PSC Insurance Group Limited (PSI) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to the call. We are going to work through the results. And we'd like, as I said, to welcome everybody to the call. They've been a great 6 months. We're a very simple business as we keep saying to everybody. We're principally an insurance broking business operating in a number of regions now; Australia, New Zealand, Hong Kong, U.K., EU and Bermuda. And we continue to stretch both the size of the business and the capability of the business and the presence of the business. Each of the parts of the business has done well in the 6-months period to the 31st of December and we'll come back and talk a little bit more about that. But as you can see from the first slide, underlying revenue up, underlying EBITDA up 19%; a little more than the revenue growth that we achieved. Similarly the underlying net profit after tax and good earnings per share growth and we're lifting the interim dividend by about 16% to $0.052 a share. Before I sort of get into some of the operational parts, I'll hand over to Josh just to talk about in a little more detail about the financial results.

Thank you so much, Tony, and hello, everybody, this morning. We're saying on this slide, its business as usual in the most positive way. It's been another strong set of results with continued and dedicated focus on our organic growth and continued incremental and disciplined acquisition growth. This growth prevailed in challenging economic conditions with rising inflation and interest rates. And this demonstrates the resilient business model we have been highlighting for many years now. In particular, with the results, the underlying revenue was up 15% to approximately $138 million, underlying EBITDA up 19% to approximately $49 million and the standout was underlying NPATA up 27% to approximately $35 million. In particular there, organic EBITDA growth was very strong at 12%, with contributions across all segments and geographic areas. With regard to acquisitions, our incremental brick-by-brick acquisition strategy continued with approximately 6 acquisitions and investments completed in the period. There was $3.1 million of incremental EBITDA growth in the period with Alan Wilson insurance brokers, Charter Union Insurance Brokers out of Hong Kong and an annualized performance from PSC Alliance being the largest contributors. Just in terms of a little more detail there and the growth drivers between organic and acquisition. On the acquisition front, I mentioned Alan Wilson insurance brokers that completed in June last year. That is ahead of expectations. We're delighted of that team. Alan and the team have joined us. As you recall, they have a fire protection specialty, both direct and wholesale, and that's going very well. I mentioned PSC Alliance, that's the annualized impact of that has come through in the period and that business has settled in very well and, again, another great team joining the group. Charter Union is a Hong Kong-based business. It's our third business in Hong Kong. In particular, Hong Kong is performing better than expected. We've got a slide on that later that we'll sort of talk about that a little bit more. And Charter Union Insurance Brokers is an SME broker out of Hong Kong and it's a company of some scale and reputation. So we're delighted to have them on board as well. On the organic growth, with the revenue, there was organic revenue growth of 9% or a little over $10 million, and that was across all segments. The distribution businesses; the broking businesses here in Australia had 8% revenue growth. The agency businesses here in Australia had very strong growth of 22%, with very strong performance from Chase and a very strong bounce back of the travel business now that COVID is thankfully behind us. In the U.K., there was 7% revenue growth in Australian dollar terms with better revenue growth in natural currency. On the EBITDA side, as I said, on the organic side, approximately 12% growth or a little less than -- or approximately $5 million, a little less. Macro events such as increasing interest rates and the FX volatility did aid the result a little in the period due to the client monies that we hold and the U.S. dollar revenues that Paragon have. The period also saw the return of some cost post-COVID, which we had sort of been flagging in previous periods like traveling conferences. And the group bulked up a little to capitalize on future organic growth opportunities. Moving to the next slide, the track record for those that follow us. Now, this is a slide that we have in all presentations. It's one of our favorites, mainly because it just shows the successful trend in our business over the years and the key areas of sort of revenue, earnings and earnings per share and dividend per share, whether compound annual growth rates have been sort of 25% plus. A strong positive in the result this year is the underlying NPATA percentage growth was greater than the underlying EBITDA growth. This reflects the benefits -- the annualized benefits of the debt refinance we did a little while ago. There's also sort of a lower underlying tax rate to the increase in contribution from the U.K. I'll hand back to you, Tony.

