Steadfast Group Limited (SDF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Steadfast Group First Half '23 Interim Results Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Robert Kelly, Managing Director and CEO. Please go ahead.

Thank you, and good morning, everybody, and thank you for joining the call. This is a very important call from our own point of view as we're 9.5 years from the date when we started this business and getting towards the tenth time we report an annual report. So we're very keen to make sure that the trajectory of what this business set out to do back in 2013 is demonstrated. So I ask you -- I'll refer to the page numbers on the deck. So if you go to Page 4, you'll see that -- that's our track record since we went to the market and said, we want to be a publicly listed company, and we want to show EPS growth and we want to show steady and accretive growth that you can rely upon. And so I won't bore you by reading each 1 of those out there. But the litmus test of the success of this business is that when you look at all of those 9 graphs that you've got there, that they are growing progressively, that they are growing in line without any erratic movement, and that they are steady and reliable if you want to invest in an organization, that's in insurance broking, underwriting and distribution. You'll see on the -- sometimes I'm asked on the bottom right-hand side about insight, and saying, did you -- have you not done as many as you have. We've done a huge amount of integration. So sometimes when we have 2 or 3 brokers and we merge them together, the amount of brokers will go down. But we -- as you can see, we're continuing to grow in sight. And it's an outstanding product and continually improving. It's a living piece of software that we continually improve. So the client trading platform, just to the left of that shows you from its infancy stages where it's now progress to the $1 billion-plus mark on a contestable platform. So that's really, as I said, though, the litmus test of steadfast sits on that page. But that's what we promised and that's how we deliver, and that's the history of our delivery and what we intend to do. So getting back to the first half, if you go to Page 5, NPAT went up 18.2%. Our EBITA rose 22.5%. And NPAT, as I said, compared to last year is $90.2 million as opposed to $76.3 million. The NPATA, up 18.8%. The diluted EPS NPAT up 7.7%. And of course, the fruits that we bear of our efforts is the half yearly $0.06 per share dividend that we pay. This is exactly what we set out to do. If you look at then the statutory earnings, they're slightly down on last year. Basically, it's very simple to explain. We paid more of some of the businesses who exceeded what we expect them to do. And under accounting terms, we have to take that off. It's a great result. On the right-hand side, our equity brokers and -- including the full network, aggregated underlying EBITA of 21.9% outstanding. The underwriting agencies, again, on an aggregated view, EBITA up 19.1%. Our diluted EPS is impacted by the capital raise we do, but that levels itself out over a period of time as the revenue comes in from the acquisitions that we bought. Our acquisition growth and completed all EPS accretive acquisitions net cost of $449 million, including the Insurance Brands of Australia. We're on target to complete the Trapped Capital acquisitions we predicted in FY '23 of $220 million. And we already, at this stage, completed about 80% of those in this financial year. From a future growth point of view, [ Stephen ] still has $227 million to fund acquisitions. Our distribution network is outstanding. Our total distribution at GWP calendar year was $13.4 billion. It's amazing when you think about that, the proportion of that is of the Australian intermediated and MDA market. So turning -- there's a little footnote. They're saying PSC is -- we're often asked about PSC and they're friends of ours, but they grew and they no longer see their flower and flower needs to award return and advance [ self-esteemed ] itself. So none of these figures include PSC, which effectively haven't been part of us since July last year, although we have helped them by keeping them on our client training platform through to May this year. We're friends. We're not enemies. But as I said, it's no longer receive PSC, so it has to grow and feed itself. I'll refer you now to Page 6. This is the reference to Trapped Capital. And as I say, we are -- in the first half of '23, our -- we had the IBA acquisition and we did completed 27 Trapped Capital acquisitions. And as you can see there, the ratio looks towards the ratio, what we'd like to buy well ahead. In the second half of '23, we've already completed 5 acquisitions, and we've got 10 term sheets out and we're completing due diligence on those acquisitions. But further 3 term sheets are between the stage of acceptance and due diligence, and there's just under 50 other opportunities coming in there. So if you look across that line, the estimated acquisition cost bears up to the ratios that we have to keep and still able to do. So we've still got $326 million Trapped Capital pipeline of opportunities, and that we've deployed $177.7 million this year. Reflecting on Page 7. And this is important because whenever you set out to do something like we did back in 2012 and then slowed in 2013, and you're going to go on an acquisition trajectory, then you're only as good as your performance, a bit like a football guide. You can win this week, but next week you've got a win as well. And our track record has proven it's successful. We complete accretive acquisitions to our learning and a long-standing and dedicated internal acquisition team worked very hard on this. We're able to keep together the nucleus of the people that worked on the flow. So we've got people now that have worked for 10 and 11 and 12 years and understand exactly the DNA of this business, what we're trying to do. So when due diligence is undertaken, they satisfy the criteria that's been successful for us over -- in excess of a decade. Our acquisition growth is -- has been complemented by a track record of continued organic growth. If you look at what we would try do is go to buy, we try to maintain the EBITA and in fact, we exceed the EBITA and we improved the EBITA. But then we work on the organic growth with a lot of the services that we can provide into it. In aggregate, our acquisitions have delivered at least the expected EBITA at the time the time we acquired the businesses. It's actually a system that we look at in terms of capital we deployed, the EBITA that we bought, the organic growth that we're achieving through. And so that we monitor that on a monthly basis. And then the bar charts down there give you some analysis of what that really looks like. The next slide on Page 8, is a really important and strategic Steadfast's pie chart. It's in my view something which I know the whole company here is exactly excited about. The acquisition team is and -- if you look at FY '13 at the IPO, we actually purchased equity brokers, which were about 25% of the GWP. So we had $1 billion that we purchased. And the network still had $2.9 billion outside it. So that was the status quo. When we came to the market, we asked to support us and you did and that's what it looked like. Then