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

Well, it's 09:00, and we'll start the call. I think everybody is in. So, thank you all for tuning in this morning. We've released the results to the market, and I'm just going to talk through the presentation pack that is now in the market. It's been a good half. We continue to grow and continue to build capabilities and continue to pursue the strategy that we've consistently outlined over the period we've been listed. And I think it's a really outstanding result in a number of ways because we've achieved a 12% EBITDA growth, notwithstanding some headwinds, some rate pressure in some key markets, particularly in Paragon. We've got some IT issues that we're continuing to invest in to provide future growth. We're now operating independently. We've moved out from the buying group that we were part of, and that itself has created some transition challenges. We've got a flat Aussie rate market broadly and got a bit of a drag from start-ups, which we're really confident will generate great returns in, particularly starting in the '25 financial year. So, a really strong result, given all of -- the aggregate of those general headwinds. EBITDA up, as I said, 12% but done in a period where we're laying good foundations for really strong future growth. Net profit up 6%, the consequence of slightly higher interest rates on the borrowing and a change in the tax rate in the U.K. Underlying revenue up 15%. Earnings per share, up 3%, and the interim dividend up 10% to $0.057 per share. All of the work that we're doing at the moment and the acquisitions we've made through the period and the acquisition pipeline that we're currently working our way through, has given us confidence to upgrade our forecast for the year to an underlying EBITDA range of $125 million to $130 million. I should note that that's assuming we're making those estimates based on the assumption that we make no acquisitions in the second half. If we do, they'll in turn, make a contribution to that second half and therefore that full year number, and we have got a number of acquisitions well progressed. As I said, we've had some tailwinds, rate declines in some markets, particularly in the U.K. You'll see that the Paragon result is down a bit for the half on the prior corresponding period. That's been budgeted. That was as expected. It's a great business, has been a terrific business to have merge into the greater group over its life, but having one of those small reset moments. They've got strong client growth. So we know that it is just one of those reset moments. So the business is really well placed for a good half, for a strong second half. And more importantly, as we say each year is a foundation for subsequent years, a great foundation for both the second half and for the subsequent years. Josh, I'll hand over to you to get into a bit more detail on the financial results.

Yes. Thank you very much, Tony, and good morning to everybody. As Tony touched on, just adding some color to what he was saying. Got some more detail on the full P&L there. But what you'll see is revenue up 15% to $159 million, underlying EBITDA up 12% to $54.2 million. Underlying net profit after tax before amortization, up 6% from $37.1 million and statutory net profit after tax up 39% to $29.8 million. We might move to the next slide just to unpack that a little more. So, with regard organic growth, so a good period for our organic growth. So up $12 million. Revenue, up $12 million and underlying EBITDA up $2.2 million. Unpacking that a little bit, the Distribution businesses, so the Australian broking, the network and the workers' comp business had a really strong period. Organic growth, up 10%, which was a really strong result. The Agency businesses has had a solid result. Chase Underwriting Chase underwriting, the construction business, in particular, going well. As Tony sort of said, the U.K. was a little bit mixed. The Carrolls business, in particular, was very strong. The retail businesses were solid. And as Tony touched on, there were 3 parts of Paragon that were a little softer due to weak market conditions and pricing in the main, they being Cyber and E&O, where the rates have been coming off and the M&A market through the period was soft. So that was the driver of the U.K. position being down, which is a temporary position. The combined drag, if you like, of those 3 years was AUD 3.5 million. So, that gives you a bit of context to it. But the businesses are well placed going forward. Just calling out the FX position for the year. The Sterling did appreciate quite a bit against the Australian dollar, about 9% and about 6% against the U.S. dollar. So as you'd appreciate, there's a bit of a natural hedge between those 2. But this year or this period, there was a bit more of an FX movement that provided a benefit at an EBITDA level of about $600,000. And at a revenue level, it was a benefit of about $5.6 million. So, moving on, thank you, Farisha. So, this is the usual slide that we show, just to remind everyone about the very strong long-term track record that the Group has. It shows that we have a long term sustainable moat over economic and insurance cycles. And it really sort of highlights what we often talk about when we explain the business, which is strong recurring revenues at market-leading margins with good cash flow and good cash conversion. I think this slide very much encapsulates that. That's the next slide, thank you. So just looking a little bit again, a little deeper again into the segment results. We look at distribution. Distribution was up 18% for the period or of AUD 4 million. Really a strong result, 10% organic growth, which I called out before, the difference being acquisitions. So, the acquisitions across the period. We were busy. We did 9 acquisitions there. In terms of the acquisitions, sorry, I should have said earlier, acquisitions contributed $9.2 million of revenue growth and $3.4 million of incremental EBITDA growth, and a lot of that was strong performances from deals done last year, PSC AMGI and Turner Rawlinson. The main -- that's been a busy period there as well. The Agency business was up 11%. As I touched on before, the Chase Construction business had a strong period. It was up 12% organically. During the period, we completed the Ensurance Australia acquisition, as that brings a new capability and team into the group in the PI area. So we've rebranded that Chase Professional Risks and I'm really excited about the opportunities that that brings us. And also in Agency, the travel business was down a little, which has overall brought down the organic growth in agency a little, and the reason for that is we're investing in an enhancement to the IT platform that that's running on, which we expect will reenergize the growth there in the second half. Moving on to the U.K., it was up 2% overall. As I sort of said earlier, a bit of a mixed result, about AUD 1.5 billion was contributed from acquisitions in that segment. In particular, the Ensurance UK, Turner Rawlinson and Giles Gower's businesses. Organic growth overall in Australian dollars was minus AUD 1 million, which was predominantly impacted by Paragon. As I said, similarly with strong performances in Carrolls in particular, and the overall drag of Paragon was AUD 2.3 million and AUD 3.5 million of that were those 3 areas that we've called out earlier. So, the other areas of Paragon are performing nicely. So just moving on to the next slide, sort of gives a bit more detail and some numbers behind the story that we've just touched on. So moving on, again, Farisha and I'll hand to Tony to talk a little more about our acquisitions for the period.

