WT Financial Group Limited (WTL) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to this WT Financial Group Investor Webinar. My name is Tim McGowen. I'm the host for today's session. We are, of course, joined by CEO and Co-Founder, Mr. Keith Cullen, who will be online shortly. Before I hand over to Keith, just some quick housekeeping. If you like to ask a question, type your name on the question and put in the Q&A box provided. Also remember, we'll be asking questions during the event and at the end of the event if time permits. If you need to leave early, remember, this event is available for later playback, just reach out to me, and I'll send you a copy. Keith, that's all for me. That's the housekeeping. Over to you.

Yes. Thanks very much, Tim, and thanks for joining us, everyone. Now unfortunately, not able to be in the studio today. Now part of that means that I've got to drive the technology. So you're just going to have to bear with me here because I think I've got it right. Hopefully, what you're all seeing now is the presentation deck that I've got for you, which is the one that we released to market. So for those of you that don't know me, I'm Keith Cullen, Founder and Managing Director of WT. Many of you already know the WTL story. I've been looking through the registration. So I'm not going to spend a lot of time today working -- walking through every step of the journey in detail. But the simple version of it is this. Over the past 5 financial years or the previous 5 financial years, we've built one of Australia's largest financial advice networks. We've done that by bringing together Wealth Today, Century Advice, Synchron Advice and Millennium3. And we've integrated them together. We've built the risk management infrastructure. We've built the adviser support infrastructure, and we've built the professional development engine. And we've done that at scale. Importantly, we've done that while delivering 5 consecutive years of both top line growth and bottom line growth. So the first 5 years of putting this network together were really about building the platform. And the next 5 years now are about monetizing that platform. And that's really what's at the heart of today's presentation. You know WTL is no longer just a network operator. That is, I think, the old way to look at the business. The business that we're building is a scaled operating platform for financial practices. with aligned revenue participation, a capital-light recurring revenue model and now through our Invesco joint venture with Merchant Wealth Partners, a real pathway to participate directly in building and unlocking equity value that's being created as the advice profession corporatizes and consolidates. And that's really the money shot part of it. The base business is proven. The market structure is favorable and our Invesco and Hubco strategy that we'll talk more about today gives us a second and potentially very powerful value pathway. So just some important information that I'll deal with this relatively briefly. Today's presentation has been released to the ASX. It contains summary information. It's not financial product advice. It's not a prospectus. And it includes forward-looking statements and risk disclosures. When I talk today about pathways, opportunity, potential value creation and market rerating, I'm talking about the strategy and the thesis. I'm not giving guarantees or forecasts. We're talking strategy and thesis. With that said, let's get into the business. So WT Financial Group Limited, this slide really gives you the current snapshot. WTL has grown from a standing start a few years ago to Australia's premier advice network with 5 consecutive years of top and bottom line growth. Today, we've got around $25 billion of advised assets in the group, a market cap that's been ranging between $40 million and $50 million. It was $41 million, I think, at the time the deck was prepared and released and a fully franked dividend yield shown in the deck based on the share price when the deck was released a little bit over 5%. The question for shareholders is not whether we have built a real business, we have. The question really is whether the market is valuing the business correctly. Because if you look at WTL only as a traditional advice network, I think you missed the next stage of the strategy. The first stage was scale. The second stage is monetization. And the third stage is equity participation in the corporatization of advice in Australia. And that third stage is where the market frame for WTL can really change materially. So the WTL business model, this is the operating model in one slide, I guess, for those of you that aren't as familiar with the business, but it's worth revisiting for those that have been shareholders with us for some time. The model is that WTL develops services at scale and delivers them to independently owned advice practices. That includes our Australian financial services licensing infrastructure, professional indemnity insurance access, risk management, professional development, CPD training, business coaching, growth tools, technology and AI tools and really the collective buying and intellectual property, buying power and intellectual property of the network. For practices, the