advice and Bridges. The trajectory of these declines pleasingly slowed in the second half, with Bridges seeing encouraging growth in the final quarter of FY '23. Offsetting this fall was a $42.8 million reduction in OpEx, with the Advice business continuing to make progress towards the elimination of losses from the acquired MLC Advice businesses, with full year UNPAT loss of $34 million compared to $55 million in FY '23 (sic) [ 22 ]. And so from the first, second half split, approximately $22 million of UNPAT in the first half and $12 million in the second half. Asset Management UNPAT was down 1% year-on-year, albeit with quite strong underlying performance given that most of the $20 million net revenue decrease can be attributed to the revenue lost through the divestment of Presima and JANA, as well as a reduction in private equity performance fees during FY '23. Delivering this flat underlying revenue despite lower FUM was a result of improved fund mix with outflows from lower margin products and inflows into those with higher margins. And then last, on the Corporate segment, quite a significant move in terms of UNPAT, mainly due to increased interest costs in that segment of $18.8 million. This cost was offset at a consolidated level by interest income. That interest income, though, is recognized in the Platforms segment below the EBITDA line. Turning back to the group result in the next slide. This shows the bridge from FY '22 UNPAT to FY '23, and highlights the impact of the lower FUMA that we've [ been ] spoken about. You can see there are also the $67.9 million net revenue decline relating to lower FUMA and the impact of reduced pricing, adding a further $41.5 million reduction. Offsetting these declines was a net operating -- a net OpEx improvement of $59.9 million in addition to the revenue synergies of $5 million. And it's important to note there, again, the discontinued operation is the contribution of AET in the first half of '23. Moving through to take a bit of a closer look at the expense base. As mentioned on the last slide, one of the highlights of FY '23 was the improvement in OpEx, overall costs down by $59.9 million. And that is the net result of salaries increasing by $25.2 million and other costs of $15.2 million. Some of these other costs are ones I mentioned earlier. Some of them are one-off in nature, in terms of increase in marketing costs for some of the relaunch of the Evolve product. There are some provisions in there for some of the regulatory issues and license conditions. But we have also seen a return to what we think would be a more normal level of travel costs following COVID and starting to move around our offices, more in line with what we have done in the past. So as I mentioned, a large percent of these costs that fit within the other segment are borne by the Platform segment. And again, it goes back to that increase in second half cost basing platforms relative to first half. Moving on to the outlook for Platform margin. So if we go back to the Q4 business and strategy update, one of our key objectives in setting out that new strategy was to provide certainty or at least more direction on some of the key strategies and drivers of future profitability. So for example, the Master Trust platform, the cost and benefits, the pathway to actually restructuring our Advice Services channel, and how we're going to deliver on the profitability commitments on Advice, and the strategy to lower costs across the business through additional synergies and optimization. The one key driver of future profits that we chose to leave for today rather than talk about at the time was a view on where we see future Platform net revenue margins. And when we -- as we repriced a number of products over the last 3 years, you can see the material impact there, falling from around 50 basis points in first half '21 to right about 47 in FY '23. When we look across to next year, we do see still a decline in Platform margin to somewhere in the range of 44 to 45 bps, but we think when we look at the remainder of the 3-year strategy period, that those declines would moderate substantially. And you can see that we're expecting those declines to certainly moderate. The drivers of the decline in '24, firstly is new pricing changes that are being made in FY '24, mainly relating to the Evolve23 migration. We've also recently transitioned about 38,000 [ 1-pub ] clients to contemporary pricing. That change was made at the end of FY '23. So that will flow through. We also have other pricing changes made in FY '23 that have not yet had a full year impact, so that will impact '24. And the third area is we do think that there'll be a normalization or reversal of some of the benefits to net margin that we have seen in FY '23, particularly the release of provisions in the first half '23 normalizing as we sort of move into '24. Thinking about what happens beyond 2024, as we flagged there, while there's certainly been more sort of tactical repricing and positioning going forward, we think that's quite different to the significant book repricings we've seen over the last 3 years. Turning now to our 2 structured remediation programs. FY '23 was a year of significant progress with provisions reducing from $191.8 million to $68.9 million for Advice and from $148.2 million to $80.5 million for product remediation. More than $120 million of remediation across both programs was paid to clients in full year '23, with the second half of the year focused more on the analytical work on remaining issues. And so we expect those cash payments to step up again in the first half of '24. We expect both programs to be materially complete this financial year, but it's likely that some of the timing of payments would continue into FY '25. Importantly, there was no net movement in either the Advice or product remediation programs in the second half of FY '23. A quick look at corporate cash and debt. As at 30 June, we had $679 million of cash and undrawn facilities. Senior leverage as at 30 June came in at 1.2x net debt-to-EBITDA, 1.2x, the same ratio as we had for the first half of '23. We've also set out here the 3 main forward-looking financial commitments, being the balance of remediation, the $260 million to $285 million 3-year investment slate that we set out at the Q4 business update. And we've also included there the face value of the subordinated loan notes, which mature in FY '26. Continuing on the theme of debt and funding. We've included this year a cash flow perspective on FY '23, highlighting the significant cash generated by the business with cash UNPAT of $349 million, up on last year's $339 million. The 3 main items to adjust to get from cash UNPAT to free cash flow are the asset sales and purchases, being AET and JANA, transformation and separation costs, and also remediation. FY '23 asset sales totaled $163 million. And then as we move from free cash flow to dividends, which is a cash view rather than an accounting view of dividends, and those dividends are shown net of the DRP. The slide highlights the importance of finishing both remediation in FY '24 and also in finalizing the amount required for transformation and separation, as we look at a pathway to increase free cash flow over the coming years. The next slide is a summary that we put up at the Q4 business update, but I wanted to make sure we just went through this again. So this is not a new slide. But it sets out the $260 million to $285 million of net spend between FY '24 and FY '26 and the gross annualized benefits of $175 million to $190 million over the same period. The program of spend we've set out here contains all of the spend necessary to [ final ] the separation from [ NAB ], to establish and stand up the new ASC Advice business and also to deliver the OpEx savings that we've committed to here. From a reporting point of view, while we've broken down the components of the individual costs and benefits, these will be reported on a consolidated basis moving forward. Turning to dividends. Our directors have declared a final FY '23 dividend of $0.093 per share, which represents a payout ratio of 64% of UNPAT. Again, there will be a DRP offered at a 1.5% discount. In line with guidance given at the first half results, the final FY '23 dividend is unfranked, and we continue to expect FY '24 dividends to also be unfranked. Finally, moving on to guidance for FY '24. We continue to give guidance for group net revenue margin and group EBITDA margin, but we've replaced the guidance on net flows instead with guidance on the spend profile and benefit realization profile of the strategic program that I just talked about in the previous page. Starting with net revenue margin. We expect to see this decline by 1.5 to 2.5 basis points from 47.3, due to the impact of pricing changes in Platforms that I just talked about earlier, where we expect to see that net revenue margin of 44 to 45 bps, and also the margin loss in Asset Management through the divestments of JANA and IOOF Limited. Group EBITDA margins are expected to stay reasonably flat with a decline of 0 to 0.5 basis points, noting that in addition to the usual annual cost increases, there's also a $20 million investment in FY '24 in cyber and governance spend. And finally, from a strategic investment point of view, of the 3-year net investment slate of $260 million to $285 million, we expect to invest $150 million to $160 million of that in FY '24. And likewise, of the total benefits of $175 million to $190 million, we expect to realize $60 million to $70 million in FY '24, noting that the net P&L benefit of these savings will be reduced by the cyber and governance cost mentioned earlier and also the usual annual cost increases, the largest of which is salaries. Back to you, Renato.