Thanks, Josh. So as we always say to our shareholders, it is a simple business. It's principally a broking business. We've got some great underwriting agencies run by Adam Burgess who does a fantastic job. The broking businesses, both authorized rep businesses and the broader broking businesses here in New Zealand and Hong Kong, Bermuda, U.K. and the EU. They are simple businesses, the people at the front of the business servicing clients and building the client base. And our role is to ensure that we've got the right leadership of those businesses and the right structure to help foster that leadership. And it's those individuals throughout the group, who both at the front of the business and the leadership parts of those businesses that drive this performance. The complexity in the business is actually that it's a people-based business and people are complex. They've all got different needs and different aspirations and you're trying to create a common goal to see the business progress and move forward. But the economics of the business, as I said, are incredibly simple. The complexities in the fact that it is a people-based business and we spend all our time on how do we make them better at their job, how do we simplify the processes to allow them to be better at their job and how do we ensure that we're continuing to build the leadership capability and the capability at the front of the business. And all of that is focused on providing an outstanding service to our client. If we get all of that right, we deliver great results to our shareholders, and we've done that, we think, again, this period. We have seen costs come back into the business; that were taken out by COVID. So we're back in front of clients. That means we're traveling more. We're trying to increase the capability of the business. So we've managed to fill some vacant spots and also increased the strength of the team through the organization. We're very much on the front foot about that because we believe being first to be and actively doing that gives us our best chance of seeing the growth in the balance of the year and '24 through to '25, the organic growth being optimized. We're really comfortable that we've got a good acquisition pipeline. We've started to shift the focus a little bit as acquisitions have got more expensive. So we've looked to find opportunities that provide really strong organic growth but are smaller and therefore require less capital, a bit more capital efficient. And we found a couple of those and invested in a couple of those in that period and are looking for other opportunities that are similar to that, but have also completed some good acquisitions through that period. And as I said, we continue to build both in size and capability and geographic spread. So the acquisitions, you can see that on the next slide that we've made another investment into Hong Kong. We've said that we'll now sort of sit for a period and see how they perform. But they are -- it's a business that is doing well, and it's surprising on the upside, which is wonderful. And we recently had a conference the whole of the business, so people into Sydney from all over the Australia and the other regions. And we had quite a few people out of Hong Kong. And again, it just goes to reinforce that insurance brokers around the world are very similar. They're a great group of people and really pleased to have them as part of the group. We bought a trade credit risk business and have also bought a broking business in New South Wales, and we'll talk a little bit more about that a little later on. And then the 2 investments we've made in the period of Bay builders. We think that's got really strong organic growth opportunities. We've also made that investment because we believe it's important to foster the growth of capabilities in that industry because it is an industry that's being stretched to provide the service that's needed for our customers. But we're also incredibly excited about the growth prospects, the organic profit growth prospects of that business. And Eldon Risk in the U.K., the individual were backing in that business has successfully built a business inside Macquarie to a considerable size. And he's now looking to do that on his own. And we're very comfortable that will produce great results over the near term. Let me talk a little bit about strategy at work, which is the next slide. We're always very consistent about our -- what we're trying to achieve and the strategy to achieve that, to achieve that goal. We're trying to build a great broking business. And part of our strategy is to look at new regions, but we do it in a very considered way. We take a small sort of footprint and get a small footprint into a region. And then if that's successful, we grow a little bit. And if that's successful, we start to accelerate the growth. That's the same approach we've taken in Hong Kong. We're feeling very confident about what we've done in Hong Kong. We've got some great businesses and some great people in there. But it was from a very small starting point where we gave ourselves the opportunity to look at the individuals and to look at the marketplace and have now, as I said, taken that next small step. And we will sit on our investment now for a period and make sure that it is performing. But as I said, the early signs of that are really positive. Strategy at work, the second slide for strategy at work is one that I'll let John Dwyer talk to, I think, you're on the line, John? I think John might be muted. So the reason we've decided to include this one, focus on this one is that it's something that we think is an illustration of the strength of PSC as a product of its capabilities in the broking marketplace. This is a situation where we've had a business. We've been involved in a business that has been an authorized rep under connect. It's an individual we know and think he's really capable. But it's too small for it to being something that we could bring into the business and start to cause to be another freestanding branch. But we found something that we could marry in with it. The compatible people and compatible client bases, but also a part of it that we thought could be grown a little more quickly if it was bought in and married up with it's -- with another opportunity. And we have now successfully executed that to create a new branch in New South Wales. Now they're incredibly complex things to do. Again, they're simple businesses. But the complexity comes from the people and making sure that when you're bringing those businesses together that they're compatible and that quickly attached to a common goal, the agenda of building that branch as part of helping to build PSC. And getting people familiar with each other and comfortable with each other and working at who's going to be the leader of that branch and getting that individual to be comfortable with that broader leadership role. That's the complexity of our business, the complexity of people. As I said, a simple business, but because it's a people-based business, it's the complexity of people. But being able to execute on that has seen us create a branch that should deliver more than $1.5 million of EBIT at a very reasonable capital price for the business. The last slide on general performance, just segment results I'll hand back to Josh to pick up from here. But the point we're trying to make here is that we do have -- we're in a simple business. The simple economics of it, as I said, the complexity of it is in the fact that it's a people-based business. But it's not just a simple business. It's a great business. It's got all the attributes that we keep talking to people about that its recurring revenue. It's a business essential as long as you're servicing your clients well, you've got a really high retention -- high retention rate. And even in difficult times, there's, often tailwinds for our business that would be headwinds for other businesses. And we've seen that again in this period and the results reflect that. Josh, do you want to talk a little bit about the segment results?