if you go to the right-hand side and you look at our FY '22 pro forma, we're on track to do $11.5 billion. Again, it excludes PSC. So we want no confusion in the market about our turnover and includes PSC. That's not derogatory statements. It's just a clarification. You might call it a cleansing statement to say. This is what we've got. Now this is a fascinating pie chart on the right. Of course, it now knows that, that $1 billion that we had in 2013 is now $5.2 billion and 46%, which is an amazingly transition and shows you that the acquisition strategy and the way we run a network absolutely pays dividends. If you look to the bottom there, there's another 8% identified in our Trapped Capital acquisitions. But still on the left-hand side of that pie chart, there's still $6.3 billion of GWP in the network that eventually, we want to do some sort of merge, buy or divest. And we're here as a friendly and reliable source of acquisition for those people. So just on Page 9. There's a little bit of a summary of what we see about the world and heading up with the reinsurance market, you have to be in another plan not to understand what's going on over the past couple of years with reinsurance reaching an incredible [ presenter ] in this particular time. The rate of attritional and catastrophe claims has not ebbed. If you go back to 2011, when the Brisbane floods hit, that was in plan that something like that could happen. Since then, there has been no plan, no parabolic curve that you can rely upon, no actuarial projection to say weather has changed dramatically. And as such, reinsurers are requiring higher retention and significant rate increases, absolutely significant is an understatement. The rate increases and the retentions are amazingly high. What does that mean? Well, the cost -- the escalation of costs to the Australian insurers and the ability to have to retain more risk is impacting -- impacted by the inflation of claims. All of that adds up to, they have to keep driving price. And I think you can reflect upon the statement that Andrew Horton made at the QBE results, that say, they have to drive price. And we're very fortunate to have a couple of great MGAs that we run with QBE. And we're very much aware of that, and we work side-by-side on that, that when prices increase, for the cost of insurance, we have to unfortunately drive price through the MGAs. And that means the consumer pays more. But it's a fairly simple system. Just on PSC, that has been part of the Network since July '22 and they're not included in our GWP for FY '23 and beyond. And as I said before, it's spirit of cooperation, they're friends, okay, we've kept them and allow them to stay on the client training platform until the 31st of May this year when I believe we've got systems, which will be able to take over that business. The thing that everybody worried about, including ourselves of the quality advice review, but commission or fees seems to be pretty well accepted, it's the most effective way to remunerate people to distribute general insurance placement. However, work has come out of pain and show where it is, the disclosure remuneration is essential -- the consumer should be aware of the total remuneration. And then as you see the third bullet there, complete remuneration is not in the consumer's interest. And then the inset there is, in our view, conflicted remuneration is volume-based. If you get volume-based commission, that's contracted. For the SCTP, we continue to increase our product and broker participation. We continue to increase the policy wordings and the integration capacity to onboard insurers more effectively. We're now finding that insurers all around the world, and we work on a world market to understand this, are now accepting that the ability to communicate digitally with distribution has to be made more simpler. In the old days, the insurers will produce a chunk of system that would allow you to do some things with them. Now in modern terms, the API systems now are starting to be rolled out all around the world. So the ability for us to get the SCTP into a range of insurers will broaden out over the next 18 months from that point of view. Remember, it's important part of our strategy to continue the development enhancement of the client trading platform. We always -- we've always been asked repeatedly about what we will do with the assets of the client trading platform. I'm pleased to tell you that it is still an incredibly viable and world-leading technology. There's nothing out there that does exactly what it does in the world all around the world. Okay. So we continue to increase the product and we continue to look at how we can apply that internationally. So over the last 3 years, more particularly, in the last 18 months, we've been looking at what we could do with that system and what we could do with the software. So we've now formulated a view. And as we've spoken before, Sam Hollman will go into the role of CEO of our international assets, and spearhead this part of what we're going to do. The reason we're not elaborating on at this stage because it's a little wider than our first thoughts about what we could do with the client trading platform. And when we formalize what we're going to do there, which will be towards the end of this year, then we'll share it with you. And I would say, by the end of calendar year '23, we're in a position to tell you what we feel, what we've done as a result of probably 5 years investigation, 3 years and more particularly 18 months of intense. So obviously, on the ESG side of the business, it's crucially important, so much so that we had -- the building that we operate here and we have 5 floors in Bathurst Street, we had -- we considered whether we could stay in this building. So we have a complete evaluation. We own those 5 floors. We have a complete evaluation done externally to find out that this building is actually okay from the CO2 point of view. So we don't have to move. But we are very keen to have a carbon-neutral position, and we're very keen to make sure that it's workable and that is scalable and that we can use it in head office in our equity brokers. And then flow that through to the networks as they're queried about what's going on in the world and what they're doing, they can rely on something that we spend an incredible amount of time and going forward. So if you look at Page 10, the broking industry -- the Broking division has had sustained growth. GWP grew by 14.7% to $5.6 billion. 11.5% of that being organic growth. Price increases across all the nonstatutory lines continue and volume increases was circa 0.3% -- 3%, I'm sorry 0.3%, we were improving it -- 3%. Network GWP is 86% commercial lines and 14% retail. So if you just go across to the right-hand side to the square box there, you'll see that we had 11.5% organic. Again, we point out we got growth in the AR networks of 2.9%. This is an ever-increasing part of distribution in the Australian insurance industry, and we are players in that. And then, of course, 3% -- 0.3% -- I'm trying to get it right this time -- 0.3% was attributed to new brokers targeting before they've been 9%. Operationally, as you can see, we've got 342 brokers in the Australian network, 53 in New Zealand network, 22 in Singapore. And we continue our investment activity in the network from first half '23. 