So, as we've said before to everyone, we're starting to look around a bit for start-up and early stage investments. So, we're talking about early stage in the sense of ones where we think there's materially, if there's small amounts of capital at risk, but they've got really -- what we believe, really good growth prospects and, therefore, growth rates. Ensurance definitely fits into that. We've now bought both Ensurance in the U.K. and in Australia. The U.K. has, again, been a good acquisition, but it's in that bedding phase as is often the case with early-stage investments. There is a sort of a realignment of people and processes that can distract a bit from growing the revenue. That's certainly been the case in the U.K. Ensurance in Australia is fitting in well, and we're really confident of what it's going to bring to the business, again, particularly in the -- starting in the financial year '25, once they've been through that bedding down process. A few acquisitions in the U.K. In addition, one in Ireland, and we continue to see a very full acquisition pipeline. The same observation as we've made before that if you had a chart and you plotted the size of the profit and the price/earnings multiple on that chart, if they were the 2 axes. It's a very steep linear line. And where that leaves us, given we're quite disciplined about what we'll pay for businesses, that leaves us focusing on the smaller end. But that's consistent with the way we've built the broking business over a very long period of time, as Josh often calls it a brick-by-brick approach to it. And we're seeing a lot of good opportunities, both in Australia and the U.K. at that smaller end, and confident that we'll go on finding acquisition opportunities. We've got a number that are well progressed and we're hopeful will come through in the second half. Next slide, please, Farisha. I talked about the fact that we exited from the buying group that we were a part of during the period.. What that's caused us to do is to have a look at whether we can improve our productivity and also mirror some of the levels of service that have been available through our authorized rep network under that buying group. We've created what we call APEX PSC, APEX, and we're really excited about what we're finding as we roll out the development and implementation of that. Very significant changes have occurred in the IT industry, as we all know, one of which is the ability to provide services using outside providers to develop those platforms, has got a fundamentally different cost structure than it might have 5 or 10 years ago. And as we dig further into that, the opportunities for us to develop APEX to eventually, hopefully, even bypass Sunrise, but to start to increase the productivity in our broking business beyond what was available to the authorized reps as part of the -- when we were part of that buying group, has been a real eye opener. And as I said, very excited. It's going well. It's running well, and we're starting to talk to insurers about connecting with them directly. We're trying to give you some sort of sense of the idea of the success of that with this slide, with some sense of the volume of work that's now going through that. The other thing I've touched on is the startups and early-stage opportunities. We've just picked out 3 of these here. There's a number of others that are probably more in the early stage. But we've got 2 new underwriting agencies that we've started, one in Credit Enhancement and one in Plant & Equipment. Both are going well. Again, a drag in the first period because you're employing people ahead of getting the revenue, they're out marketing, they start to build the revenue, they then get to breakeven and then start to make a profit contribution. That'll probably maybe a small drag again in the second half. That's obviously factored into our forecast, but they'll be good, strong contributors in FY '25 year. Eldin Risk, we own 40% of it. We've got people on the board there. There was a Board meeting there. They're well ahead of the -- where they expected to be on customers. The business is, in some ways, a wholesale broker. So, you get appointed to the customer base, which are really private equity firms where you're trying to maximize the outcome for them on the coverage of their underlying assets. But each of those assets has a unique renewal date. So, once you're appointed by the private equity firm, the revenue flows as those renewals start. So, while they're ahead of where they expected to be on client numbers, they are still building the revenue base there. So it'll continue to be a bit of a drag on earnings, was through this half and will be probably in the second half. But again, that's in the forecast, we've talked about. Very bullish about the outlook. That client base -- the client base aggregate gross written premium for the insurance of the clients that they've appointed is already well in excess of $500 million. So we've got an involvement in the business there with very capable people in a good marketplace and they've got a good start to the development of their business plan. The next one is just a bit on Paragon. We've always said to you that one of the great parts about SME broking or middle market broking or the retail broking as it's called in the U.S., is that it's very stable earnings because what you've got is a mix of clients and therefore, a mix of insurance types. The insurances don't all move together in that there is a cycle, the rates go up and rates come down, but the motor insurance doesn't move at the same time and the same pace as, say, property insurance. And with retail, because of the mix of insurance types and the mix of client types, you're in a very stable earnings environment. We're setting the path where always got more exposure to rate in terms of its impact on profit are the areas where there's a concentration of classes. And we've always pointed Chase and Paragon for that. Paragon has got a good mix of classes, but it's more concentrated than a retail broker. There's 2 parts of that business that are facing some rate pressure at the moment. And again, we've mentioned this before, that's both rate pressure and relative rate pressure. So about half of Paragon's book is wholesale and half is retail. That wholesale piece, almost all comes out of the U.S. So risk coming out of the U.S. can remain in the U.S. when there's a difference between the rates and the -- or the appetite in the U.S. and the U.K. wholesale markets. And that's been a bit the case in some of these classes and also the rates themselves are down a bit. M&A is different. There's just been not a lot of M&A activity. So they're just -- their result is a product of the slowing in M&A activity in the U.K. and the U.S. markets. The M&A have probably the largest pipeline of opportunities that they've ever had. So a very positive outlook there. And the rate declines in Cyber have been going on for a couple of years now, and we think they're out there starting to get to the bottom of those. A great result in the other areas. It's a great business. It's been a terrific addition to the business. And obviously, it's profits up significantly even in this period over when it joined the group. Next slide. B.P. Marsh, we've always asked about that. Finally, the market is starting to recognize the value of the underlying assets, based on prices over the last week. Our holding in that is probably worth double what we paid for it over the 5-year period. So the returns are starting to reflect our belief in that area. We're not looking to exit it at the moment, but it is worth noting that it's a business that is performing well. The guy is a -- Brian Marsh, who's the person effectively is the Investment Fund Manager as well as Principal Owner of the business, is an outstanding investor, and that's been demonstrated, again, by some of the realizations of the underlying assets in that business through that period. There may be some fund returns out of that, which would be obviously helpful to our funding position. I'll hand it back to Josh just to talk about the statutory net profit reconciliation and cash flows and debt.