Thank you. Yes. We'll just go into a little more detail on some of the results. We spoke about earlier. With regard to the distribution businesses, the growth -- sorry, the EBITDA growth there was 15%. There was good acquisition-based growth, as I've touched on earlier and good organic revenue growth of 8%. Rates have continued to assist in the broking businesses generally, but in our experience at a slower pace. And in the network businesses, the numbers of ARs continue to grow. And the network continues to be a good source of acquisition activity. On the agency side, I sort of touched on before, that's grown very strongly, driven by Chase underwriting, where market conditions remained favorable and the team are doing a great job there. And I mentioned too, the travel business in a post-COVID world has bounced back strongly and very strongly in that. It's looking like it's going to be certainly larger and more profitable than pre-COVID, which is a great credit to the team to keep that business together when it was in hibernation. So we're very pleased with that result. As it relates to the U.K., a few parts there that we'll touch on. Paragon had a strong performance; in particular, cyber, the E&O/PI team and health care teams had very strong performances. There was a flat performance in the D&O or Executive Risks team as lights have reduced in that marketplace. It was a lower result from the M&A team on sort of lower transaction activity in the market over there. They're very well placed for an upturn in that market. There was constant currency growth of around 5% of revenue and about 7% EBITDA of constant currency level. They -- additionally, they had a strong USD was a good tailwind for Paragon in the period. As it relates to Carrolls, which is the domestic wholesale business, in sterling terms, there was 13% revenue growth on improved margins. So a great result as they sort of pushed out new products on digital platforms, which has been a key driver of that. Foreign exchange was a headwind for that business as it's purely on sterling-based business. The MGAs being Breeze and Chase, again, performing well, approximately up 11% in sterling terms and improved margins. On the Chase side, which is our underwriting construction underwriting business in the U.K., it's taken a little while for regulatory reasons. But we're looking to complete the insurance U.K. soon, which will be greatly improved the scale of Chase underwriting in the U.K. On the U.K. retail side, there's been steady performance there. And the integration is complete with the new IT platform, and we're well positioned for growth there. So moving forward, thanks. That's just some of the detail on the segment results. We've touched on the next one. Thanks for that. Just so the reconciliation between the underlying results and the statutory results. They're the usual adjustments here, nothing particularly unusual. As you all know, we sort of adjust out any fair value change, which is principally driven by BP Marsh, which was flat in the period, in terms of its value, noting that it's up over 10% since balance date. In terms of the charges, the main one is the fair value changes in our deferred consideration liabilities for acquisitions; they're up $4 million. That's basically cohort for the acquisitions are doing well. That needs to go through the P&L. On top of that, there were some noncash costs regarding our LTI plan and some costs largely driven by the acquisition activity across the group, probably a really pleasing result in all of that. I probably haven't touched on enough is the underlying earnings per share growth period-on-period of 17%. Moving forward, thanks for it. On cash flow, again, good cash conversion for the period, up 13% to $57 million, noting that the first half of the financial period is the seasonally stronger cash period for the group. So just to remind you on that, that cash flow has been good in the period. Moving forward, again, thanks, [ Fruatia ]. Just having a look at the balance sheet. We got balance sheet is in a very strong position. As you would all know, in March 2022, we did an $80 million raising. And we're pleased to say that 75% of that is either deployed or committed in our incremental acquisition strategy that I think all of you are pretty clear on. Tony has discussed some of those. And the acquisition pipeline continues to be good. Those acquisitions have been cash funded, but do remind everyone that in our debt package, there was $83 million of undrawn debt limits. And sort of moving forward a little bit, just touching on that and funding capacity. One way of sort of showing that is the balance date leverage ratio. As we define it, is comfortable if you can use that term of 1.4x, which sort of shows the ability or the capacity we have for future acquisitions. We put in a scenario there, if you like, of a hypothetical $125 million in acquisitions that if we were to complete that would see us broadly at the midpoint of our gearing range. And again, it sort of shows the funding capacity that we've got there in front of us. And I will say just on the Tysers retail JV, we're continuing to work with AUB on that. And that's -- I'll hand back to Tony to wrap up and talk about the outlook.

