Old Mutual Limited (OMU) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Old Mutual Limited Investor Call on the proposed Bula Tsela Broad-Based Black Economic Empowerment transaction. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the call over to Sizwe Ndlovu. Please go ahead, sir.

I'm Sizwe Ndlovu, Head of Investor Relations, and good afternoon to everybody. Welcome to all those who are joining the call. This afternoon, we'll be hearing from our Chief Executive, Iain Williamson; and CFO, Casparus Troskie, on both the rationale for the proposed transaction as well as some indicative financial impacts following the SENS that we released on the 20th of April 2022. Please note that the presentation has been e-mailed to all participants who have registered as at the close of business yesterday and will be available on the home page of our Investor Relations website as well. If you haven't seen it, I would encourage you to access it and also for those who have received it, please follow using that during this presentation. Once Iain and Casparus have concluded, we will be happy to field any questions you may have for the remainder of the call. [Operator Instructions] Over to you, Iain.

Right. Thanks, Sizwe, and good afternoon, everyone. We're also joined on this call by Taskeen Ismail, who is our new Head of Corporate Finance; as well as by Ranen Thakurdin, who is our General Manager of Group Reporting. For those of you who are following on the slides, I'm going to start on Slide 3. We mentioned at the announcement of our year-end results on the 15th of March that achieving the empowerment targets we had set for ourselves at listing in 2018, which was to be best-in-class, is something that we have taken and continue to take seriously and have been working on achieving. As at 2018, best-in-class amounted to 30% black ownership of our business. And we're pleased to be bringing an impactful transaction to the market that has a wide set of participants with employees, communities and the general public included. The proposed Bula Tsela BEE transaction will allow us to reach just over 33% black ownership, subject to all necessary approvals, assuming, of course, that our current BEE ownership percentage of between 28% and 29% remains at that level. Bula Tsela is a Sesotho phrase that means paving away and we are indeed paving away for the transformation of the financial futures of those who participate in the scheme. We're also the first insurer to facilitate a share offer to the Black South African public. And based on the share price at the end of March, we expect the transaction to be valued at ZAR 2.8 billion. Moving on to the next slide, Slide 4, for those of you who are following. The proposed transaction gives life to the commitment that we made in 2018 and goes beyond that. We believe that it will give us an enhanced competitive advantage, particularly in the key corporate and investment segment. And the development of South Africa is at the core of what we do. The more equal and inclusive our society becomes, the more opportunity there is for us to achieve sustained growth and unlock value for shareholders. The transaction aligns with both our responsible business and shared value approach, and it is deliberately truly broad-based. The benefits we believe far outweigh and will outlive the costs of the implementation. On Slide 5, the rationale for the transaction is that we firmly believe it makes business sense to drive real empowerment. The more equal inclusive our society becomes, as I said before, the more opportunity there is to achieve sustained growth and unlock value. So the way that we constructed the deal is deliberate to achieve genuinely broad-based transformation. There are 3 groups of participants: Our employees, the Black South African public and our communities. On employees, we want all of our employees to share in the success of the Old Mutual Group and this will, in this case, include non-Black South Africans and our employees in the Rest of Africa. However, we will materially tilt towards Black South African employees and entry-level positions in our company. Within the communities, we aim to support community development and specifically the development of Black people and Black-owned entities through financial and other educational and digital skill development programs. We will aim to help create jobs in the SME sector and develop the skills to fill those jobs. And in including the black public, we are broadening our shareholder base and specifically including Black South Africans at lower income levels, which has not been done before. The deal will be good for Old Mutual. It should improve our BEE ownership credentials, enhancing our ability to compete successfully in our chosen market segments. We did a substantial amount of work on analyzing business at risk from our current lack of empowerment. And this deal, together with the sale of 21% of Futuregrowth to AIH that we announced earlier this year, will help move both Futuregrowth and the Old Mutual Investment Group towards becoming majority Black-owned businesses, which will help those businesses to remain preferred service providers for institutional investment mandates. And it also helps the Old Mutual Corporate business to be more competitive in its offering to institutional counterparties. On Slide 6, the salient terms of the deal. As you would have seen in our SENS announcement, we are proposing to issue just over 205 million new Old Mutual shares to be allocated to the employee scheme, the retail scheme and the community trust. Detailed funding plans for this will be outlined in the shareholder circular that will be released in due course. At a high level, we anticipate that individual group companies will contribute to fund the employee scheme, with the remainder to be funded by Old Mutual Limited through notional vendor funding. For the retail scheme, Black members of the public, including Black-owned entities, will be invited to apply for shares and will contribute some equity to do so, with the remainder to be funded through preference share funding from Old Mutual. And for the community scheme, notional vendor funding will be provided by Old Mutual. Other key points worth noting are that the allocation of value in this deal is largely tilted towards the Black population and towards Black women in particular. There is no strategic equity partner to ensure that the deal remains broad-based. Nonexecutive Directors of Old Mutual will not be participating in the transaction. And the scheme will be in place for 10 years, with the community scheme to continue operating beyond the 10-year period. We will not be providing any specific business updates and will communicate these in the normal course of our investor calendar and via SENS. I'll now hand over to Casper for a brief overview of the indicative financial impacts of the transaction and we will then take any questions at the end. So Casper, over to you.