Thanks, David. Just turning to our outlook now. And having successfully completed the last 2 years of integration work post the acquisition, the foundation now is to provide the opportunity to sharpen our focus as we look to unlock the inherent value in the franchise, in the context of what continues to be an industry with really positive macro factors. There are some undeniable truths about our industry, which gives us confidence about the next 3 years. And whether it's the growth of superannuation over the next few decades from $3.5 trillion to $9 trillion, the disproportionate concentration of these assets, so towards the larger funds in the sector, or more recently, the reforms proposed under the better financial outcomes package, which supports improving the accessibility and affordability of financial advice. The opportunity set ahead over the next 3 years is probably the most promising in a generation. And I think it supports the creation of greater financial well-being in our communities more broadly. And I think Insignia Financial finds itself at the epicenter of a lot of these opportunities. And the decisions taken over the past 2 years will really provide the opportunity to capitalize on these over the next 3. Just reflecting on the growth of Super, it's worth understanding the demographic exposure Insignia Financial has in this space [ and provides ]. You'll see on the chart that -- the distribution of our assets under administration as well as our member numbers. And I think what this reinforces, certainly relative to others and specifically relative to specialist platform providers, is that Insignia Financial has an overweight position to the accumulation phase of the superannuation sector, with the 35- to 44-year-old cohort actually being the largest by way of member numbers. While these members clearly will have a lower average balance, they also represent the largest embedded value by way of future prospects in asset accumulation. So to put this into numbers, if the 35- to 44-year-old cohorts were retained through to the pre-retiree phase, all else being equal, the $23 billion in assets would increase to over $60 billion in assets. It also reinforces the embedded value in our focus, in our new focus in [ direct to ] client engagement that, in the retention of our existing younger cohort, underwrites our asset accumulation and underwrites our net funds flow growth, before we even address the prospects of acquiring new clients. In other words, the demographic profile of Insignia Financial actually has a greater exposure to the tailwinds of the continued growth in accumulation in superannuation. Conversely, our business lines that are targeting the advisory segment also capture the pre-retiree and retiree segments, which continue to be a really strong source and important source of high balance relationships, again reinforcing the diverse nature of Insignia Financial's model and the benefit of a strategy that capitalizes on both. So having reflected on the tailwinds in the industry, the favorable positioning of Insignia Financial franchise and our execution track record over the past 2 years, we believe that the potential of this next phase is very clear and very specific to the organization. Importantly, I think it's also a strategy that few others can replicate in the current market, which is why we see the next 3 years as presenting a particularly important opportunity from a competitive positioning perspective. And the reason I believe this is, firstly, we're one of the country's largest super funds with circa $150 -- $170 billion in funds under administration. We have one of the broadest and largest set of advice capabilities to serve the community and particularly emphasize the opportunity in the retiree needs. And we have further benefits to extract from scale and simplification, with core capabilities in administration and technology. So by any measure, I think it's a relatively unique capability set that we think our refresh strategy really looks to exploit over the next 3 years. While we spend a few moments on each of these 4 key pillars, it's important to reinforce that our strategy combines growth opportunities, both from direct client engagement as well as excelling in servicing [ canes middery ] channels. And all of this is underpinned by investment that comes from the benefits of scale as well as a mindset to risk and governance that is embedded in decision-making and system design. Turning to our first pillar of improving our clients' financial well-being. This opportunity is made particularly valuable to Insignia Financial, given our starting point is serving nearly 2 million members, and currently attracts approximately 250,000 new members each year. I think what currently disguises these opportunities is the $9 billion in outflows that we currently experience today from what is a relatively contemporary client engagement model for the industry and arguably a leading engagement model. However, clearly, it still leaves an unmet need and opportunity that we'll look to exploit going forward. In terms of this area of focus, we've announced the creation of a new business unit that will be establishing a Client Wellbeing division within Insignia Financial and we'll be appointing our first client -- so a Chief Client Officer. This unit will be -- will have their existing client engagement capabilities, including our Professional Service Advice businesses, with the