value is simple. They get infrastructure, support, risk management and resources that they couldn't economically build on their own. For WTL, the revenue model is equally as simple. We earn base fees service fees, recovery fees and importantly, with the vast majority of our practices, a revenue share from adviser revenue. And that revenue share component is absolutely critical because it aligns us with the practices that we support. When practices grow, WTL grows. When adviser revenue increases, WTL participates. When pricing improves, we participate. When practices build capacity and serve more clients, we participate. So this is not a flat fee sort of toll road style model. It's an aligned revenue model sitting on a largely fixed operating platform, which is why we went about consolidating these businesses together to give us enough revenue and enough profitability in the business to have a best-of-breed offering in the marketplace. Now that we've done that, that really is a largely fixed operating cost platform. So this is what creates the operating leverage that we've started to unlock. And now through our Invesco and Hubco strategy, we also have an equity ownership model for internal and external advice practices. So there's 2 engines here. The first is recurring revenue from the existing network. The second is equity participation in the value of scaled advice businesses. So that's the shift. 5 years of profit growth is just what this slide does. Those that have been following the business will know this. For us, FY '21 was a loss-making position as we started to move out of -- completed our move out of retail and really focused our attention on this business-to-business model of building the network. By 2025, EBITDA was nearly $7 million and EBIT $6.3 million and profit before tax, $5.5 million. So that's 5 years of profit growth through, in effect, what's been a really difficult period for the advice profession. And I think that's important to touch on because it shows that the operating model is not theoretical. We acquired, we integrated, we invested and we improved the platform and we grew revenue. We grew profit and we pay dividends. So when we talk about the next stage of growth, we're not asking shareholders to believe in a concept without a business underneath it. That business is real. And the issue now is how much more value can be created from the platform that we've already built. There's a pause for a breath there and a little top up of water, if you don't mind. So, the half year metrics, obviously, we're getting towards the end of another reporting period, so we'll have new numbers out soon. But it's worth just touching on the half year metrics for those that are new to the company. We've continued that momentum of the previous sort of 4 or 5 financial years. Net revenue was up by 16% on the PCP. Gross revenue was up, statutory NPAT was up and the underlying EBIT was up. Importantly, operating cash flow was up solidly on the PCP, and we paid an interim dividend of 0.25 cents, and it was fully franked. So the key point is the shape of the result rather than the specifics, revenue growth, profit growth, strong cash conversion, and dividend and continued investment in our platform. So that's a good place to be before we even get to the larger strategic opportunity. You'll have heard me talk a lot about the tailwinds in this profession or in financial services more broadly, but the big industry megatrend is the supply-demand imbalance. This is the structural backdrop to the business that we're building and we have been building. Australia now has $4.3 trillion in its superannuation pool. Around 0.25 million Australians every year are reaching whichever measure you want to look at, retirement, preservation age, 65, getting to the point of being able to either retire and/or access their super. The population is aging, retirement is becoming more complex. The wealth transfer is accelerating in this country. Ordinary Australians need help navigating super and tax, retirement, income, aged care, insurance, estate planning. So the reality of it is that demand for quality advice is increasing. But against this backdrop, adviser supply has gone the other way. Adviser numbers are down 48% since 2018. That is a structural imbalance, more demand, less supply, higher complexity, fewer advisers. Now the important point is that a favorable market condition doesn't automatically create revenue either for our advisers or us. Clients don't voluntarily wander into their advisers' office and pay more just because there's fewer advisers in the market. Practices still need to capture that opportunity. They need confidence to charge properly. They need to build capacity so that they can serve more clients and they need lead flow to fill that capacity. Beyond that, they need enterprise structures that turn professional practices into valuable transferable businesses, and that's where we're sitting today, and that's the opportunity. We are not just exposed to the supply-demand imbalance. We're building the machinery that helps practices capture it.

Keith, just a couple of quick questions, if you don't mind.

Yes. Sure, Tim. Go ahead. Let me draw a breath and have some water in the meantime. Thank you.