Thanks, Iain. I hope you can all hear me well. In terms of the -- and I'm referring now to Slide 8, if investors want to follow. In terms of the terms announcement, we showed the indicative pro forma impacts of the transaction. And we refer to total cost of ZAR 917 million, which is made up as follows: In terms of the scheme costs for the employee scheme, the accounting treatment is similar to our existing employee schemes with the only difference being the vesting period, which for this transaction is 4, 6 and 8 years. And the IFRS 2 costs of approximately ZAR 377 million will be incurred over the duration of the scheme. In terms of the community scheme, the expenses represent the use of trickle dividends in the community trust to be paid out to various qualifying initiatives on a discretionary basis and we assumed that we will be paying out the full trickle dividend for purposes of the financial impacts. In terms of the retail scheme, this represents the upfront IFRS 2 charge of ZAR 174 million, calculated as the equity settled costs of the scheme less the contribution from retail participants and this amounts to ZAR 305 million, as the equity settled cost less the contribution of ZAR 131 million, which gets you to the ZAR 174 million. The once-off implementation costs consist mainly of consulting and implementation fees and further detail will be provided in the forthcoming circular. Should the retail scheme be listed in year 5, we have estimated an additional amount of listing costs of ZAR 10 million. The annual administration cost represents the ongoing costs that we will incur to manage the administration of the schemes. The costs contained in the terms announcement are based on assumptions at 31 December 2021. And final costs incurred will be impacted by changes in both the market and the market assumptions. We have used the Black–Scholes model to set specific assumptions for the deal over a 10-year period. We have made fairly conservative assumptions of value in our model for share price volatility, dividend yield and risk-free rates amongst others. These assumptions give us additional confidence that value indeed can be created through the proposed transaction. We will provide further detail on these assumptions in the circular, which will be distributed to our shareholders in the coming months. We are firming up with our auditors the exact dilution impacts and in particular around the retail scheme as well as the impact to net assets and we'll provide further details in the circular once we have alignment with our auditors on these items. I think the most critical points that we've been very clear on as a management team is that the benefits to Old Mutual Limited of this deal far outweigh the cost of its implementation. And we've used fairly conservative assumptions in terms of what the deal would cost and we then have quantified internally what we expect the cumulative benefits to be of the scheme. And we [ formed up ] this in 3 ways. We've looked at current funds at risk that we -- we are managing funds where those aren't risk because we are not, not above the 50% ownership in our asset managers. So that's the listed equity franchise, Futuregrowth as well as Old Mutual Corporate, all of the entities that are affected. We've looked at the ability to source additional funds from existing clients. And we've looked at the ability to increase our win rate in new proposals, both for the asset management -- asset management businesses as well as Old Mutual Corporate. And in that case, we've looked at our pipeline to try and quantify what the impact would be. And taking that into account, we -- the actual annual benefits are material that we've calculated and are expected to fairly quickly exceed the cost of the transaction. So back to you, Iain.

Thanks, Casper. So just in terms of process and next steps, we will issue a circular that will provide additional information regarding the transaction in due course and we expect that will be in the next couple of months. And following the release of the circular, we will also do a shareholders' meeting and we will be seeking approval of the proposed Bula Tsela BEE transaction and its terms and we will issue a prospectus for the retail scheme. And we anticipate that we would want to schedule all of that such that we can conclude this transaction subject to regulatory approvals by the end of the year. So I'll hand back to Sizwe to just take any questions that you may have on the line. Sizwe, over to you.

Thanks, Iain. I see we already have some people lining up. I'll hand over just to Irene from Chorus Call. We have Michael, Craig and Larissa. Irene, over to you.