20 new equity holdings, including bolt-ons and 2 step down. Remember, when we do step down, that's bringing people into our businesses where we own equity and giving -- and selling them equity. And of course, that means we're going to get a reduction in EBITA for that percentage we do. So we have to pick that EBITA up and when we're getting organic growth, it's a great system. We've got some wonderful partners in it, and Steadfast now has equity just in 70 of our brokers. Client trading platform for the GWP, plus 22% on a rolling 12-month, just $1.4 billion in the first half, but just under $560 million. Steadfast equity brokers, including the network, an underlying EBITA of $151 million or 21.9%. And if you want details for that, have a look at Slide 18. If we go to Page 11, this is the underwriting agencies. And people keep saying to us, when is this going to slow down? When is it not going to be good? And I have to tell you and explain to you that as the insurance companies have to raise prices and they have to be more restrictive about what they do, then they have to look at a portfolio on a portfolio basis, and underwriting agency has delegated those right in specific areas. So it's a -- they have the agility to be able to say yes or no to something without having to go through some of the ramifications that the structure of a general insurance company has in getting its authorities pushed through. So what happens in hard markets? The agencies become agile, the insurers become restrictive. And then the brokers know that they go to specific underwriting agencies to get underwriting expertise and get placement or not placement. They don't get micro around, and then they can come back. So these agencies continue to grow as what was a side bar 10 years ago or 15 years ago is now a mainstream blade for general insurance brokers to place a whole range of businesses that will never go back to the insurers that will still remain strong. So highlights. Steadfast underwriting agencies grew 18.8% in the first half to just -- to the $1 billion mark. That was driven by price, but also driven by volume. People are coming and saying, "Hey, can you do this business and in circumstances where they've got a correct delegated authority, they will do the business. Property line pricing remains strong and capacity constraints in certain lines mean that insurers are saying we're not going to do that. And then an underwriting agency, we'll have capacity in that and has the ability to do it. There are opportunities for agencies as insurers to repositioning product lines, and that means that the distribution will approach agencies after being sort of trusted, will turn back or slowed down by an insurance company. Underlying EBITA of plus 19.1% of $82.1 million. We're very fortunate that, that was made up of organic growth. You can see on the right-hand side there, a 15.2% (sic) [ 15.6% ] and from acquisition growth of 3.2%, giving us the 18.8%. So the operating highlights. We continue to roll out robotic operations contained within the agencies to do the maintain work that more efficiently in underwriting agency pricing and loan business. Long-term strategy, we're closely aligning our capacity to provide for technology and continuing a strong service effort. People will come back to you if you answer their questions quickly, and you can give them a solution. We benefited greatly from the price hike from the strategic partners. And also, we've gained market share because of our expertise. Participating on the client trading platform, we've got 5 product lines, business pack commercial property, ISR, Strata, Liability and Professional Indemnity. They're not completely full. We are backfilling other insurers coming into some of those lines. The Business Pack is pretty well full. We're bringing new player on to that at the moment. It's designed to allow people who want to come on to compete on a contestable platform at a fixed commission rate where there's no volume involved. The spin-off for us is the second last bullet point there. We have the best data analytics on over $1 billion worth of GWP, and the Australian market is unbeatable. In fact, the insurers come to us to ask us about their portfolios, and we can tell them instantly, it's live data. It operates all the time. It's 24/7, and we are continually enhancing what we can deliver from that point of view. So last point, 29 agencies, over 100 niche products, we have a look at Slide 38, that will give you an idea of what it looks like. Remember this, very importantly, all our underwriting agencies are available for the entire market. There are nothing that we do, which is exclusive to Steadfast. So they have to get out and be competitive for everybody in the market and provide service for our competitors. And that's why we've got the largest group of underwriting agencies in Australia because we cater for the entire market. Just on Page 12, that's an analysis of the current insurTech. It's pretty simple. It's a contestable platform. It serves the consumer really well. The product -- the policies are aligned with what we found in our claims triage, what needs to be clarified, what -- how we take ambiguities out of certain sections of the policy. So a client trading platform policy is a far superior policy to a policy that you can get down Sunrise Exchange. It's tailored based on a dozen years of our experience with our emissions program and our triage program to exactly make sure that the consumer gets what they expect to get when they buy a client trading platform policy. We do remain focused on improving the client trading platform. We continually work to automate the back-office rating systems with the insurers that's slow because they have so much legacy systems that they have to work with, and it's a very difficult thing. But the next product line we're rolling out, for instance, is Farm. So 9 insurance lines, 17 insurers and underwriting agencies are partners on SCTP. INSIGHT has 185 live brokers just under 5,000 licenses. With an extra 22 brokers lined up to be converted and 68 others that are in discussion with us. On the right-hand side, we've done 8.6 million quotes through it. We're just under $560 million first half. That $560 million first half have been put through growth of 22%. Last year, just a rolling 12 to 13-month $1,046 million, an annual growth rate of 16%. You can see the bar chart demonstrates that rate effectively on that point of view. So the good part is on Page 13. And I think this is outstanding. Our interim dividend is up 15.4%. So it's $0.06. It's tremendous to see that all of the hasten talk about the market and how it's going, going forward and prices are rising is demonstrated in the fact that we are able to produce profits that allow us to distribute those profits back to -- there's no discount on our DRP. The ex-dividend date is 27th of February. You can see Dividend record for 28 February, DRP, 1 March and payments on the 22 March. And then on the right-hand side, you can have a look at the performance of our share price, and I'll refer you back to Page 4, and that's what we're in business for -- to have capital provided by the public and to afford the public by producing profits. So I'll now hand you over to Stephen Humphrys to give you a fun part of this and run this financial strength.