Of course. So where does the kind of future supply of advisers come from? You've spoken about a 48% reduction in adviser numbers.

Yes. Look, it's a really good question, Tim. And the answer is it comes from nowhere at the moment because what happened a few years ago is the government implemented this ridiculous esoteric degree as the only entry pathway into the profession. So regardless of whether you're a university student coming out of university or whether you're a career changer in their late 20s or 30s or even 40s is you cannot even get accepted to start your professional year until you have done a very esoteric financial advice degree. And you'd be shocked to know, I've had people come into this office that have had, say, 10 years in investment management, working for a fund, working for an asset consultant. They might have a master's degree, a double degree in finance and economics, send their transcript Dr. Kaplan, who's one of the higher education providers. turns out they've got 4, 5, 6 units to do before they're even able to come on to the adviser register in their professional year. So we've got an absolute chokehold on supply, which is what is sort of driving this supply-demand imbalance. And until that gets reformed, it's going to be very difficult to grow adviser numbers significantly. So we've spent a lot of time lobbying around that, and we do think it will get reformed, but not for a couple of years yet because it requires a legislative change.

And just one more, if you don't mind. You've grown through acquisition, will that continue to be the strategy?

No. We've said, I think, repeatedly over the last couple of years, Tim, the acquisition strategy for us was about making sure we could build sufficient scale into the business to be able to afford to underwrite all of the resources that great practices need and all of the resources for us to be the best-of-breed offering in this country. We are well past that point now. So I'd never say never that acquisition opportunities if they were genuine and if they really aligned with where we've got this network, and we're going to add value for shareholders to it, but it's certainly not a strategic thing in terms of having to enlarge the number of sort of advisers or practices in the group at this stage.

Thanks, Keith. I'll let you continue.

