Insignia Financial Ltd. (IFL) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Insignia Financial Fiscal Year 2025 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Ehlich. Please go ahead.

Thank you. Good morning, everyone. Welcome to Insignia Financial's FY '25 Results for the year ended 30 June 2025. I'm Andrew Ehlich, General Manager of Capital Markets. I'd like to begin by acknowledging the traditional custodians of the lands on which we meet today. I pay our respects to their elders, past and present. Presenting today's results will be Scott Hartley, Chief Executive Officer; and David Chalmers, Chief Financial Officer. As mentioned, there will be an opportunity to ask questions at the end of today's presentation. I'll now hand you over to Scott.

Thanks, Andrew. Good morning, and thanks all for joining today. I'm pleased to deliver our full year results for FY '25, which saw strong growth in UNPAT, up 18% and an improvement in NPAT by over $200 million as we see the finalization of separation and remediation. FUMA increased -- sorry, our costs fell by 6%, driven by a net reduction in operating costs of $60 million, as we pursue our vision to become Australia's leading and most efficient diversified wealth manager. FUMA increased to $323 billion, supported by strong net flow performance of $1.6 billion, a $5 billion turnaround from FY '24. Our cost-to-income ratio continues to improve from 73% last year to 68%, which is a significant reduction. But of course, we still have more work to do. So when I joined at the beginning of last year, I committed to the continuation -- continued delivery of our FY '24, '26 strategic initiatives as these were critical for our future. I'm pleased to report the early successful completion of these transformation and separation initiatives, which laid the foundation for our 2030 vision and strategy. Rhombus Advisory was launched on the 1st of July in 2024. This innovative model -- this innovative partnership model enables us to maintain strong relationships with Rhombus high-quality self-employed advice businesses while allowing us to focus on the growth of our selling advice businesses. MLC Wrap was successfully migrated to Expand in late FY '24 and bedded down during the first half of '25. We delivered $60 million in OpEx savings in FY '25, a total of $84 million over 2 years, while completing NAB separation. There was no net increase in historical remediation provisions in FY '25, and we remain on track to complete APRA license conditions. At the end of next year -- sorry, at the end of last year, we announced our vision to become Australia's leading and most efficient diversified wealth manager by 2030. With the early completion of our previous strategy in FY '25, we've been able to build early momentum toward our 2030 vision. We've embedded our new operating model with 4 accountable business lines, refreshed the executive team and put the MLC brand back in market. In our Advice business, we've unlocked future growth by investing in adviser efficiency, delivering a significant uplift in revenue per adviser and positioning cost to income ahead of FY '28 targets. Our platform continues to scale with funds under administration now exceeding $100 billion. We've also launched MLC Retirement Boost, a new retirement income solution supported by a strategic partnership jointly with TAL and Challenger. This will bring significant benefits to our customers' retirement outcomes. We've advanced our Master Trust strategy with price reductions to the MasterKey suite, completed the transition to SS&C and confirmed our long-term direction supporting a simple business and improved customer experience. Our Asset Management business -- our Asset Management business is continuing to gain momentum with new alternative funds launched for institutional and wholesale markets and our $3.3 billion in managed accounts FUMA -- FUM now spreads across 10 industry Wrap platforms. Our Advice business is performing strongly with new client growth and a focus on higher-value clients boosting revenue from $750,000 to $850,000 per adviser. This growth is complemented by a more efficient cost-to-income ratio supported by $6 million in optimization benefits. We've earned industry-leading recognition with 25 Shadforth advisers featured in Barron's top 150. And we're off to a strong start on our 2030 strategic agenda in advice, enhancing adviser efficiency, improving cost to income ahead of FY '28 targets and increasing the number of clients per adviser. Strategic investments in automation and AI are helping simplify the advice review process and expand adviser capacity. Our Wrap business continues to perform strongly with FUA surpassing $100 billion and enjoying $2.1 billion in net flows to the MLC Expand platform in FY '25. Despite margin impacts from the MLC Wrap migration, we've improved cost to serve through $20 million in cost optimization benefits while also supporting net revenue growth by average -- higher average FUA. Adviser satisfaction has significantly improved with Expand Essential ranked as the #2 platform in the recent Wealth Insights FY '25 survey. Adviser engagement with both Expand Extra and Expand Essential has grown markedly with usage up over 50% for both platforms and NPS has increased 25 points for the Full Wrap and 15 points for Essential versus industry uplift of 11 points. Additionally, we're expanding investment options on the Expand platform, simplifying our product suite and investing in AI to streamline advice processes and enhance adviser efficiency. In Master Trust, we've completed key transformation milestones with the NAB separation a few months earlier than planned and the OnePath custody transition, which was successfully completed in May 2025. We realized $9 million in optimization benefits, helping to lower the cost to serve. We also delivered net revenue growth driven by higher average FUA and supported by improved Master Trust flows, reflecting the positive impact of pricing changes. We're well progressed on our 2030 strategic agenda, highlighted by the successful transition of the Master Trust tech and ops function to SS&C, and I'll touch more on this later in the presentation. In October 2024, we reduced fees in MasterKey, which is beginning to show positive signs and retention. While there was no revenue impact in FY '25, there will be margin implications in FY '26. We're also maintaining strong momentum in our digital direct strategy that will be supported by a refreshed [ brand position ] launching in the first half '26. In Asset Management, our multi-asset capability continues to perform strongly with 85% of FUM outperforming benchmarks and the flagship MySuper Growth option achieving top [ quartile ] performance over 5 years. The asset management team earned multiple industry awards, highlighting both performance and recognition. FY '25 saw strong momentum with $1.9 billion in net flows into multi-asset retail managed funds and managed accounts and new large institutional mandates in fixed income. In terms of key metrics, we saw improved -- improvement in cost to serve from 14 basis points to 11 basis points. We're accelerating progress on [ our strategic ] agenda with the launch of new alternative funds, including the MLC Reinsurance Investment Fund and Private Equity Co-Investment Fund IV. And our SMA continues to enjoy strong flows now with over $3.3 billion in FUM across 10 industry Wrap platforms. As I mentioned earlier, in FY '25, we launched the refresh of the MLC brand for the first time in more than 5 years. [ It ] remains one of the Australia's most recognizable financial services brands with prompted awareness of 68%. In FY '25, we began revitalizing the brand with a targeted campaign to recognize awareness and address declines in key metrics, positioning MLC as a resilient and strategic brand for the future. As a result of this campaign, MLC's brand responded well to relatively small investment with key brand metrics improving, notably reputation and consideration up 3 and 2 points, respectively. These foundational activities built in FY '25 have set the stage for full scale brand relaunch in coming months. So you have to have been living under a rock not to know that we have reached an agreement with CC Capital, but following a 7 month process, which began in December 2024, on the 22nd of July, we announced we have entered into a scheme implementation for the CC Capital to acquire Insignia Financial. The offer values equity in the company at approximately $3.3 billion, a 57% premium to the undisturbed share price on the 11th of December 2024. The Board unanimously [ recommends ] the scheme, which remains subject to regulatory and shareholder approval. I'll now hand over to David Chalmers, Financial -- Chief Financial Officer, to take you through our financial results in detail.

