AMP Limited (AMP) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to AMP's Analyst and Investor Call. The topic of today's update is the announced joint venture discussions with Ares. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Francesco De Ferrari, AMP'S CEO. Thank you. Please go ahead.

Thank you, and welcome, everyone, also from my side. I'm here with James, our CFO, and Jason, our Group Treasurer and really wanted to provide you sort of the exciting update about our ASX release today. We've announced a nonbinding heads of agreement with Ares Management Corporation with the intent of entering into a joint venture for our AMP Capital private markets business. And the perimeter of this joint venture is infrastructure equity, infrastructure debt and our real estate businesses. You would have seen from the media release that actually, in difference to the media releases of the past, it actually has the logos of both companies at the top and a lot of SEC disclaimers. That's because in the spirit of the partnership with which we've held the negotiations and intend to bring this forward, we actually agreed with Ares that it would make sense to have a joint announcement. So this went out at the same time in New York, noticing this is also a very material transaction for Ares as a group. So as of today, we've entered a 30-day exclusivity period, and our collective teams are working towards driving towards a binding agreement. So let me take you through a few things just quickly and then open it up for Q&A. First, the strategic rationale for the partnership. As you know, during the portfolio review, we've tested a lot of market interest for our various assets to understand whether our own transformation plans or whatever outside interest we got was actually the best outcome for our shareholders. In August of last year, for our AMP Capital business, we had announced a strategy to pivot this business towards the very significant opportunity we see in developing and further growing our international private markets business. Now we did that on the basis that we've built a great business that has market and global-leading franchises in infra debt, infra equity and then a very strong domestic real estate business. So we have great product, and we said that we would intend to effectively build sort of our own distribution powerhouse to effectively scale that great product globally. Within this context, we analyzed Ares as a partner and evaluated whether they could help us turbocharge this growth. And effectively, when you look at Ares, I mean they're a global -- one of the leading global alternative asset management players listed in the New York Stock Exchange, almost $200 billion of alternative assets, of which very strong presence in credit and then presence in private equity and real estate. Our product fit is very complementary. We obviously are very leading in infrastructure and very well complement their mainly U.S. real estate presence with our Australian one. They've, interestingly, last year alone -- I don't know how many of you had a chance to google them. They've fundraised in excess of USD 41 billion just last year. And so we are very confident that in this partnership, they can help us bring scale with global distribution, and we can power that with our great product expertise and client proximity. So we feel that it's actually a partnership that works really well. What is the transaction mechanism that we've announced today? So the proposed transaction is a 60-40 private markets JV, with Ares assuming management control upon completion. The transaction values the joint venture at USD 2.25 billion (sic) [ AUD 2.25 billion ]. So Ares' 60% is valued at $1.35 billion, and AMP's 40% is valued at $0.9 million. We've also agreed that AMP will retain certain assets and contingent considerations valued at $0.9 billion, which really includes, as we've disclosed, the seed and sponsor investments we've made in the growth of our private market fund as well as existing carried interest on these funds. And so if you think about it from a high level, we have retained, for our shareholders, all the upside of the business that we've built so far. And we are retaining 40% of the business that we will build together with Ares. So overall, AMP will receive cash proceeds of up to $1.55 billion for Ares' 60% stake. We said up to because that is dependent on where we land in terms of the ideal funding mix for the JV. The JV, the way it's set up, will also allow us to release $0.1 billion of capital that's currently trapped and for that use. We have not commented on the potential use of proceeds today given we're really at the nonbinding stage. And so I know you might have a lot of questions on further details. We are at the nonbinding stage. The next steps for us is that we are in this 30-day exclusivity to get to a binding transaction, at which point we will actually proceed also with an independent expert and the seeking of shareholder approval. So you will effectively then see all the details well at that time. This joint venture will be governed by a Board that will have 60% Ares and 40% AMP representation. Now shifting focus to our retained business. We had already set our own transformation agenda for these businesses. For the remainder of the AMP Capital business, for MAG, as we committed at the end of the year, we will take our Multi-Asset Group, restructure it and move it to AMP Australia to build an end-to-end superannuation business that will be able to compete head on with the super funds. And we reiterated our intent to explore the sale or partnership of our GEFI business. That's a business where scale is absolutely critical, and so we don't think long term, we are structurally the best owners of a business like that. In terms of the remainder of the group, I don't think I need to go into the transformation strategy. Again, we're in the second year of heavy lifting that will allow us to get most of the legacy issues behind us. The next steps from here, 30 days to reach a binding agreement with Ares. And then we need to go through, as I said, shareholder approval and all the other sort of regulatory approvals and CPs that are necessary to complete the transaction. So in summary, a very exciting opportunity to turbocharge our growth in private markets, where there are massively supportive macro trends definitely over the next 2 years. So if -- we see this joint venture as an opportunity to quickly turbocharge this growth, a great partner in Ares that is very complementary in terms of fit from a product capability and brings real global distribution, and a balanced outcome for our shareholders that allows us to retain all the upside in the great business we've created so far and get a 40% stake in what is hopefully going to be a faster growing, really successful business. I know a lot of details still remain to be worked through. That's the objective of the next 30 days. With that, James, Jason and I are very happy to take any questions.