Thanks, Rob. I guess [indiscernible] who's followed insurance sector to understand that we've had a very strong premium rate rise. And that, together with us executing on some of those Trapped Capital programs we've been talking about does help us lay down some pretty strong numbers today. As per usual, on Slide 15, we start with a reconciliation of underlying results to stat. The prior period had a number of significant one-off profits that we called out as nontrading. This year, they were not so large. So whilst you have a reduction in statutory earnings, you still have that healthy increase in underlying earnings. As per usual, we strip out our mark-to-market profits from Johns Lyng investment. As part of our Trapped Capital program, we acquired further interest in our associates, we now become subsidiaries. And we removed the profit that resulted from the revaluation of our initial interest in those associates. We also remove any profit on sale of businesses or any tax in costs that we've incurred on those transactions. We also had a loss on some earn-outs, which means we ended up paying more for the business than what we originally expected because they delivered more profits than anticipated. So it's probably the best $9 million we could say that we spend. Just going through to Slide 16. We turn now to those headline underlying results for the first half of '23. It's a significant uplift in earnings with strong increases on every metric. We recorded revenue increases of 27.2% and 22.5% increase in EBITA. Those increases were the result of both the hard insurance market, together with the acquisition growth of which insurance brands was the largest. The Trapped Capital program obviously contributed strongly in that acquisition growth as well. There have, of course, been cost pressures, which we've talked about before with a tight labor market, meaning significant pay rises that we recorded on 1 July. And also a full return of a fair bit of discretionary spend being the marketing, convention, sponsorships, travel and entertainment. We've effectively now, if you like, rebasing the cost base to what it used to be. And given that we had the 12 months ago, that wasn't there. We obviously had a little of extra spend that we knew was coming through. So probably about $5 million really returning to those expense lines in the half. Given that we had second half '22 seeing that return to spend as well as first half '23, we don't anticipate that expense line to be growing as much in the second half, which means that the revenue growth rate and the EBITA growth rate would converge as we progress through this next half. We also recorded, as you expect, higher interest rates on some of our debt facilities and the amortization of our customer lists, meaning our NPAT rose 18.2%. The earnings per share was up 7.7%. We had a call on the last time saying -- asking about our methodology. There recent alternative methodology, which we could have used, where you spread the share cost increase over the -- just 6 months that actually would have meant we would record a 9.9% increase in our EPS. But whichever way you use, there's no calculation on the full year impact ending how you calculate the growth in each of the 6-month periods. Importantly, we've previously guided to you that our earnings per share growth will be skewed to the second half, given we got those discretionary spend returning to full swing in the first half '23, as it was in second half '22, so less drag in our future upcoming second half. Secondly, we adjusted the wage base, meaning those additional lease accruals hit immediately in first half '23. Insurance Brands, like the vast majority of our brokers, is more heavily second half skewed with the strong June sales. The uplifted rate environment has a more meaningful dollar value impact on our second half organic growth. And of course, we raised capital upfront and deploy it through the year on our Trapped Capital. So the earnings in first half '23 will be proportionately lower than the second half. So this, together with a further hardening of insurance premiums, the strong January result meant we were able to upgrade guidance last week and uplift our full year EPS range from that 5% to 11% bracket to that 10% to 15% bracket. Price rise that we're seeing, we originally forecasted 5 to 7.5 type rate increases that's now coming through at more of that 7.5% to 10%, and we're going to assume that, that absolutely carries on through the rest of second half '23. We also saw some good volume growth that Rob called out there, 3%. There's been no signs yet of any diminished SME sector in the Australian economy. So our current forecast assumptions on acquisition growth metrics remained broadly in line with what we told you in our original guidance. That is, that we will complete the $220 million of Trapped Capital acquisitions in this financial year. So if you're going to review the guidance that we gave originally in August when compared to the new outlook, the key reason for the uplift is that our original forecasted 6% to 12% organic growth is now revised upwards to that range of 11% to 16% based on the first 7 months of trading and that expectation of continued hard market conditions. so going through to Slide 17. This slide dissects our 22.7% EBITA growth into some of the key components, which we've shown there. Organic growth, 9.3%, acquisition growth 13.2%. We've talked about the strong rate environment. We've also had interest rate rises on our deposits, just as a side note, around about $7 million increase from those interest rate rises compared to about a $5 million costs on our borrowings. So a nice little tailwind for us, given we've now finished some of our hedging, it might be more like a $7 million uplift from the second half and $6 million expense. So still uplift going forward.