aim of creating a single continuum across our client segments, creating a more holistic set of client value propositions. As we sit here today, there's already a significant capability and effort in this space, which in part is -- has already supported improved net funds flow over the past 12 months, as we've seen through Workplace. However, increasing our focus in strategic intent and leadership will only serve to improve this and unlock the opportunity. And as I said, creating a seamless continuum across help, guidance and advice for our membership as well as looking to attract new members in time. And again, all of this just goes to complement our competitive net return offer to our members today. In addition, this division will also continue to pursue the further improvement in growth and efficiency in the Professional Services businesses, so specifically [ being ] Shadforth and Bridges. It's worth recapping briefly on the announcement last month around the intention to create ASC, an independent adviser-owned self-employed licensing model, which since announcement has been really well received, both from existing advisers as well as prospective new advisers to the group. I think it's also a good example of our determination to seek to create value from our business by doing things differently. And I think we're very much focused on making sure that we now establish the new model [ and bed it ] down successfully over the next 6 to 12 months. Turning to our strategic intent in deepening our partnerships with advisers and employers. This is really leveraging off the traditional strengths in the B2B space and supporting these well-established channels. Particularly in the workplace and advisory channels, our intent is to be a market leader. I think we're certainly there with respect to Workplace, and on track to do the same with our advisory platform offer. And I think that's evidenced by our ongoing improvement in rankings and community standing of Expand. We've got a really clear set of priorities across these channels, and the teams are really excited by the clarity and the execution focus this brings. The institutional space is one where we see client needs bifurcating, and we believe we continue to have a really compelling set of propositions for sophisticated buyers of investment performance, be they research houses, consultants, super funds or platforms. And I think it's worth considering that we're increasingly in a world where people are questioning the true diversification that comes from listed markets, and we've seen commentary talking about the fact that 35% of the value of the S&P 500 sits in the top 10 stocks. I think the same dynamic is experienced here in Australia. And for us, having a private equity capability with a track record of over 25 years with stellar performance and [ is able ] of offering true diversification across geography, across sector, across vintage with thousands of diversified investments in it, is one that is growing in appeal, and I think leaves us in a position that really we've got a capability that is unmatched in the Australian market, and one we'll look to exploit more broadly over the coming years. The emphasis on simplifying the business is not new. And again, we're getting more specific about how we define this and how we look to execute this going forward. It's worth calling out that within this strategic pillar, we're deliberately emphasizing the building of enterprise foundations that really represent the foundation of a modern, more uniform set of technologies that will help us unlock the agility, the insights and the scale of the business. So whether it's new data management platforms or protocols, whether it's management information systems, it's rare that an organization gets the opportunity to entirely rewire this aspect of their business, and it's certainly an opportunity we're planning on taking advantage of. In addition, and off the back of some strong planning, we're clearly executing on the separation of MLC. And as we said earlier, we're halfway through, and we've got a good operating rhythm and process around this. So it clearly remains a key business imperative going forward. And finally, turning to building a safe and trusted business. In many ways, I consider this the most enduring strategic advantage that we have, building and delivering to a trusted reputation. To the organization right now, that revolves around uplifting our governance, including responding to license conditions as well as building a culture and capability set that are able to continue to adapt to the changing sets of risks and challenges and expectations that undoubtedly we'll face going forward. As part of this process, we've appointed a new Chief Risk Officer earlier in the year in Anvij Saxena, and we're working through the requirements of the license conditions alongside the Superannuation Boards. So finally, before opening to questions, it's pleasing to see that we've delivered a strong '23 set of outcomes in terms of growth, efficiency and strategic execution. I think it's track record of strategic execution that gives us confidence into this next phase, and creating a business with a unique competitive advantage that will deliver sustainable growth, scale-driven, efficient business and a competitive advantage through the quality of our outcomes to clients. So with that, I'll thank you for your time in advance, and happy to open up to questions.