[Operator Instructions] Your first question comes from the line of Nigel Pittaway.

Just a, first of all, question on stranded costs. Can you comment to the extent of stranded costs that might be forthcoming from a result of -- if the transaction goes ahead? And also, I think Francesco, you said that if AMP Capital wasn't part of the group, it would represent a new turn in terms of your cost saving targets. So can you maybe talk about the potential for further cost savings if the deal goes ahead?

So thank you, Nigel. The reality is that if we look at AMP Capital -- and you will see this as we work through the next phase and split out the P&L. As we discussed, I think a big part of our journey and our transformation strategy is to get the end-to-end P&Ls of the sub-businesses so that the market can transparently understand all the returns. In reality, you will find that the private markets business is a pretty lean business in the way it's set up. And a lot of the support and infrastructure costs are really linked to our MAG and our GEFI business. And so in reality, finding the right pathway for those businesses is the more important pathway to effectively then determine the stranded costs. We are working on that transaction, and so we still don't have what the effective perimeter that is going to allow us to effectively answer that question. As far as it pertains to the group, clearly, we will become a much more focused group. And so part of this next phase is also working out what is the right setup for our corporate office, recognizing that we already have sort of a $300 million cost-out plan that we're working on and recognizing that this transaction effectively further simplifies -- that gives us the opportunity to relook at some of that. We also, though, Nigel, need to take into consideration -- I mean we are at a nonbinding heads of agreement phase. We need to get to a binding phase, then we need to get to completion, and then there is the separation phase. So all of these will require time.

Okay. And maybe the next question is, can you comment on the constraints now that would stop you resuming the buyback? Would you have to wait for shareholder approval in this transaction? Or if the deal sort of gets agreed, would that open up the way to resume share buyback?

So one, as we discussed, I think, in calls with most of you, we are definitely very sensitive to capital returns. And at the current share price, we really think buyback is very value-accretive for our shareholders. We had paused it because of the portfolio review. Our current hypothesis is if we do reach binding terms, at that point, we would be ready to go back into the market and effectively start the buyback. We wouldn't have to, therefore, wait for shareholder approval.

Great. Okay. And maybe just finally, I mean you've talked about doing a partnership or selling off the rump of the business, the Global Equities and Fixed Income. Has that advanced at all? Or is that just sort of something to be looked at if indeed this deal with Ares proceeds?

Nigel, the rump of the business is just a terrible term. We actually have really good businesses in there. If you look at it, I think our fixed income products had more than 90% delivering above benchmark over 3 years. Having said that, we -- as we went through the portfolio review, we really looked at all the assets and stress-tested them about market interest. So there have been conversations, and we are looking now that we have clarity on this part to be able to progress those quickly.

Your next question comes from the line of Andrei Stadnik.

Just wanted to ask 2 questions. Firstly, in terms of the cash and capital needs to support AMP Capital for growth going forward -- and it looks like it should be faster growth. But equally, that might mean there are more demands on seed capital or being able to prepurchase assets into funds to capitalize on opportunities. So how much extra cash do you think -- or capital do you think you may need to hold to support the growth in AMP Capital going forward, in particular private markets side?

Thanks, Andrei, for the questions. So at the moment, we would be putting up to, in our infrastructure equity funds, USD 150 million or, in our infrastructure debt funds, up to USD 50 million into each fund as a sort of the shareholder capital. As those funds grow, building the track record of those, we would expect that to reduce over time. Clearly, as the venture grows, that would be the case that we would obviously need to continue to put capital in, but we think that the alignment continues to grow stronger. So the requirements, over time, reduce. Obviously, partnering with somebody like Ares who have an even longer, deeper track record would hopefully start to mitigate that as well. Obviously, alignment between investment teams and the house is very important for clients. And so there will always generally be a requirement, but we think it should dissipate over time. I guess obviously, any go-forward commitment would be done in the percentages of the joint venture as well. So the capital requests on AMP would be proportionate to our residual investment in the venture.

My second question, I wanted to ask around the bank. I mean the AMP Bank has had good mortgage momentum for several years. But in the last year or so, that momentum stalled. And as you can probably see, the regional banks marketplace becoming very competitive, Bendigo and BOQ scaling up, Suncorp seeking to grow, Macquarie doing very well, and ING there. So do you need -- what kind of investment do you need to make into AMP Bank to make sure it actually stays relevant?