It's still a natural hedge.

Absolutely a natural hedge. In fact, a positive for us overall. We talked about the cost increases, particularly those corporate office costs coming through. So even though you do see quite stronger growth rates in the broking and in the agency slides, we're about to show you those other costs do come through here. Obviously, we had a little bit more IT spend and a little bit less capitalized on the balance sheet. That comes through here on the organic growth. So you actually have the overall growth rate there dialed down to 9.3% overall. The acquisition growth includes the financial results from over $150 million of Trapped Capital acquisitions done in the first 6 months plus insurance brands at $275 million -- or $276 million plus that $25 million earn-out plus the run rate, of course, from prior year acquisitions. Importantly, we should put on record insurance brands just like Coverforce in the prior year, have delivered the underlying results in line with our purchased EBITA expectations. . So we currently anticipate paying a large proportion of a full payout of that $25 million deferred earn-out for Insurance Brands, that was dependent upon their delivery of the FY '23 results. You'll recall that we negotiated a defense mechanism with that earn-out trigger for up to $25 million of the purchase price. We also received a healthy increase in earnings from Trapped Capital as we closed out a number of acquisitions pre-Christmas. As you saw from what Rob said, we've done effectively a transaction a week, that's been a pretty busy time. That $177 million that we spent to date as of today, it was around about a 10x EBITA multiple. And so we do anticipate hitting and maybe exceeding that $220 million target for FY '23, given that healthy and increasing pipeline of opportunities. Effectively, at August, we told you about $400 million of opportunities, we've now trued through some of those. But in total, that $400 million has now risen to $500 million of opportunities, of which we've now executed $177 million. However, until such time as we do actually choose through those ones, we're not yet prepared to uplift that guidance metric around acquisitions, let's complete that the remaining $43 million first. Acquisitions that we have done this year would deliver another 4% growth into next year. So that's now being factored in for us. The seasonality for our earnings, we think there is a -- as we said, a strong second half coming up. We think around about 44, 56, if you were going to the midpoint of the guidance, assuming there's no further, let's call it, major corporate transactions beyond the Trapped Capital that we've talked about. Slide 18, we go through to the results for the broking and agencies as if we own them all 100%. We've taken out any profit shares to analyze the position more consistently. For the brokers, you see that we've noted 77% ownership up a couple of percent, particularly driven by insurance brands being 100% ownership. And that's really made up of 72% of pure broking and 100% ownership of our network. There was 11% organic growth in the top line revenue as well as on the bottom line EBITA, so in line with those GWP movements. Hard market conditions, obviously coming through, we've talked about the expense increases coming through. Contained in that top line growth is a 3% policy can increase, so a good uplift in volumes. In addition, we had that 12% growth in revenue from acquisitions with 11% increase in EBITA. We expect the margins to slightly improve across the full year with the above inflation rate premium rises counteracting the slightly lower increased cost base coming through in the second half. Going through to Slide 19. The agencies from which we own roughly 91%. As for a fifth year in a row, continue to trade ahead of expectations throughout this period with solid performances across most businesses. Organic revenue growth of 19.3%, a strong result, 17.7% growth flowing through the bottom line. Hard market conditions strengthened further. In our large businesses, we were probably the forerunner of the price increases required from insurance strata in particular. For some, they continue their volume expansion with great opportunities to win business based on that superior service on the niche products. They have continued to implement those process enhancements from AI, that Rob spoke about, but we've also had to manage the increased compliance and regulation costs. So we do anticipate a small decline in margins, but not enough to mute this strong uplift in underlying profits, of course. Going through to Slide 20. Our business do convert profits into cash. We had over 100% of our $111 million NPATA converting into cash. And the chart details how we calculated that $129.6 million worth of cash flow from operations. Our first half is always seasonally strong because we collect those large building months of June and even May into that first quarter. Our debtor days continue to be equal to or better than the historic pre-COVID levels. I would note our premium fund business has gone superbly well. The collections have continued again without concern, which we think is another great test for SME business and where they're up to with their cash flows. So again, significantly better than pre-COVID lockdown levels. And of course, the $60 million worth of free cash flow, we have again well and truly invested into our ongoing acquisition activity. In terms of our balance sheet on Slide 21. You know that our actual position activity was partially funded by the new capital raise. Thank you for supporting us, the shareholders. We had obviously some from the free cash flow and some finance through debt. As of today, we've utilized $433 million of our $660 million debt facilities, leaving $227 million plus free cash flow for future acquisitions. We do, of course, have an additional $300 million accordion facility we could activate if required. Those facilities extend partly November '24, but also the November '26 that is shown on the slide. I've talked about them being hedges before that they've -- most of those have now unfortunately finished, but there is still $50 million, $60 million that you still hedged. Our gearing ratio, importantly, is fairly conservative 19.1% when we did the capital raise, we took 17% with the latest round of acquisitions, we are now 19%, could we debt fund all the Trapped Capital acquisitions from our $227 million of debt capability right now, and gearing ratio would go to more like 25%. I think that's probably for me. I will hand over to Rob.