[Operator Instructions] Our first question comes from the line of Anthony Hoo from CLSA.

My first question is just around cost. Looking at the different components of your guidance for next year. It looks like it's implying quite reasonable cost growth into next year. So if we exclude the cost savings targets and then if we also exclude the $20 million that you flagged in terms of cybersecurity and governance, can you talk about where the rest of the cost pressures are coming from? Are you reinvesting into other parts of the business?

Anthony, it's Dave here. No, it's mainly from those ones that you mentioned. So the way I think about it is, at a gross number of, as we said, they're sort of $60 million to $75 million, you've then got your normal salary inflation, which we do see being more normalized '23 to '24 than it was '22 to '23. And then it's really the $20 million that you mentioned earlier. So those are the main components of cost that we see for '24.

Okay. Second question, just around the platforms and the pricing, you've given us a bit of detail around your expected short-term change in your pricing. Can you tell us how much of your FUA is still on legacy pricing structures. For example, how much of your FUA you think could be transitioning to Evolve -- to the Evolve platform, for example?

Yes. So as we've said there, we think that if you look over the last 3 years, it's certainly been a period where there's been significant repricing of products, as we've sort of set out. What we're saying is that post '24, we think that's going to moderate significantly. So that doesn't mean there won't be any pricing movements. There's always tactical pricing, there's [ APAPs ], things like that. But those are typically much smaller repricings than what we've seen in the past. So you can take from that, that we don't see there being a significant amount of back book that needs to be repriced post 2024.