Thanks, Josh. What we've given here is guidance for the full year. We're upgrading both EBITDA and net profit after tax. And that reflects our confidence in the second half. As we've said before, these are really good businesses. And we believe that the outlook is really positive. These numbers are pre- Tysers. Josh has just mentioned that we're comfortable that the -- we're on track to commence that getting the benefit of that joint venture from the 1st of April. It has been a long gestation period for a number of understandable reasons. But it has meant we've sat on cash a bit longer than we would like. So it will be good when that's done. And as I said, that's targeted for the 1st of April. These numbers are pre any contribution from Tysers. We continue to be really positive about the growth opportunities for the business, both other acquisition opportunities, but more important, really good uses of capital in the illustration being Bay Builders, which is obviously a smaller version of John's Ling does the same as John's --. And as I said, we're principally investing in it to foster the service that our clients can get access to when they're in the situation of needing those services. But we also believe that it's got really good organic growth opportunity. And we've bought it at a really capital efficient price and believe that we'll get a phenomenal organic growth out of that and same with Eldon. We're in a situation where we put a modest amount of money at risk in there and believe that it will generate really good profits going forward. So we've got good acquisition opportunities. We're starting to find good investment opportunities in either related areas or directly in broking, which is what Eldon is. And we believe that the strength of the business will go on seeing us delivering good organic growth through the balance of '23 and '24 and so on into the future. That's the benefit of us being very focused on what we do, which is we are a broking business. It's a business with simple economics. It's got very robust economics in the things that we've pointed to previously with recurring revenue and that good tailwinds of interest rates are a benefit to us, where they aren't to others and rising premiums. All of that means that a very positive outlook for the future. So that's all we've got to say. Any questions can we unmute and take any questions for Fruatia?

Okay. Why are you guiding to the lower to H2-H3 EBITDA growth? There's a question from Jason Palmer? Why are you guiding to lower H2-H3 EBITDA growth?

Sorry guys, can you hear us or anyone -- any questions from anyone?

I'll just unmute Jason Palmer. [Operator Instructions]

Jason, you can hear us, but we can't hear you. Do you want to text your message, throw to me.

He says, I'm on a computer. I've got a message here. I mean, Josh, do you want to read it?