Yes, fantastic. Okay. So the WTL investment thesis as this slide is headed. And I guess the thesis has 4 parts. First, where WTL stands today. We're one of Australia's leading advice networks, and I'd say we're the premier network in the country now. That's what we've emerged to be. We have scale. We've delivered growth. We have strong adviser relationships. We have real operating infrastructure. The second part of the thesis is the revenue pathway. Now this deck, those of you that have studied it will see that it sets out a pathway from where we are today, around $220 million of gross adviser revenue in the network, a pathway to $330 million and a longer-term pathway to $660. Now that pathway comes from adviser revenue growth. It comes from pricing confidence that increases revenue per client. It comes from AI, automation and good systems and processes building capacity. The demand that's in the marketplace is filling that capacity and our experience in helping advisers with lead flow enables them to make that lead flow more disciplined so that they're in a position to capture that capacity. And as practice become more efficient, more profitable and more valuable, because WTL participates in adviser revenue, that growth translates directly into WTL net revenue and bottom line opportunity. The third part of the thesis is the equity partnership model, and this is the important part. Our 50-50 joint venture with Merchant Partners allows us to help the advice profession corporatize and consolidate, and it gives WTL a way to participate not just in practice revenue, but in practice equity. The fourth is the compounding network. The more practices grow, the more WTL participates. The more Hubcos we help create, the more equity value can be created. The more services we build to support those practices, the more revenue opportunities that arise. And this is a compounding effect that is really important. So the investment thesis is not one thing. It's recurring revenue, operating leverage, equity participation, services expansion and a potential market rerating. So let's talk about capturing value from the supply-demand imbalance. This slide shows how the opportunity converts into value. Today, the network has around $220 million of gross adviser revenue. The midterm pathway, around $330 million. The long-term pathway, we see being $660 million. The mechanism to get there and help advisers achieve that is what we call our 4 strategic growth pillars; pricing confidence, capacity building, lead flow and enterprise value and succession. Now for existing shareholders, I don't need to labor those points to pick those thematics up out of other sessions like this that we've done over the years and out of our annual reports. But I do want to make one point really clearly. These are not soft practice development themes for us. They are genuine commercial levers. Pricing confidence means advisers charge properly for the value that they create. Capacity building means advisers can serve more clients without drowning in hours worked and drowning in long days. Lead flow means the right clients arrive into a practice consistently. And enterprise value and succession means the practice becomes a genuine transferable business, not just a job wrapped around a talented adviser. That's what changes the economics. For WTL, that matters because our revenue model is aligned to practice revenue. As practices improve their revenue, WTL participates. As practices become more valuable, the Hubco strategy gives us a way to participate in enterprise value as well. That is the bridge from operating company to capital partner. So let's have a look. This slide is headed equity partnership model, the insurance broking playbook. And this is where I just want to slow down for a minute because this is the strategic comparison that matters when looking at our business. The financial advice profession today has so many similarities with where the insurance broking sector was before both Steadfast and Austbrokers became the businesses that they are today. Insurance broking was fragmented, advice is fragmented. Insurance broking has thousands of independent operators. Advice has around 15,000 advisers across thousands of mostly privately owned practices. Insurance broking experienced significant regulatory and compliance pressure. Advice has been through FoFA, LIF, FASEA and the royal commission aftermath the education reforms that I talked about before, PI pressure with the cost of professional indemnity insurance going through the roof and just ongoing regulatory complexity. Insurance saw an institutional pullback, advice has seen the banks, AMP and Insignia retreat and reshape their exposure. Then in insurance broking, early consolidators built critical mass. They helped professionalize the sector. They created platforms. They provided capital. The delivered services at scale, and they supported acquisition activity. And the market eventually valued those scale platforms very differently from the fragmented businesses that came before them. So that's the playbook. We're not saying that advice is identical to insurance broking by any means. It's not. But the pattern is really clear. fragmentation, regulatory pressure, institutional exit, entrepreneur-led private businesses, the need for capital, the need for scale, the need for succession, potential for re-rating. I think this deck shows entry multiples today for fragmented advice practices around 5.5 to 6.5x even. Scaled recurring revenue advice platforms can attract multiples that are much higher than that, 7.5, 8.5. Globally, multiples are significantly higher again, 12 to 20 in the U.S., 8 to 12 in the U.K. And of course, then you have the opportunity depending upon how you build these networks is to attract the public company multiples. So the gap is where the opportunity is. The arbitrage is not just buying small and selling big, however, the arbitrage is helping high-quality practices not only get that arbitrage through scaling, but become much better businesses, better structured, better governed, better capitalized, better able to acquire and better able to grow, not just through acquisition, but grow organically as well. And then the virtuous circle of being better able to attract and retain