But does that -- your assumption, does that assume that there's no further significant impact from migration of clients to more contemporary structures?

Yes, correct. Not certainly on the scale we've seen, as I said, over the last few years. So that's not to say there won't be any, but we see it moderating -- certainly moderating in '25 and even more so in '26. So yes, you're correct.

[Operator Instructions] Next question comes from the line of Kieren Chidgey from Jarden Group.

Just a couple of questions. Maybe starting on this $20 mil cost uplift. Can you just confirm, is that a recurring number? And then I'm just interested in exactly what's incorporated in that, given how material it is to the group's bottom line?

Yes. So yes, I expect it would be recurring. On the cyber side, which is the majority, I probably won't get into too much detail on that other than to say it's a combination of some internal staff and also some use of external expertise to help both in forward identification of potential threats and making sure that also we're able to respond quickly should there be any sort of issues that are there. So broadly speaking, that's the main -- that's the largest component of the $20 million, it sits in that cyber area.

Okay. And I mean, just from a timing point of view, I'm just surprised that wasn't outlined in July when you rolled out sort of the medium-term enhanced cost programs.

Yes. Look, I think it's always a challenge coming up with a commentary on costs in -- a month ahead of results. So what we decided to do was to limit what we said at the Q4 update. We did say that there'd be more information coming. So I take your point, but I think with a month there to go, it did leave us in a difficult place from the point of view of how much commentary to give on '24 guidance before we had even spoken about '23 actuals.

Okay. Just a second question, a follow-up question on the Platform margin. The numbers you put up I thought sort of would just remind me, there was a significant repricing around cash margins that I thought came through late '23. So presumably, notwithstanding that, we're still looking at 5% reduction into '24, so that allows for that as well.

Yes, correct, Kieren. So that pricing changed April 1. So there's a little bit of that benefit in '23, but you're right that most of it is in '24.

Okay. And the dotted line drawn on the chart, can we just get a feel for what you're actually suggesting in basis point ranges for '25 - 26?

Look, I think other than saying we expect it to moderate, probably be in line. I think the picture tells a thousand words there. That's what we're expecting visually. I think we'd be reluctant to, 2 years out to give sort of specific numbers on that.

You're saying it's in line with the FY '24 exit rate, but not the '24 average?

Yes. And there's obviously a lot of factors that go into that. I mean 1 of the obvious ones is that it is as a proportion of FUMA. So what markets do over the next couple of years will also have an impact on that number. So it's not one that, that from a -- we've obviously -- even if we knew with certainty all the pricing changes, you still have to factor in a view of what markets are going to do to get to the overall basis points number.

Okay. Maybe I can ask it another way. Do you have a view on, taking that caveat into account, on what your current expectation is for the '24 exit rate?

I guess what I'd say is that we think that there's some new pricing, which we've talked about, in '24. Beyond that, and some of that will certainly have a run rate impact into '25. So for example, take the Evolve23 pricing. But at this stage, there's nothing more that we've got in '25 or '26 that's been approved.

All right. And just my last question, third question on the EBITDA guidance. I presume that still accounts for the Advice business as a 100%, and we get a non-controlling interest further down the P&L. Like how should we be thinking about [ ISE ] from an accounting or P&L impact in '24?

Yes. So for '24, I would consider it as nothing changes. So we -- I consider that we will still consolidate that all the way through FY '24. As we sort of move to deconsolidate, that's likely to be towards the tail end or early in FY '25. So for '24, I think the easiest assumption is that it continues to be 100% consolidated.

Next question comes from the line of Nigel Pittaway from Citi.

Just first of all, the SMA capability that's meant to be on the Evolve platform by 31st of December, is that on track?

So I'm not going to comment on the commitment for 31st of December. So we certainly are committed to ensuring that the SMA capabilities there prior to migration of MLC [ rep ], and that's currently on track.

All right. Okay. I thought it was originally -- well, you've got a number of charts that show it done by 31st of December. So presumably, that's been delayed.

We did not -- sorry, Nigel, just -- we did in the Q4 business update talk that we'd moved the Evolve23 migration date to -- out to '24, so [ I'm not sure to report ]

All right, so that's delayed with it. All right. Secondly, just to clarify that the cost saves you did in that -- so the 4Q. I mean, were any of the -- to what extent are those cost saves actually related to the separation in Master Trust?