[Operator Instructions] Our first question is from Michael Christelis of UBS.

Thanks very much for the time and thanks a lot for the detail, I guess, around the cost of the scheme and how you expect this to come through. Two questions, if I can. Just one related to those costs. I mean presumably, these costs will be shown in your central cost line. Is that right, just for my modeling? And that 2022 cost presumably all gets incurred in half 2, if you're hoping to do this by year-end? If you can just clarify that for me? And then secondly, maybe just on a sort of higher level, just around new business over the last, say, 2 or 3 years, have you actually lost business purely on the basis of your BEE ownership? Or do you think this is more a defensive move and therefore, is it something that you can actually quantify how much business you've lost in the last couple of years and then it's material or not?

Should I answer?

I'll let Casper answer the first question around the accounting treatment. Regarding the second one, we can point to specific transactions and mandate losses in the asset management space that have been attributed by the clients that have moved the business specifically to the issue of majority Black ownership in asset managers, so the answer to that is yes.

Michael, on the -- on your first question, so the once-off costs will be treated as a transaction cost, which we exclude from our adjusted headline earnings and we've agreed that treatment with our audit committee. So the once-off cost that you see in year 1, so that -- the ZAR 150 million for the transaction plus the retail scheme, that once-off cost will go outside of adjusted headline earnings, so will sit in the center. The rest of the costs relating to the employee scheme will allocate to the business unit. And then obviously, the community scheme will sit in the center. So -- so I hope that gives you -- and you can see that's not really material. So hopefully, that gives you a sense of -- we shouldn't see the employee scheme solely sitting in the center, so that's -- some of that will be allocated now to the business units.

Our next question is from Larissa Van Deventer of Barclays.

Three questions, please. The first one is about, on the lock-in. You have a slide and you do specify that it's 10 years. Does that mean that after 10 years, all of the shares are fully free to trade? The second question is on the funding. Can you just please help me understand the extent to which the funding -- is this effectively just a loan that will be repaid? Or is there a free element to it? I'm not clear on that. And also is the attractive funding cost included as a cost or does that come in, in addition, the differential between that and market rates? And then the last one is, Casper, you mentioned the benefits and you mentioned where they would come from, but I'm not clear as to how. Are you expecting to get all the benefits from additional business? Or how did you quantify those benefits, please?

Okay. Thanks, Larissa. So let me start with your last question. So we've looked at -- as I said, we've looked at funds at risk in our existing client base where there is a government mandate, okay? So we then also looked -- so that's one part of the answer. So that's -- these are the fees we can lose if we don't do this. Then we've also looked at our existing clients where we have current allocations to us. Where we think by having a higher empowerment of being above 50% of the Black-owned will give us the ability to attract additional funds from those clients. And we've quantified what we think that number is. And we also -- we also then looked at proposals we're currently excluded from, that we're not -- that we -- because we're not majority Black-owned. So we've looked at potential additional pipeline that we can source because we will be Black-owned in our estimate. And we -- we've put a number to that sort of opportunity and we've calculated what that could mean from a assets under management, revenue and a profit perspective. So I hope that helps, Larissa. In terms of the notional funding, there is -- there is obviously interest charged on the funding, depending on which scheme it is, and it would be as a percentage of prime and the -- how the notional funding works, whether it be the cost of that [ bolus ] of the funding is including the interest, tacking off the dividends, either excluding the trickle dividends, whatever that ends up, at the end of the day, you then cancel enough shares to pay for the outstanding funding and the interest roll-up on that at the end of the scheme, so that you get to the amount of shares that are actually based for each -- each of the participants. For the community scheme, it's effectively a -- it remains post the 10-year period. So -- and those will be treated as treasury shares on an ongoing basis. And you'll see the trickle dividends go through as a cost. So I hope that helps, Larissa.

Okay. I'm not sure that I'm entirely clear, but let me think about that one. And then -- so the lock-in for everything is 10 and then it's completely free flow. Is that right?

For the employee scheme, there's a 4-, 6- and 8-year lock-in. For the other schemes, there's a 5-year period for the retail scheme. We then intend listing the retail scheme shares on the the BEE exchange, which then preserves that, that BEE nature of those shares for longer than the 10-year period because they are listed on that exchange.

Our next question is from Craig Gradidge of Gradidge-Mahura Investments.

I think my first question was partly answered. It was around the retail scheme. So it's a 10-year funding term, but there's the intention for it to be an evergreen scheme by staying listed on an exchange. And I think you've answered that. So I'll go to my second question is whether the staff shares will also be listed on the same exchange so that if members of the public wanted to get a bigger exposure to Bula Tsela, they could, to at least improve the liquidity.