Thanks Stephen. Yes. Look, just to conclude, before we get to questions, Page 23. I mean from us is a hard-working company and a group of people that dedicated to us. It's wonderful to upgrade the guidance to $420 million to $430 million on an EBITA basis. And then the NPAT from $198 million to $208 million, and then the underlying EPS 10% to 15%. These look like [ growing ] numbers. I can tell you, these are difficult numbers to achieve. These are numbers that require the whole mechanism that we operate this business on to fire and for every individual sections of the business to interact with 1 another and go forward. But we're pretty proud to announce that updated guidance with -- and again, the NPATA from $242 million to $252 million. We're proud of that, and we think that we continue on and the business is extremely strong from that point of view. There's some caveats there. The guidance is subject to continued premium rate increases by insurers. I can tell you I've been saying that for 3 years now, and there is response coming. Completion, of course, of the balance of the $43 million Trapped Capital, that's an imply. No economic out trends or any global uncertainties. We don't know what impact that could have at the moment. We're not seeing any of that. And that the key risks that set out in 48 and 49, that's the caveat we put over there. But we -- our organic growth has exceeded our expectations. Our acquisition growth is meeting our expectations and the Trapped Capital continues to meet the forecast that we want to do. So I'll conclude on that now and hand you back now for questions. Thank you.

[Operator Instructions] Your first question comes from Andrew Buncombe from Macquarie.

Congratulations on the results. The first 1 for me is just in relation to PSC leaving the network. Can you just give us some color around the potential implications for the PSF, but also were they paying you an annual membership fees, to be part of the network?

Okay. It has no impact on the PSF because, they've not been included in our PSF negotiations, but basically from the day that we went from the M&A system, the Marketing & Administration system over to the PSF, they were not included in our negotiations at that time. In terms of the revenue we were getting out of them, we were only charging them an access fee, which is peanut does move in rates. And so there's no loss of revenue for us, and there's no impact to our PSF.

Excellent. And then the only other question from me was just in relation to Slide 6, please. Just on those final 62 brokers in the Trapped Capital pipeline, so the 49, the 3 and the 10. How many of those do you already own stakes in? I'm just trying to understand how many new acquisitions compared to roll-ups?

Most of them are new. There have been -- if you look at the last 6 months, perhaps 4 or 5 transactions that would relate to increasing equity stakes. But the vast majority relate to new stakes and new products in our network, yes.

Sure. And then maybe just a quick final 1 in relation to Slide 17. This is probably something that's been asked in previous years, but just to remind me. Why are you not defining bolt-ons as acquisitions? What's the background there?

Well, [ BAU ] brokers will continue to buy small brokers and stuff like that really.