There's a variety of different drivers. Master Trust is not one of the larger ones. I mean it does play a role. We've rolled into that, as you can see, the Evolve23 migration. But I wouldn't call out Master -- the Master Trust strategy that we've used is one that, in terms of that sort of potential revenue drop-off, it certainly minimizes on that side of things. It's a contributing factor for cost, but it's not the main driver.

Okay, fine. And then, I mean, you did sort of at that time reiterate this low to mid-60s cost-to-income ratio. And just the rate at which you've obviously got an extra $20 million of cost today, the synergies do seem to be getting offset a bit when they flow through the actual OpEx number. I mean that has to surely materially change for you to have any chance at all of reaching that cost-to-income guidance. So can you just talk us through that and what happens in order for you to be able to achieve that?

Yes. So a couple of areas. The execution of the cost program is clearly very important in terms of delivery of that, ensuring that it does drop through to the bottom line. The second area, obviously, is in terms of continuing to have growth in our net revenue. So if you look at this year, where we've seen the cost-to-income ratio move the wrong way, a big part of that has been the fall in revenue at the same time. So as I said earlier, 7% fall in revenue, 5% fall in costs, it's moving the wrong way. So as hopefully we get to more normalized growth, both from the point of view of investment markets and also from the perspective of that normalization of decline in terms of net operating margin on platforms, a combination of that plus the execution of the program is what we're looking to do over that -- over the next couple of years.

Next question comes from the line of Siddharth Parameswaran from JPMorgan.

So just a couple of high-level questions, if I can. Firstly, Renato, a year ago, I think you mentioned that you were expecting the EBITDA -- the group EBITDA margin to be flat. And I think you're basically implying that, I think, we had seen the bottom in terms of underlying declines in UNPAT. We're seeing, obviously, guidance for FY '24 now to show further declines from a declining actual '23. I'm just wondering, is '24 what you regard as the base from here? Or I mean, should we think that, that's the base? Or do you think that there is actually room for that to pick up from here?

Sorry, Sid, so the base in terms of?

Well, I mean, just that group EBITDA margin was 12.5 basis points in FY '22. And I think you were guiding to that starting to improve from there, but obviously, it declined in '23 and you're guiding to declining again in '24 into ...

So we certainly expect that to improve over the outer years given, as I said, those sort of cost savings profiles we talked about before. You're right in terms of -- if I go back to what we saw in the second half, particularly in platforms, I called out that increase in OpEx in the Platform segment. So that certainly didn't help in terms of -- now again, we understand why those costs were there. Not all of those are recurring costs, but nevertheless, that's partly why there was the -- from an EBITDA point of view, there was that decline in the second half of '23.

Okay. So -- sorry, just to be completely clear, you're saying in FY '25 you think that the group margins will start picking up?

Yes, well, that's right. I mean, if you look at what we talked about in terms of the amount of the gross savings that we've talked about arriving in '24, it's about 35% of that overall target. I'd expect FY '26 to be a bit of a tail end year from the point of view of realization of synergies, so '25, we would see as being the largest year of the 3 in terms of those synergies benefiting the bottom line.

Okay. Maybe just a question about just the adviser reception for your new Advice model. Just keen to get some more clarity on what the feedback has been, whether they're accepting of it, whether -- maybe if you could just help us understand what the feedback has been?

Yes. No, happy to, Sid. I'll probably point you to the slide that -- in that sort of back section, Slide 27, actually, which in the sort of right-hand box there, you'll see some commentary from some survey work we've done, which demonstrates -- it's overwhelmingly positive. And to be fair, there's a degree of neutrality in there as well, which is, they are curious and optimistic, but are clearly detail people and would want to understand the details. So but it is overwhelmingly positive. Importantly, both from existing advisers, but also from those that are looking at this model with interest from outside our existing network. So there has been no sort of unexpected negativity or any unexpected sort of lines of question. I think all the conversations have been on the positive side to possibly our expectations. But there's an onus now on us to provide the adviser with more detail and a more detailed understanding of what exactly the model entails, which is absolutely our key area of focus at the moment.

