Netwealth Group Limited (NWL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Netwealth Group Limited Half Year Results 1H 2023. [Operator Instructions] I would now like to hand the conference over to Mr. Matt Heine, Managing Director. Please go ahead.

Thank you, Lucy, and good morning, everyone. Thank you for dialing in, and we're looking forward to delivering our first half financial results. My name is Matt Heine, I'm Managing Director of Netwealth Investments, and I'm joined this morning by Grant Boyle, our Chief Financial Officer. If we move to Page 6, and I will move through the first few slides relatively quickly. It's been a mixed half, but a positive half given the macroeconomic background. Funds under management at the end of December were AUD 62.4 billion. And as of Monday, the 13th of February, we're near all-time highs from funds under administration basis of AUD 65.1 billion. The AUD 62.4 billion represents a 10.2% increase or growth to PCP. Our funds under management, so that is our managed accounts and global specialist funds reached AUD 4.4 billion (sic) [AUD 14.4 billion], a growth of AUD 1.2 billion for the half. And our managed account, which continues to be a major driver of growth is now AUD 12.2 billion with growth throughout the half of AUD 0.9 billion. For the first time, we have also exceeded AUD 100 million in revenue and total income for the first half '23, was 1.02 sorry, AUD 102.8 million with an underlying NPAT for the first half of AUD 30.6 million. Grant will provide further information in a few slides time. But if we turn to Page 7, you'll see that yet again, during the period, Netwealth was rewarded and awarded for that matter, with a number of accolades from various research houses and really represents not only the investments that we've been making over many, many years, but in particular, the investment that's been flagged and made over the last 18 months and we'll come back to that. For the 12 months to September '22, Netwealth was the fastest-growing platform from an inflow perspective of AUD 11.9 billion and remains very focused on ensuring profitable funds under management -- growth of funds under administration. Our market share increased to 6.3%, an increase of 1.1% and importantly, shows that we have significant headroom to grow within the direct platform market and also as we expand our total addressable market with the introduction of MAPS through this half. On Page 9, we've provided a little bit more information just on the makeup of flows. So, you'll note that the organic flows from existing clients was AUD 4.7 billion for the half, so relatively consistent with previous quarters. Slightly slower over the last quarter from new advisers joining the platform. However, we've been extremely successful in securing some very significant and important new licensees and advice clients who will begin transitioning during this half and we expect to see that number increasing. We also did some analysis of the book and looked at the vintage or the amount of FUA that rests with advisers over different periods of time. And as you can see from the pie chart on the bottom right, it is very well diversified with 31% of our business sitting with advisers that have joined over the last 5 to 10 years, an extremely loyal client base that's been with us for more than 10 years of 37%, and where we see a big opportunity and continued flows is the 31% who have been with us for between 1 and 5 years. And that 1% that you see at the top, is obviously a further opportunity and a focus for the sales team and for the business. But really pleasing to see just the loyalty of the client base and also the opportunity set in front of us. Moving on to strategy and product update. It certainly is an interesting market at the moment. There's a lot of different things to think about at the moment. We've got a change in customer behavior and certainly a lot of change in the technology world. The investment landscape just from the various new investment opportunities, whether that's on-platform, off-platform, overseas, through managed accounts or with a big focus on ESG, Netwealth is extremely focused on ensuring that we continue to diversify the range of assets available to our customers and that really is across all market segments, so whether it's the emerging affluent, the mass affluent or our high-net-worth clients. Our business model, no doubt we'll spend a bit of time on maybe in Q&A or over the next few days with the quality of advice review well and truly underway and now out with the industry for further feedback, we see some great opportunities as advisers hopefully can drive efficiency across their business with reduced retake, which will inevitably increase the amount of Australians that can provide advice and therefore, our opportunity set. I think what's been really pleasing is that the investment that we have made over the last 18 months is starting to pay real dividends. And so I won't go through in a lot of detail. Page 13 provides some information just on the key focus areas that we're working on. And again, just to reiterate, it really is across all of our market segments. We've been certainly very focused on high-net-worth historically. That product, which is particularly suited to them being MAPS, our Multi-Asset Portfolio Service, we'll be going live more broadly to the industry in March and the pilot has been incredibly successful with around AUD 33 million transitioned on to the service to date. So, we will be focusing on MDA's high-net-worth and mid-market clients for the remainder of the year and into the next financial year. Our mobile continues to be upgraded and new feature is very well received with bank accounts and property being added in recent times and also pilot now for our first integration with Xeppo, which we own 25% of. A big part of that is the data and leveraging that data to help advisers not only provide better client engagement and better service, but also understand their business is better to drive efficiency. A lot of work being done, just enhancing our core functionality. Report builder and our reporting capability is well underway with the [indiscernible] release scheduled for mid to late March. MAPS we've touched on going live, and we continue to shift a lot of our technology into the cloud, which not only helps us recruit and retain tech talent but also provides scalability and stability into the future. The final one I'll just touch on is just our focus on adviser efficiency. So clearly, with the cost of advice currently going up, notwithstanding the changes that the quality of advice review may implement, we are working very closely with our clients to make sure that we can remove bottlenecks within their business, whether that's through the introduction or the expansion of our record of advice service, through smart managed accounts, data and analytics or mobile and client engagement for client consent moving forward. And again, you can see a list of those initiatives on Page 14. Page 15, just gives you a little bit more insight and we've been through this historically, just the, I guess, the purpose and our positioning of MAPS, our Multi-Asset Portfolio Service. The business and myself we're very excited about this, as are the clients that are on the pilot and then looking to join in the near future. We've taken the opportunity to really reimagine what we believe the platform of the future looks like and based on feedback from the industry, we have been expanding our investments as previously touched on. We've added wholesale funds or IMs to the platform, we've managed capital calls on the platform. And now with the introduction of non-custodial, we really can cater for our client's entire portfolio. And through that service, we'll be doing the similar services to what we do for custodial clients. So, we're doing applications, income, pricing, tax and reporting as well as providing advice fee calculations on the client's entire portfolio. It's very exciting and we look forward to releasing that in early to mid-March. I'll skip through the next few pages. But if you do have time, we'll just provide some examples of the latest technology, the result of the investment that we have been making. Our corporate sustainability is continuing on. Not only is it being well received by staff, but also obviously, those in the communities that are benefiting from our various programs. With the return to office and some sort of normality, we've been able to engage in a greater number of volunteer programs. We've been able to raise significant money and make some very meaningful grants to different organizations. And there's a list of the various initiatives listed on Page 19. Beyond that, I'm going to hand over to Grant Boyle on Page 21 to give you some more information on the financial results and look forward to answering any questions post outlook.