Yes. So we've always, I guess, taken the view that if broker #1 used to have $10 million of sales and now they've got $12 million sales, whether they bought a small bolt-on portfolio whatever or happen to hire someone who had some fees with them, that it's still really core broker #1. But to make sure that we clearly delineate that for whichever way an analysts wanted to analyze it, we made sure we showed the 2 columns and people can call it whatever they want.

Your next question comes from Kieren Chidgey from Jarden.

Rob and Stephen. A couple of questions. Maybe, Rob, just sort of following on your comments from the great data analytics and insights you get and can provide back to insurers. Just wondering if you could sort of talk about at a high level sort of claims inflation that you see through the data you can access and also what changes you see as we look out to sort of second half '23-'24 in terms of the likely sum insured drivers in addition to sort of rate -- risk rate changes on a go-forward basis?

It's a good question, Kieren. The reality is that insurance has, for the most part, an 80% coinsurance flow that accepts that you could be 20% out in your sum insured, and they weren't [indiscernible]. There is repeatedly breaches of that when you see clients have come in. So our clients have got to put a percentage of the claims that they have to bear themselves, the coinsurance part. So -- that -- if you look at that pre-COVID, the sum insured was struggling to be at 100% or at the 80% mark, then you take COVID into play. And you have the impact of the supply chain drag and the inability to get people to work for you on cheaper pricing, then labor is up, cost of goods are up, and supply chain lag is impacting clients. So let's say that claims are going to rise by 10%, which is a very conservative figure. I've seen cases where the claims inflation is twice that and sometimes 3x that in specific areas of property. So let's say that 3 years ago, they were borderline not fully insured and breaching the 80% coinsurance mark. And then the cost of building before COVID was escalating and hadn't been built into the equation, then during and post COVID the impact of the cost of rebuilding is dramatic. We've had some examples that we've seen where prices were quoted at $940,000 and now it's $1.4 million. And this is not a price card. This is -- well, label has gone up dramatically and goods have gone up dramatically. So I think that there's going to be 2 things that's going to occur before you're going to get any respite in the cycle. Firstly, that generational change from being underinsured to being appropriately insured. That's probably a 2-year journey over the next couple of years. And I mean, we invested in Robertson & Robertson in advance of the valuation firm to make sure that we could allow -- we could give that access to the brokers give to their clients to make sure that the correct replacement values in. So that's working in some sectors for us. So I think that you've got a couple of years run before the correct sum insured comes into play. And during that couple of years, the insurers have got to drive rate. Their cost of reinsurance is horrific at this stage. I mean just from our own point of view, with CHU, we were paying 12% of the premium back 10 years ago for reinsurance [ and are paying ] 32% of the premium for reinsurance. Now we have to drive rate to -- that's basically considered cost of claims on top of everything else. So if you're running at a 35% claims ratio, and you've got to put in 32.5% for reinsurance. You have to drive rate to get back to a margin that you want to achieve and a good margin on property should be in a combined in the high 80s to the low 90s, that should be the margin, not in the high 90s to just over 101. So without a doubt, that's what it's going to look like over the next 2 to 3 years.

That's great color. And just 2 quick questions or points of clarification. The equity stakes in your broken network, 46% currently. Can you just provide us a view as to where that will land if you complete the $220 million of TCP spend by June?

Yes, we've got on the slide there that you'll see that is a total of 8% of GWP that is tied up in around about $300-plus million of potential spend.

So to clarify that 46% is that -- 46% of the sales we own the businesses. And as Stephen said, the attract capital adds another 8% to that. So that puts us up to 54%.

Yes. So the $326 million represents circa about $1 billion worth of GWP there, so that if you were going to do $220 million, it'd be about 2/3 of that -- are you talking about probably 5 on the 5%.

That we actually control -- that we control.

The other quick question, Stephen, you kind of highlighted the net interest rate leverage given the cash interest exceeds debt. Just wondering if you can remind us whether there's any lag in terms of the cash pickup you get on the cash interest? Or does it flow through pretty cleanly with higher cash rates?

It's been flowing through fairly quickly. Obviously, the competition from banks, you never know when they're pretty quick to put the interest rates up on the -- on your lending and questions how quickly does that come through on the borrowing. But I can tell you at the moment the banks are definitely competing to get that term deposit money. So it's coming through fairly quickly at the moment.

And actually, they're being proactive on it. They're really saying, hey, you know what, we can give you this, which has changed.

Your next question comes from Jason Palmer from Taylor Collison.

Yes. Thanks for your time, and good morning. A couple of questions from me. The first 1 was just in respect of international expansion. You've touched on plans or some plans around the client trading platform and the network broking platforms and maybe leveraging them overseas. Have you had any thoughts around some of the operating agencies and how they could expand overseas as well as maybe replicating your Australian business in other markets as well. This is independent to Unison.