Next questions, we have on the line from Lafitani Sotiriou from MST Financial.

I've got two. The first is in relation to the Advice model reset. It's more one of clarification, and I'm not sure if you have the detail yet, but I think there was an earlier question on it. But from -- for the next few years, are we looking for the new entity to be fully consolidated, or -- and I think you mentioned previously you start off with a majority stake. Is there a rough idea as to how long you'll step down your investment in it? And if it is loss-making and it doesn't hit its breakeven level, like are you guys still going to fund it? Or how should we think about it?

Laf, it's David here. So yes, the way I think about consolidation is consolidated for '24. And our best case assumption is at the moment is that it will be deconsolidated for '25. So in other words, we expect to be bringing on board new equity in the second part of FY '24. From a loss-making/profit-making point of view, look, we've spent a bit of time working through it to make sure that the model is profitable. So we've tried to set up that way to make sure that it is not going to be a continual cash drain on the business or that, that's not something we've got to sort of ask ourselves. But look, we'll just have to play that as it sort of rolls out. But certainly, the understanding and the objective in setting it up has been that it is self-funding after the initial sort of setup in FY '24.

Okay. Got it. And then just the second question is in relation to the one-off spend. And I'm just trying to reconcile a few things here. So currently on the table and as per your previous disclosure was the cash investment required for the next 2 years. And I think it's, net of the capital release it's $260 million to $285 million. I just want to first check that, that is a pretax number. And then secondly, how does this reconcile with the current half? Because there's a material step-up in one-off expense going to just over $90 million for the half. And it was -- some of the notes that you put in there attribute it to this particular program, but this program still has the same remaining spend. So can you just talk us through the step-up in one-off costs in the second half, and just the numbers around the next 2 years?

Yes, sure. So yes, those are the pretax numbers that you sort of see there. In terms of what we expect to see, the profile of that. So we've given you the profile of what we expect from an FY '24 point of view, again, as a percent of that sort of -- of that $265 million number. So FY '24 is the largest year of spend of that program. FY '25 will be less, but around the same sort of ballpark with really the tail end coming through in FY '26. And so what we've said is that from a one-off cost point of view, these initiatives, the ones that we sort of set out at that Q4 update, those are ones that will continue to be UNPAT-adjusted, but that moving forward, what we will be looking to do would be accommodate any sort of future initiatives or ideas we work on inside the OpEx space. So that's the way that I'd expect those below-the-line costs to sort of move over the next couple of years. We want to get the business back to UNPAT being something that is not the main metric going forward, and much more where that gap between UNPAT and NPAT significantly narrows.

Just to follow up. So the explanation for why there was a material step up in the last half, because the run rate and based on previous expectations was never that it would be over $90 million in second half '23 as project costs. So could you just talk us through what the step-up was? And I understand your comments that you'd like to get to that. But for the foreseeable future, in the next 2 years, that's a long time of material one-off costs still flowing through. But if you could just clarify why there was a material step-up in the last half, that would be great.

Yes. So the step-up was related to both the work that's being done around, around Evolve23, and also the preparation work around Master Trust strategy. So there's a step-up in spend now. And the reason that -- that you're seeing that in second half '23 and in '24, is really to get that work done ahead of the exit from the NAB TSA. So that's why there's a larger profile of spend, as I said, second half '23, first half '24.

So that then implies that the actual spend for it to get those synergies that you've indicated were actually more than what you've put on the -- in your presentation and at the quarterly update. Is that right?

No, I don't follow that. Just go back over that?

So if you've already spent money in the last financial year, and it's -- you've still got $260 million to $285 million left in the next few years, there's actually more spend that you've needed to do in order to complete the separation in Master Trust piece than what was previously on the table. So there's a circa $40 million-odd that's been sort of pushed through in the last half as one-off costs that we weren't aware of previously, and isn't detailed in your cash investment spend requirement.

So there's no change from what we talked about 4 weeks ago in terms of the profile that's there. These numbers are based on a view that's changing from FY '23. So happy to pick it up when we have our one-on-one, but there's not a -- there's no change beyond what we talked about 4 weeks ago.

There are no more further questions at this time. I would like to hand the call back to the management for closing remarks.

Thank you for your attendance today. Appreciate the support and look forward to speaking to you [ later ]. Thank you.

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