Thanks, Matt, and good morning, and Happy New Year to everyone on the call. So moving to Slide 22, getting into the financials. So, this slide summarizes the improvement on the half and half financial results. But before we get into the numbers themselves, there is a minor change to the way that we account for transaction revenue and expenses that I just wanted to remind people of. In the past, we've booked our transaction revenue net, this year, we're booking at growth. So, the effect on this half has been to increase revenue by AUD 1.8 million and increase expenses by AUD 1.8 million. So, the comparatives have been changed, but that's just something to bear in mind. I think most people didn't incorporate any of that in their modeling. So, that's part of the variance between some of the numbers that are out there. Okay. Total revenue increase was 18.9%. So that was primarily driven by the growth of our funds under administration, which grew by 10% over that period and also the improvement in the cash margins over that period. With the RBA rate increasing, we did get some benefit of that coming through to the cash margins in the first half and also the cash balances at the beginning of the year were relatively strong. Operating expenses were up 30.1%, and that's been flagged pretty consistently over our recent updates that we have been in an effort to maintain our innovation and scalability. We've been strategically stepping up our investment in technology, in both people and infrastructure. We invested heavily in our operations people last year and our systems to ensure that we maintain the service levels as we continue to grow rapidly. We've now got a really solid platform for our future growth. First half also had another increase that was kind of a one-off in a relative perspective in that we came out of a COVID environment. Last year, we had no travel or marketing expenses as we were pretty much in lockdown for most of last year, whereas this year, we've returned to having financial adviser events and travel expenses. So, that accounts for some of the increase versus last year. So despite all that, we've retained a strong EBITDA margin of 46.1%, which is obviously a little down on where we've been in the past, but that's really on the back of that heavy investment in tech and operations and also a lower cash margin than normal, which is obviously starting to improve, as we'll touch on a bit more later on in the presentation. We've continued to expense all of our internal development costs. So, there's been no change there. The underlying NPAT was AUD 30.6 million. Earnings per share increased by 11.7% on the prior comparative period. So, that's obviously a very strong result in a tricky 12-month period. We retained our exceptional cash generation with very high pretax operating cash flow of AUD 51.2 million. Today, we had a Board meeting and declared our final dividend of AUD 0.11 per share, which is fully franked and 10% higher than the prior comparative period. But to summarize, a really strong result again. We've continued our growth. We've been investing heavily for the future and we will now move to the operating metrics on Slide 23. So, majority of these metrics you would have seen as part of our quarterly update in January. So, I'm not going to spend too much time on regurgitating those. A few items to call out. Our FUA grew 12.2% in the first half. We had net flows of AUD 5 million -- AUD 5 billion rather, as Matt touched on before in the first half. And apart from that, as I said, the rest of the metrics were largely reported as part of the quarterly. Slide 24, please. So, this slide is one of my favorites. You'd be familiar with the -- that revenue per account is an important metric for us. We've been progressively -- we've been successful in progressively growing the revenue per account. Since we listed, we had a short-term blip in second half of 2021 due to the reprice and the interest rate headwinds. But pleasingly, this has rebounded really strongly in the first half. And with the recently announced improvements to our cash margin, we expect this to continue to trend in the second half. The bottom chart on the right-hand side, which is the basis points, I've tried to ask you to look away from in the past as it's heading in the wrong direction. It's not as an important metric for us as it's largely an outcome of the mix of our business. But this year, our mix has retained -- remained pretty strong over the -- sorry, pretty consistent over the period, and therefore, we haven't seen a reduction in that basis points. Indeed, it's increased due to the better earn out of our cash, so cash revenue. So, it supports the story that it really hasn't been driven by pricing pressure, it's more a mix issue. That's really pleasing to see. It's the first time since we listed that we've actually seen that basis point margin heading north. Slide 25, we'll move to now. So, this sets out the revenue diversification. Been really successful in diversifying our revenue and it's proven resilient through various market cycles. Ancillaries has increased to 34% and that's largely on the back of improving cash margins, which now represent close to 28% of our revenue, and that will clearly improve it with a better rate that we -- better margin that we've achieved with our institution. Transaction revenue was a little down in the first half compared to the prior period. That's really a factor of the economic environment and volumes in the market being down overall and with the uncertainty that we expect that to provide a good and contribute to our revenue going forward and it's good to have that diversification in our revenue. Moving to Slide 26 now. Yes. So I've had a -- as Matt touched on, and I've spoken of, we have stepped up our investment in previous years to support the growth and innovation. We've made some strategic investments across infrastructure, our people and our software. So, operating expenses are -- have increased by AUD 12.8 million on the prior period. We've only added 27 additional roles in the first half compared to 55% last year, which supports what we have been saying in recent announcements that it was a step-up and we were hoping that the growth would return to more normalized levels and that's certainly been the case in the first half. We've upgraded our IT infrastructure and a number of operating systems, which will enable us to provide excellent services. We continue to grow rapidly. The increase is primarily related to migration to the cloud, upgrading workflow systems, security, CRM and contact systems and onboarding systems. Other increases, as I touched on before, relate to the T&E and marketing and advertising costs, which have risen as the economy reopens after the COVID-19 lockdowns. Moving now to Slide 27. This sets out the headcount increases in the first half. As I said, we have been accelerating our expenses in previous years. We've seen that normalize in the first half. We have, as you can see, continue to invest in our tech team and that's just to ensure that we maintain our market-leading features that we're always endeavoring to build. Moving to Slide 28. We've invested in the first half, AUD 2.5 million in capital expenses expenditure and that's related to the initiatives that are on that prior page to maintain the efficiency, build some additional scale. We're enhancing some operation systems, strengthening the security and updating the IT infrastructure. We're developing new features for managed accounts, managed discretionary accounts, high-net-worth accounts, mid-market accounts and upgrading the account opening and onboarding systems. These initiatives are critical to allowing us to support our future rapid growth into the future. So, now moving ahead to my final slide. Netwealth remains in an extremely strong market and financial position. We've got a strong balance sheet. We've got low capital expenditure. We have no debt, and we've got significant cash reserves. There's a really strong correlation between EBITDA and cash flow, we've got high levels of recurring revenue and the revenue continues to grow. But at the same time, we're investing for the future with ongoing strategic initiatives to upgrade IT infrastructure, people and software. We are a leader in the mass affluent, high-net-worth and private solutions and we have the highest Net Promoter Score by advisers in the market. And with that, I will hand over to Matt, who will provide an operating outlook and invite you to ask some questions.