So it's not -- we're intending to treat the staff shares, except for the listing -- the difference in the listing period is exactly the same way as we're dealing with our current employee share allocation. So those might be listed on the BEE exchange. That's the current thinking.

Okay. And then last question, the selection criteria, it looks like you will be favoring smaller investors. Do you have the peer selection criteria that you can disclose now? Or do we just wait for the prospectus for that?

I think we'll be detailing all that detail in our circular, but there will be a substantial skew, both in the staff scheme and I'm really -- when we say substantial, we mean substantial. There will be a substantial skew towards our lower-paid employees, at lower levels of management. And equally, there will be a skew in the actual retail scheme. Taskeen, I don't know if you want to just give a bit more detail on that?

Thanks, Casper, yes, that is accurate. On the retail scheme selection criteria, it really does depend on the level of applications that we get. But the intention is to try and build that book with as broad an allocation base as possible.

Our next question is from Andrew Sinclair of Bank of America.

Two for me, if that's all right. Firstly, we just -- really, do you expect this to be essentially a one-off such transaction or do you think there'll be any further such transactions in the future, because best-in-class is clearly a moving target? And second question was just on the benefits, really on what time line should we start to see the benefits that you've been talking about?

Andy, I think on the -- on your first question, our view is that -- at this stage, it's sort of a one-off in the sense that we made a particular commitment as part of management [indiscernible], which we're honoring. I think any decisions around the future transactions will be driven by essentially a business case for that transaction in terms of understanding what we believe the cost benefit equation looks like. And I think so at this stage, we don't necessarily plan anything else, but it would -- it's an evolving story over time, depending on the business case at that point in time.

And same way for the benefits?

Casper, do you want to elaborate at all?

Sorry, I got cut off. So they're dropping...

Andy was asking the business benefits that we've thought about in terms of business at risk, et cetera, time lines for those.

Yes. I think the -- based on my understanding of the work that we've done, actually, a lot of -- we've been able to keep some clients at bay because of the fact that we're all going ahead with the empowerment transaction at [indiscernible] level and the intention to get [indiscernible] investments to 51%. So -- so there's almost immediate benefit starting to accrue. But I expect the time line to -- for the benefits to accrue and then for us to be on the front foot on the benefit side of this, the cost, to be within the 10-year period time frame.

Our next question is from [indiscernible] of [ EPA ] Asset Management.

And I'm so sorry, my [indiscernible] and IFRS 2 knowledge is a bit rusty. But just one in terms of the cost assumptions that you put out here and the current share price, because obviously, we've seen quite a significant correction in your share price, along with the rest of the market. What sort of an impact would it have on these costs and on your cost estimates if we see material either upside or downside movements on your share price?

So obviously, the scheme is dependent on -- pretty dependent on how the share price performs over the period. So the starting share price, given inputs. And then obviously, what happens to return over the 10-year period, you'll see is a higher return, more shares, more shares will vest and the impact -- so we based our financial impacts at this stage on a set of assumptions which we'll be disclosing as part of the circular. And obviously, if any -- if interest rates are higher, if there's a change in volatility, if the dividend yield that we've assumed in the model is higher or lower, the full impact on the ultimate number of shares that are vesting. The IFRS 2 cost is fixed because the equity settled will be fixed on day 1. So once we -- and that can move around until we actually do the deal. So -- so it depends on what happens to the market. So you calculate that on the day of the implementation of the transaction using the various inputs at that point in time. And then you will calculate the IFRS 2 cost and that will then be your cost that you use for accounting purposes. The actual number of shares that then vests at the end of the day, if there's no growth in the share price, there'll be no -- there'll be no shares vested. So the share price actually has to perform to -- for participants to -- to obviously get value out of this transaction. I hope I've understood your question correctly and I hope you're happy with the answer.

Will you be publishing a sensitivity analysis to your cost once you have more of the details?

Yes, Taskeen, I'm not sure if we're doing it as part of the circular. I think we will be doing some scenario analysis. We certainly have 2 scenarios I know of. But we can certainly provide you with -- once we've made the announcement, we can certainly provide you with some sensitivities as part of the update to investors when the circular has gone out, around some of the key assumptions like share price growth and so forth. So we have a -- you can have a better understanding of what the sensitivities are.

[Operator Instructions] We have a question from [ Syrene Barnett of 91 ].