I think to answer that question, too, Palmer, is that, in some jurisdictions, our agencies would be very well received. For example, the -- if you look at North America, it's over serviced by wholesale broking and by wholesale placement of business. So if you were going to look at North America, you'd be very certain spec about whether you could take an MGA over there because there is a plethora of them operating in the market. However, if you look at other parts of the world, some of our MGAs could go into various jurisdictions very easily. For instance, cyber, our cyber business is 1 of the strongest cyber suppliers into the Australian market. And that's been built on expertise on risk management and protocols to put in place so that you don't get cyberattacks before you actually do the risk transfer and transfer it to an insurer. So that would fall over. But in terms of the -- when you uplifted whether you bring your IT into a jurisdiction, you actually have a look at the distribution in the jurisdiction. You look at the inadequacies in the jurisdiction in terms of IT. And then all of a sudden, you look at the fragmentation of distribution there and the net part of that distribution where a system such as what deadfast has developed and built over the past 26 years would actually seamlessly fit in and be simpatico with the way they would want to operate. So all we read about in the press basically is the AquaSure and the Brown & Brown and Adonis and the Gallagher buying the mid-end and the top end of the town. Nobody has paid [indiscernible] to parts of that are the markets, which were very similar to circa 1995 in Australia, where you have a big range of people that are not being service depicted efficiently because of the insurers concentrating on the mid-market or the upper market and ignoring that lower market. So the potentiality for doing something in that area is something that we have to look at.

So are you sort of suggesting there a 2-pronged strategy there. There's a technology strategy and maybe a distribution strategy more broadly replicating in Australia?

I think you have to -- when you look at the market, and I mean, I've been fortunate to be involved in the North American market for 12 years now at an intimate level by being on the board of a cord and understand distribution limit. When you look at that market, you have to draw that conclusion to say what comes first, the chicken or the egg. Because the reality is there is such a vast amount of distribution in that area that would go in greatly from what we can do and have done and could execute. And so you have to step back and say, well, do you drop the technology in? Or do you look at the distribution side of it. And that's what we're prosecuting at the moment looking across both sides.

Yes. Thanks for that important marks. I mean, arguably, the distribution side of it is probably the first step, right, as opposed to the technology side.

Well, yes, that's exactly right, which comes first, the chicken or the egg? You'd opt to chicken or the egg, would you get the chicken -- or do you get the distribution and then got the technology...

We only get chicken and the egg.

Well, we want both, if we can -- potential.

Okay. Just the last question I had for Stephen, please. In respect to just -- I know you sort of tried to unpack the difference between the IFRS numbers, the EBITA line, organic and, I guess, the 100% basis. I ought to sort of help us understand at what stage you're at with that investment in head office and IT? And at what point we will start to see some of that operational leverage really to come through in the organic line?

I think -- I guess I'm trying to flag a little bit today on the call that a fair bit of that cost base is now what you might call rebased to where we are now to allow us to move forward and not have such increases going forward. So I think we're seeding to the point now, obviously, we've made some investments into, as you've heard today, the AI and the IT, et cetera, that allows us to drive further productivity and efficiencies through our businesses. So I do think that, as I said on the call that the difference between the revenue growth and the EBITA growth, they will start to converge even in the second half now. So those benefits will start to come through from here.

Your next question comes from Julian Braganza from Goldman Sachs.

Just a couple of quick ones from me. Just to clarify, so in terms of just the guidance relative to previous comments made, I just want to be clear, that 4% NPAT growth in to FY '24, does that include IBA or is it just Trapped Capital?

It's mainly Trapped Capital. You'll recall we bought insurance house around about mid-August. So there is still 1.5 months that does flow into next year. But there's a fair bit of run rate that comes from the Trapped Capital program. And even in particular, our M&A team, we're quite busy in December, closing out quite a few deals. So there's actually quite a few transactions that have really had an impact on first half '23. That will come through in second half '23, little on first half '24. So it's -- but there was a little bit from insurance as well.

Right. Perfect. And then just lastly for me. In terms of triage I mean, are there any risks there that we should be thinking about at this stage, just given ratings around.

Well, the triage report publicize, it's been given to everybody that participates in that market. And it's fully detailed out the REM distribution and then the potential conflicts and stuff like that. And not 1 person is running our fund. And said, this should change. Nobody said it doesn't work at this stage are worried I've wasted their money and getting an independent review done but we'll continue to roll out the third stage of it over the course of the next couple of weeks. And then we'll put it to bed. At least what I've done is explained to the market with somebody independent like John doing a review over everything, how REM works in Strata. And if everybody is aware of it knows what it is and is happy with the status quo then the status quo will probably stay in my view.

There are no further questions at this time. I'll now hand back to Mr. Kelly for closing remarks.

Okay. Look, I don't want to hold you up. Thank you very much -- I won't hold you much. We're very proud of what we just presented, and we're very strong that this company can continue along the lines as articulated. So thank you for listening to us this morning, and we'll keep briefing you as we improve all changes occur in our business. So have a good balance of FY '23.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.