Thank you, Tony. Yes. So, just touching on the reconciliation between the underlying and the statutory position. Tony touched on, big part of that, the revenue that we exclude from underlying earnings or the fair value on our investments in particular. So B.P. Marsh was up materially in the period. It was about AUD 8.6 million. That's because they've done 3 divestments; 3 very, very successful divestments over the last 6 months. So, as Tony touched on, they've got -- the best part of sort of GBP 70 million or GBP 80 million in funding capacity. So, there could be -- they're looking at sort of increased dividends and capital returns for that, and the share price has reflected that. Also, we sold 3 joint venture, joint ventures that we were involved in for a profit of around a little over $3 million. So, that's on the revenue side. In terms of the expenses, just the usual suspects, really. There is $3.6 million of increase in deferred consideration. That's largely due to the good performance of those acquisitions, in particular, PSC AMGI and Turner Rawlinson. There was a $1.9 million charge regarding the implied option costs on our long-term incentive plan. There was an increased cost in professional fees relating to our acquisition activity. A couple of ones to particularly call out there is, I think we've said on the record as saying we had a really strong look at the Honan's acquisition in the first half that completed in November, and probably the other one to call out is the scheme of arrangement with Ensurance. Tony touched on the tax rate. The average statutory tax rate is up to 30% from 27%. That's largely the result of the increase in the U.K. company tax rate from 19% to 25% and a slightly higher contribution from the Australian businesses in the period. So, moving on to the next slide. Thank you. The cash flow remains good. So, I think as you'd appreciate, the first half is the strongest sort of seasonal half for cash flow. The operating cash flows were just down a little bit, from $57 million to $51 million. The reason for that is timing. There's higher balances in the working capital, in particular, higher cash tax payments and slightly higher receivables that you'll sort of see when we look at the balance sheet slide next. So that's just a timing issue in some of the movements of working capital. If we move to the balance sheet, please. So, there is the summary of the balance sheet. So a couple of things to call out. Again, you'll sort of notice between December '22 and December '23, the working capital balances are $9 million higher. So again, that low is the cash conversion, which should unwind and just be pure timing. In the period, we spent $35 million in gross cash on acquisitions and deferred considerations. So as said, they're $25 million in net cash because the difference being we purchased some cash as part of the Ensurance acquisition and made -- got about $5 million from the sale of those joint ventures. But probably the main point on the balance sheet is the Group gearing position is strong in the sense that the leverage is low, and we'll have a look at the next slide shortly. But -- no, that's okay. It's okay. So, this is illustrated here. So our leverage ratio is less than 1.5x and our stated range is 2x to 2.5x. We've just presented a scenario there that we've got capacity, probably $150 million of acquisitions, in a hypothetical sense, would get us to a leverage ratio of bit less than 2.4x. So that shows the strength of the current balance sheet and funding position. If we look at our pipeline now, it's strong and it looks and feels very much similar to what it has over the last few years. So there's some good opportunities there. Probably an important point to make is that all funding for those can be achieved with our increasing free cash flow in the business and debt availability. And I'll hand back to Tony.