people, really critical in that limited supply market that we're talking about, the potential to create, for example, capital structures that enable buy-in and equity reward programs for staff. Most importantly, better able for the founders of these businesses to convert professional goodwill into genuine transferable enterprise value. And WTL is really well placed to help practices do that because we already have the relationships. We have the risk infrastructure. We have the network and the practice knowledge, the due diligence capability and the strategic context. And that's why our Invesco model really matters. It gives us the capital partner profile to be able to turn that position into equity ownership. So let's have a look at that equity partnership model. This slide shows the scale of the opportunity. And these 3 boxes across the top are really very similar, and they follow the same path as those revenue boxes where we go $220 million to $330 million to $660 million. Today, advice practices are predominantly subscale, and this is not a unique feature of our network. This is right across Australia. That affects enterprise value. The typical practice in our network is sort of running on about a 40% margin, and that will be valued typically at 5.5 to 6.5, let's call it for the ease of math, 6x even. That suggests to you that the current capital value of the practices in our network is about $0.5 billion, $528 million by that math. The midterm pathway of growing revenue to $330 million on that same operating base gets us and doing that through pricing confidence and partial corporatization really creates further value by moving us into a different EBIT margin model and a different valuation model. So there's your pathway to $1.5 billion. The longer-term pathway from the exact network is capacity building, capturing the demand, taking advisers from dealing on average with 120 clients to doubling that number through efficiencies and through capturing the demand properly. These are pathway numbers, of course. They show the thesis, but the thesis is not answerful. The advice profession already contains significant revenue and significant earnings. The problem is that much of the value is trapped inside subscale privately owned practices with limited access to capital, limited succession options and limited capacity to corporatize. That's the opportunity. The Hubco model is really designed to unlock that value, but we're not trying to back every practice. Selection criteria is absolutely critical. We're looking for practices with recurring, high-quality revenue within our network, strong retention of clients, earnings visibility and a proven track record of growth, typically above $2 million in turnover. Margins above 40% or a clear pathway to get there and a clear growth strategy from the leader of those practices, acquisition and integration capability and critically really strong management capability. And this last point really matters. We're not trying to buy practices and run them from head office. This is not a top-down command and control structure. We're not trying to impose a single national brand on everyone. We're here to back entrepreneurs within the network. And that is the fundamental philosophy. A great Hubco for us starts with a strong cornerstone practice and a strong entrepreneurial leader. And then you bring together advice practices around that leader. Now some of those principles might be looking to retire or step back, some may want to stay and grow. Some may want to swap a stand-alone practice for equity in a larger, better capitalized group. There's a lot of what we would call accidental business people in this space that want to be independents of running their own book of clients and building a business that they've woken up, you know they've come out of a bank structure or an employee structure. They've woken up and they realized every day, they're wasting time not doing their favorite thing and their highest value thing of dealing with clients, but worrying about the website going down, worrying about the admin person quitting, worried about building the referral network, building the lead flow, worrying about all those operational things. And they're looking to be part of something bigger where they can really focus on the high-value work of sitting in front of clients, but also go from really owning a job to having real equity value in something. And the point of all of this is that we're here to build these Hubcos to give them that structure and a structure that they couldn't create alone. It gives them scale, gives them capital, gives them acquisition capability, helps give them governance and helps them with a succession pathway. And it gives WTL a way to participate in the enterprise value that we help create, and that's where the real opportunity is. So let's have a look at the equity model with Merchant Wealth Partners, our JV partner. This slide is really the money shot of the next phase for the company. And it explains how WTL moves from being only a network operator to also participating directly in enterprise value that's being created as we help professionalize and corporatize and consolidate the advice profession. So we've established an investment vehicle called Invesco. Technically, it's WTL and MWP Invesco Proprietary Limited. For short, we'll call that now full Invesco. And we've done this as a 50-50 joint venture with New York-based Merchant Wealth Partners. So you can go back and have a look at our deck from last year where we -- I think I did an interview with you, Tim, and we did a deep dive into the JV. But Invesco is the capital partner. And our strategy with Invesco is to use it as the capital partner to create a series of Hubcos as I walked through from the prior slide. Inside Invesco, the 2 joint venture partners bring different primary strengths and responsibilities. WTL's primary role is opportunity origination and execution. So we know the practices. We know the principles. We know the quality of the revenue. We know the operating capability within the businesses. We understand the people, their culture, the risk settings and the growth potential. So WTL drives the opportunity origination, the relationship work, the people due diligence, the commercial due diligence and the operational due diligence and also drives the whole transactional process. And you would have seen us announce our new CFO recently. In fact it's been fantastic having Michael on board. There wouldn't be many, if any, executives in Australia with more experience around executing on M&A transactions specifically inside wealth management in Australia. So it's absolutely fabulous to have him on the team, and it's part of our main role as the lead and managing joint venture partner in Invesco. Now merchant's primary role, fantastic business, U.S.