Thank you for that question. A couple of, I would say, considerations. One is last year, we approached -- when COVID hit and we were all debating, is this a V or a U or a deep U recession with all the uncertainty, we were very prudent with the management of our bank. And so we slowed down mortgage growth and we ramped up deposit growth because we just wanted to make sure we wouldn't get in a funding squeeze. And so you would have seen our deposits grow 12% last year, but our mortgage is essentially flat. That was a deliberate strategy given the importance of a bank and a group like ours not to create wider issues. We did a significant investment last year, as we announced at the full year results, and effectively completed the replatforming of our core banking system on time and on budget, which was a really significant success for our teams. We have now opened the bank back to growth. And so we are seeing encouraging results versus -- I fully agree with you that from a regional bank perspective, it's tough in Australia given some of the funding and capital arbitrage versus the larger players. I really feel our bank is uniquely positioned because we have a great return on equity, much better than the regionals. Two, we have a very low-cost income ratio at 36%. And we don't have branches. So we are a lot more scalable and a lot more resilient than some of the other names you mentioned. So that's why in our full year results, we also sort of said that we really see the bank going back to double-digit earnings growth.

Your next question comes from the line of Kieren Chidgey.

I Just got a few questions. On the profit contribution between private and public markets, are you able to provide a little bit more guidance as to what the split for FY '20 was between those 2 segments?

Thank you, Kieren, for the question. We cannot provide specific guidance right now. We're at the nonbinding stage. If we get to binding stage, you will see effectively full P&Ls and everything. The only thing we had sort of included in the release, because we felt there would be a lot of interest on this, was a comment around the contribution that public markets did last year to the $139 million of underlying NPAT of the whole of AMP Capital. I mean -- yes.

Okay. Secondly, just on -- so just keen to understand what the medium to longer-term intent is here. You've got a minority stake without management control. Can you talk about sort of what the intent around the put and call options in 5 years' time actually is?

So thanks, Kieren. So the -- as you rightly say, there's a put and call mechanism which triggers -- or is effective after 5 years. That works obviously both ways that the AMP group has an ability to put the shares in a staggered way back to Ares after 5 years. And equally, Ares has an opportunity to take 100% control, which becomes available to them after 5 years. Look, we would obviously -- as Francesco said earlier, we would obviously look to -- effectively, by doing this transaction, we have crystallized the value created today and then provides us an opportunity to participate in the upside that we see out of the partnership. AMP will be -- we will have a number of, as you rightly say, strategic investments with our investments in Resolution, the China Life Group, and now this AMP-Ares joint venture. And so there'll be some significant investments there at the group level. But I think we will obviously sort of play that out over the medium term to sort of see what happens, but we're very sort of hopeful that the partnership creates a great and well-performing asset.

Okay. My final question, just around the capital intensity of the business ex private markets, which Francesco, you've always said you need to continue seeding funds, was a factor weighing on the dividend policy at a group level. So just wondering how this transaction may impact that group's dividend policy payout range.

Yes. Kieren, it's a very good question. So we have typically thought about our group policy, which we had guided in -- when we -- about the transformation strategy of 40% to 60% payout ratio at a bottom line after tax results. Obviously, the midpoint of that is about half. We looked at that in the context of the wealth businesses generally sort of have an 80% or above 80% payout. The bank, we think we can get broadly to about a 50% payout, and AMP Capital was broadly around that, but it did sort of have some volatility given the seeding of those funds, as we've talked about earlier in the call. That can be material. I think that given the shape of the earnings of the group, it does become that the dividend policy, you would start to see a lift in the percentage. I think the thing we would just need to make sure we're very conscious of is that if our portfolio of strategic investments, the returns on those and just how that they would move over time will be the thing we'd just be monitoring. But we effectively are going to a very capital-light wealth management business in Australia and New Zealand. Obviously, the capital is required to grow risk-weighted assets, and the bank is going to stay the same. But the use of capital for AMP Capital would dissipate over time. Obviously, it's much lower because of our 40%, 60% share. But also, we think that, that requirement to seed into the funds should proportionally reduce over time as well as that business gets bigger and is also leveraging the brand and distribution of the Ares group as well.

[Operator Instructions] Your next question comes from the line of Andrew Buncombe.

Just the first one, I'm just trying to wrap my head around how disclosure could potentially change for this just because you've got a -- let's call it, a minority stake in the JV at 40%. Is the intention just to push it through the investment income line going forward? And are we going to lose all the disclosure about the -- related to the moving parts like we have with Resolution?