So, as I said at the start, a really strong result. I think it's a result we're really proud of, given that it's been achieved notwithstanding some headwinds, some that are market driven and some where we've decided that we're going to invest in businesses to grow, whether that's -- or invest in startups or new capabilities that initially have a bit of a drag on the underlying earnings, and that's important for us. We've said that we're trying to be more of a 3-legged stool with organic growth and acquisitions and start-up and early-stage investments. And we're seeing the benefits of that in things like Eldin Risk where we've made a move to get 40% of the business that we think can be a really significant contributor in future years, but it is a bit of a drag in the current period. t's also -- the business is in really good shape. It's a strong result. That's an indication of the capability in the business, which continues to grow. We're seeing that, particularly in the U.K., the retail group grows in size and strength, and we've got Pat Miller over there now running that retail area. So he's taking the expertise he's built in Australia and building a good team inside that. We've got some really good businesses that we've acquired there with good people at the front serving clients, and it's got that same client-first approach that worked so well in Australia. So we've got a good result, a strong business and a consistent strategy that's paying dividends. We've increased the guidance going forward. As I said, that doesn't include any acquisitions we make in the second half, and we've got some that are well progressed and we've got a really strong balance sheet. We've got a dividend payout ratio now that leaves us with about $30 million of free cash flow each year. So it's both a good, strong balance sheet and a good amount of retained cash flow to fund those acquisition opportunities going forward. So, hopefully, all of that gives everyone comfort that the outlook for the business, both in the second half and for this full year and for subsequent years, remains really positive. Maybe that's a good place to stop and get some questions.

So, if you have any questions, please send them through via the platform, and we shall have a look at them and respond.

So, one of the questions here is, now that interest rates are high, have you increased the required rate of return for acquisitions to reflect the increased cost of capital? We've tended to be very cautious about how we spend money. We try to be very disciplined about it. We're probably still looking at investments that are -- we're hopeful of buying things in the 8% to 10% range and are consistently doing that and some even better than that. We tend to run out of sort of interest if they sort of sit outside or sit above that range. If there's a really compelling reason to be above that range, for instance, they've got significantly higher growth prospects, we'd have a look at it. But we've always taken a view on acquisitions that if we think about this as sort of a through the cycle cost of capital. And that's reflected in that discipline about the price earnings multiples that we've been paying. We've always felt that the interest rates would rise or cost of capital would rise. And we've e, as I said, maintained the discipline that allows us to continue really unchanged in that sense about the way we think about acquisitions. The other is that we're very good at integrating them because we also make the integration task much simpler by that brick-by-brick approach that we're talking about. Because a lot of this is merging those businesses in and getting people to understand the sort of the values, beliefs and disciplines of our business and getting them to own them and believe them in the way that the existing business does. And that's much easier if you're bringing smaller groups of people into a large group who've already got a buy into those values, beliefs and disciplines, and that maximizes the return from these opportunities.

I'll just add some color on that. So on Slide 9, we've given a little bit of a breakdown of first half's acquisition activity. And to Tony's point, you sort of see there, on balance, those 9 acquisitions that we've made, the average multiple we've paid is right in the middle of the 9x. And that's sort of where we're seeing the market pretty consistently in the smaller acquisition space.

So the next question is, Paragon, how much premium rates, [ make sure of ] what you have planned to spend? [Technical Difficulty] So, can you go right to the top? So the next one is seasonality of profits. What's the skew FY '24 to the second half due to recent acquisitions. Look, it hasn't tended to change much. There's less skew first half to second half in the U.K., but Australia remains skewed to the second half. There's no real change to the split between first half and second half from recent acquisitions. Josh?

No, the second half has always been and remains the higher profitability half for the reasons Tony says, particularly driven by Australia and the acquisitions that are recently done have not skewed that in any sort of meaningful way.