Thank you very much, Grant. Great summary as always. Moving forward, Netwealth remains very positive, notwithstanding that there is still clearly a risk of further market deterioration. But as a business, we continue to gain market share. We have a very strong pipeline, a very diverse pipeline, both geographically and across different market segments. And we have been very successful in winning some very large and significant clients in recent time, which we expect to start funding new accounts, hopefully in the not-too-distant future. We maintain our net inflow guidance for financial year 2023 of approximately AUD 11 billion. And as previously reported, back in our quarterly update, the margin on the balance of the Netwealth cash transaction account has increased to approximately 1.35%. So, we're getting very close to our historic earn on the cash account. One of the keys is after a period of increased investment in our people, resources and technology, we have a very large team now and our focus is now really on driving productivity, efficiency and operating leverage from the resources that we have. This is really important for us to ensure that we not only build a sustainable growth profile, but also that we can maintain our profitability. A lot of exciting things coming out over the next 6 months. I've touched on a number of them -- number of times now. So with MAPS, our partnership with Xeppo has come fruition through our data integration and we will be rolling out a range of adviser efficiency tools as well as a number of the strategic initiatives that Grant just set out previously. So overall, with a mixed background in macroeconomic environment, we remain positive and are looking forward to the next 6 to 12 months. So on that note, we might hand over to questions. Have we got any lined up?