-based. They bring the capital capability and also enormous amount of M&A and minority shareholder experience in advice in the U.S. and elsewhere globally to the table. So they bring the capital capability required to fund Invesco's investments in the Hubcos. Now importantly, WTL also has the right but not obligation to dollar match capital into Invesco as it funds particular opportunities. And that distinction really matters. We're not simply a junior party relying on someone else's capital here. We're an equal ordinary shareholder in Invesco. We're actually the managing partner, I'm the Managing Director of it. We originate and execute the opportunities. We have the right to participate further in the preference shares when capital is required and our relationships and operating knowledge are central to the model. The economics are also important. Whoever contributes that capital when Invesco calls on capital as and when it's required for a particular Hubco investment or to establish a new Hubco is issued with nonvoting preference shares in Invesco, which receive a 15% dividend preference and 50% capital upside benchmark. So significantly above those benchmark returns, the ordinary shareholders, which is WTL and Merchant 50-50, share the excess economics, both in terms of dividend flow and capital upside. So there's several layers of value for WTL. First, WTL owns 40% of the ordinary economics of Invesco. Second, WTL earns a 6% origination fee on total transaction values. But importantly, that's not equity Invesco. That's origination fee is taken as direct equity in the relevant Hubco. So WTL can have 2 separate exposures to the same Hubco. We have our exposure through Invesco because we own 50% of the ordinary economics of the joint venture. We have our direct Hubco equity earned through origination and transaction work. That's a powerful distinction. It means WTL is not only participating through the capital vehicle, we're also being directly rewarded in the Hubco itself for creating and executing the opportunity. The third is WTL can choose to co-invest additional capital by subscribing through Invesco preference shares where and when we want to. The fourth way is this, the Hubco practices remain inside the WTL ecosystem or if we brought them in from outside, they come into the ecosystem. So they're using our licensing, our PI, our technology, our risk management and support services. So the equity strategy does not operate, does not replace our existing revenue model, that sits on top of it. So let's have a look on this slide of a live example, which is Titan Advice Group. We'll call it TAG for short. TAG was formed around a first stage valuation of about $10 million, bringing together Titan Financial Planning, Darwin Financial & Retirement, and Wealth Connect. On that first $10 million valuation, Invesco contributed approximately $3.5 million. And that capital allowed some of the practice owners to take some capital out and allowed debt to be repaid, and it created a clean debt-free vehicle to pursue the next stage of growth. Invesco therefore ended up owning about 34% of TAG at that point. So separate to that, WTL was issued 6% of direct equity in TAG for originating and executing the transactions. So from day 1, WTL had exposure through Invesco and a separate direct equity holding in TAG. TAG then used that debt-free platform working with us to go on and acquire Rushby Financial for $2.8 million and Fusion Partners accounting for around $1.6 million. WTL helped organize the major bank debt funding to enable those acquisitions to be done with debt and again, earned its 6% direct equity entitlement on those transactions. So the pattern is exactly what we want it to be, create the Hubco, put it on a clean footing, bring in patient capital, give the principles a larger platform, use sensible debt funding where appropriate, acquire aligned practices, build revenue, build profitability and then allow a valuation to re-rate as the business becomes larger, more corporatized and more scalable. In TAG's case, given the increased size of the entity from a revenue and profitability perspective, the valuation has re-rated from around 6x where the valuation came in on all of those initial entities in to 7.5x EBIT. And that's created a significant capital uplift with the enterprise value of around $17 million net of debt. So that is the model in action. It's not a theory. It shows how WTL is using its network position, relationships, due diligence capability and transaction execution capability to originate these Hubco opportunities, help facilitate outcomes for the advisers and the advice business owners and then earn direct equity, participate through Invesco, support further acquisitions and build real capital value for everyone involved in that business. And so that's why this strategy matters so much. It changes the way shareholders should think about WTL. I think the old frame was as a network operator, which was an evolution in and of itself, to be honest, because it was the evolution away from dealer groups as these networks used to be called. But the network operator is the old frame. The new frame is network operator, capital partner, transaction originator, direct Hubco shareholder and participation and driver of corporatization of the advice profession. So let's have a look at -- sorry, Tim.

I might give you a breather and ask a couple of questions, if you don't mind.

Can I get some more water?

Yes, take your time. So with that TAG example, it actually brought in an accounting practice. So does the Invesco have the opportunity to bring in accounting practices kind of like-mind businesses as well as advice practices outside of the network?