I just want to find out how do I think about the impact on the embedded value? Because Casper, as you said, initially, I mean the notional loan will likely be paid off with appreciation with the share price of the shares. So will it initially be zero and as the share price appreciates, the sort of ones that seem to vest will be taken into account? Or how do we think about that?

So the -- the impact on the balance sheet are -- are actually quite small because IFRS 2 is effectively a charge through the income statement, but it's -- the credit is taken to reserves. So we'll be providing you with the detailed impact on the -- on the impact on the net asset value and then the EV will be much the same if you -- so -- at the moment -- sorry, [ Syrene ]?

So what happens to the shares in issue for the EV?

So the EV -- the shares -- so the shares in issue, because they're not treated as -- they're treated as treasury shares until such time as they vest. You have a -- you won't have any impact in the near term. And when those shares then vest, we'll be providing you with detailed disclosure on the dilution impact of the shares. What the accounting rules require us to do is to show the negative side only. So we need to take the costs into account and the additional shares that we think might be issued, but we don't take the benefits into account. So -- so the -- and obviously, for this to be a complete picture, one actually has to understand what benefits you've derived from this transaction, which I've spoken through before. So -- but just to be 100% clear, shares are treated as treasury shares and there's no impact over the term until you get to a vesting date, then dependent on how many shares get issued, there will be a dilution impact. And we feel confident that as management that the benefits that should accrue should more than make up for the dilution impact in the shares. But if you -- the way we had to cut or report this from an account -- IFRS perspective requires us, as I said, to only take the costs into account and the additional shares that we will issue. There'll be detailed disclosure, [ Syrene ], on the expected dilution impact. Once again, that could change quite materially depending on whether the share price performs -- underperforms or overperforms. So you'll have a much smaller dilutive impact if the share price under performs and vice versa if it overperforms. I hope that -- but all those details we'll have in the circular.

Right, in the circular. And so the EV isn't going to anticipate the expected dilutionary impact. So make assumptions on the share price accretion over the 10-year period and then take the dilution into account immediately -- like EV sort of putting a value on it?

No, because the value you've effectively calculated on day 1, the value of what you're giving the shareholder. And then -- because that's what the IFRS 2 charge represents, is the cost to the shareholder of this transaction. So that...

Yes, but not the dilution. So basically, if everything goes according to plan and so you issue 50% of the shares, of the -- I can't remember, 205 million, 215 million shares, at the end of the scheme. Then in year 9, you will have everything is still treated as treasury shares and in year 10, all of those shares will come into issue and you'll see the dilution in the EV only in that year.

Yes, but indeed, we'll tap the reserves through the IFRS charge to effectively pay for those shares. So I think it's I think what we'll do is we'll try and provide a bit more detail on that, [ Syrene ] as part of the circular.

Okay, that would be great. That would be very helpful. And then I just wanted to ask on the share scheme, so Iain was saying that the funding will be provided by the different business units. So I wasn't clear. So the ESOP scheme also has a notional funding attached to that. So will that notional funding be the liability of the business units or the liability of the participants?

No, it's the -- it will be the liability of the participants, so for repaying the funding. But the funding to the participant is provided by -- it's not so much the businesses, it's more the legal entity that provides the funding.

Okay. So the hurdle for the ESOP scheme is substantially higher because the notional funding is based on the net fair value, 80% net fair value, instead of the VWAP, which obviously you still have to disclose to us, but I assume the notional fair value will be quite a bit higher than the VWAP?

I didn't quite follow that, [ Syrene ].

So my understanding for the ESOP scheme is that the notional funding that talks about the subscription price will be 20% of VWAP and 80% fair value. So is my understanding there incorrect? So that's what needs to be paid back from -- by sort of selling shares at the end of the period.

Casper, can I add -- sorry. Yes. So [ Syrene ], we just used the word fair price because it's not the VWAP. We'll use the share price we use in the option pricing model for the fair value calculation. But I think for your intents and purposes, just think of it as the share price.

Okay. Great. I couldn't understand. Yes, I looked in the [indiscernible].

It's more on accounting tax technical issue that we have to approach it that way.

[Operator Instructions] Since we have no further questions on the line, I would like to hand back to Sizwe for any closing remarks.

Thank you, Irene, and thanks to everybody for participating in today's engagement. We do still invite you to contact the Investor Relations team, should you have any specific matters you wish to discuss with the company. And finally, we'll be making a transcript available on our website of this call very shortly. Thank you and goodbye.

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.