[Operator Instructions] Your first question comes from Bob Chen from JPMorgan.

Just a couple of questions for me. I mean in terms of your non-custody FUA, it looks like it's grown to around AUD 2.7 billion since the last update. Can you give us a little bit of color on how much of that was market-driven versus flows driven?

Are you talking about total FUA for or the non-custodial? The non-custodial pilot...

Non-custodial.

No, the non-custodial pilot...

Total custody FUA, sorry.

Okay. So yes, obviously, between the quarterly and our current FUA, it's a combination of net flows and market growth, but we're not providing the breakdown at this stage.

And then just some clarity on your outlook comments on the cost base. It looks like you're trying to sort of limit other expenses growth, but we should still see some employee expenses growth. Should we see sort of the same quantum of employee expenses growth into the second half?

Bob, it's -- the guidance that we've given right, so the head count increase, which we think will be similar numbers to what we had in the first half. So, in terms of how that plays out in terms of the cost, that's going to depend on the timing throughout the half, but it's -- certainly the magnitude of the increase is pretty similar to what we've experienced in the first half.

And then if I just may just finally, I mean it looks like your revenue growth for the business sort of tracking around that 18% to 19% level, but the OpEx is still a little bit elevated. I mean do you expect that to sort of revert back to more positive jaws into the second half and into next year as well?

Yes. Certainly, one of the comments we did make in the announcement was we expect the non-people-related cost to be flat half on half or largely flat. So certainly, we would hope our revenue would grow in the second half, given the -- what we know about the FUA increase and the better cash margins. So, we would definitely expect part of that equation to be heading in the right direction, given revenue going up and non-operating expenses flat and relatively low increases in headcount. So, those all things should contribute to a better second half than a first half.

Your next question comes from Siraj Ahmed from Citigroup.

The first question, just on that FUA debt. It does seem like the flows are below your sort of the run rate required to hit AUD 6 billion in the second half. It also means that you've not start -- the large transitions have not started or are you still seeing outflows. Can you just comment on that?

Yes. So, as I mentioned before, we're not giving the split of that. So as far as, I guess, the quantum of the flows to date, it's tracking to the seasonal patterns that we've seen historically. Flows are a bit subdued across the industry, as you know. And we've revised our forecast to approximately AUD 11 billion to reflect what we believe is still coming in.

And Matt, just on the guidance for the flows, how much of that is from these large transitions? Or if you can quantify the pipeline, like how big is the pipeline are you talking to?

Yes. We're not -- we don't have that split at the moment. So historically, when we had a range of AUD 11 billion to AUD 13 billion, the upside was really from some of the large institutional accounts. We're still expecting to see that business trickling in, but we haven't got visibility, we're not providing visibility over the mix at this point.

Yes. So when he said, we don't have visibility, we certainly build up that forecast based on our existing clients and the known transitions, but we haven't provided that to the market.

Your next question comes from Nicholas McGarrigle from Barrenjoey.

Just in terms of the around outflows in the last half, can you talk to just some of the more qualitative trends of that? Is that money that's moved from the higher net worth accounts into off-platform cash, sort of sitting on the sidelines not sort of redeployed into market sources also?

Yes. We've done quite a lot of work on that. So, we've done a deep dive and analysis of where the larger chunkier outflows went. So, the big outflows were definitely from, I guess, our high-net-worth or ultra-high-net-worth family office style accounts. And therefore, the quantum of them is bigger, but the revenue impact is less. So interestingly, a number of them pre us launching MAPS more broadly. So, the non-custodial aspect have actually been deployed to off-platform alternative investments for a number of our larger groups where they're looking at getting non-market-related returns. So, we would hope that, that slows down in the future as we're able to actually administer the whole spectrum. There was a few large philanthropic outflows. And outside of that, sort of your normal business.

But I think just on the point around the TDs certainly would account for some of it we imagine. We actually haven't drilled down to the...

Where it goes with...

To the individual adviser level on account level because it's just too much detail to ingest, but you would expect given how many -- how much TDs on the platform have increased, some clients would be willing to take that of off-platform to pay admin fees or adviser fees.

There's also a couple of accounts which move to different advisers to groups that didn't use Netwealth. So, a bit of a mix, but yes, we don't see that thing systemic.

Yes. So, some permanent into alternative asset classes and some maybe being held off-platform in cash and TD?

Yes.

Given I'll spend my second question on -- just a question around the strategic capital expenditure. So, I think you mentioned the...

Sorry, Nick, we've lost you.

We haven't killed Nick off, he's actually dropped off the line.

Are we still connected?

Yes.

There we go.

We're connected, pardon me, sorry, yes, he did drop. So, we'll move on to the next question, if he could join back in the queue. We'll take the rest of this question. So, the next question comes from Brendan Carrig from Macquarie.

Just one from me in addition. So, just that new chart that you provided on the tenure. I'd just be interested in that 1- to 5-year cohort, do you have any commentary or insights into, I guess, the expectations of how much of the flows have sort of been coming from that group? I mean the purpose of my question is just trying to understand, have you had a large amount of flows coming across from that group over the last sort of 1 to 3 years post Royal Commission and large adviser movements? And is the risk, I guess, that those transitions will start to slow and then you'll be more reliant on new advisers and new flows because you're getting less from that existing cohort?

Yes. The upside is obviously a bit determined where in that particular cohort that came from. So, year 5, there's going to be less upside, those that have come in over the last couple of years, certainly greater upside. And we have seen a big uptick in advisers. There is still significant opportunity within that cohort. But the 1% and the pipeline and also the licensees that we've signed up in the last sort of 6 to 12 months also provides ample runway.

And then just a very quick follow-up. Just on the other income. It looks like that was predominantly interest income that drove that bump up. So, there's nothing else that's sort of more one-off in nature in that line item, so we can probably continue to expect about AUD 3 million a half in your other income?

Yes, certainly, that's the most significant driver. It's interest rates and return on the ORFR, so those 2 elements.

Your next question comes from Scott Hudson from MST.

Just I guess a question around the quality of advice review. Do you see any, I guess, upside or risks to some of the findings disclosed in that review?