Thanks, Scott, and good morning to everyone on the call. I'd like to commence the review of financial performance with a summary of our results for the period ended 30 June 2025, starting with net revenue of $1.405 billion, [ a 9% ] increase on FY '24. It's worth noting that the FY '24 comparison period includes revenue from several divested or deconsolidated advice services businesses, most notably Rhombus Advisory. [Technical Difficulty] revenue in FY '24 and a loss of $4.3 million in FY '25, which represents a loss of [Technical Difficulty] of Rhombus Advisory on the 1st of July this year. Looking at performance on an ongoing business basis, which excludes these divested and deconsolidated businesses, FY '25 revenue was 4.7% higher than FY '24. Turning to costs. Our total OpEx fell by 5.9% with net cost reduction of $60 million over FY '24, in line with FY '25 guidance. Early progress on our base operating cost reduction projects in '25 allowed us to be ahead of our cost-out targets for the year. And so we were able to invest $12 million for the early stages of the SS&C transition work, the timing and quantum of which were not known, therefore, not included at the time we gave the original guidance. We've tagged this spend as reinvestment OpEx [Technical Difficulty] of OpEx that will be used from FY '26 and going forward, as I'll cover shortly. From a profitability point of view, there was a significant uplift compared to FY '24 with EBITDA up 18.9%, while underlying net profit after tax increased by 17.6% to $254.8 million. UNPAT adjustments for the period were $238.7 million, the notable adjusted items, including expense transformation and separation costs of $167.3 million, legacy legal settlements of $41.3 million and the impact of fair value adjustments for the subordinated loan notes of $51 million with the variable equity-linked component of those notes now confirmed and booked. These adjustments result in a statutory NPAT of $16.1 million for FY '25 compared to an NPAT loss of $185.3 million in FY '24. Focusing now on the drivers of the changes in profitability, I'll step through the bridge between FY '24 and FY '25 UNPAT. Firstly, as covered on the last slide, net OpEx fell by net $60 million as we continue the execution of our cost-out initiatives consistent with the 2030 vision and strategy. On the revenue side, our 2 advice businesses grew revenue by $10.6 million, a pleasing result driven by a lift in revenue per adviser and favorable growth in investment markets, helping to grow account balances. Turning to our 3 FUMA linked segments. The strong investment markets predominantly in the first half of FY '25 and better-than-expected full year net flows saw FUMA growth contribute increased revenue of $81.6 million with FY '25 average FUMA of $322.6 billion being 7.1% higher than FY '24. The divestment and deconsolidation of our advice services business, Rhombus Advisory and the sale of other smaller businesses were the main driver of the change in our Corporate segment, which is where these legacy businesses were reported. Net margin contraction for the period was $23 million with group net revenue margins of 43.7 basis points versus 44.7 basis points on an ongoing basis in FY '24. During the period, margins declined modestly in Master Trust and Asset Management with $15.9 million of the net $23 million revenue decline coming from our Wrap business. And the main driver of this contraction was approximately $9 million full year impact of the pricing changes made for the migration of MLC Wrap to Expand with FY '25 representing a full year's impact and therefore, no further margin erosion from this transition in FY '26. Other factors impacting wrap margins were the impact of fee tiers and caps in a rising market as well as changes in the mix of our Wrap portfolio. Net interest and net non-cash together impacted UNPAT by $17.8 million with a $12 million increase in net interest costs due to higher drawn average balances and increases in funding costs. Higher depreciation and amortization charges had a $5 million impact. And then finally, there was a 15.9% increase in tax expense. Moving on to the next slide on Slide 16. This shows the evolution of our cost base over the last few years with base operating expenses declining by $96 million between FY '23 and FY '25. As we set out last November at the Strategy Day, we see the opportunity to reduce these costs further through FY '28 and FY '30 with efficiencies driven by business simplification and improved operating efficiency. Another part of last year's Strategy Day presentation was the new way in which we will report our operating expenses, splitting them into 2 categories. Base operating expenses, which represents the running cost of the business on a BAU basis and reinvestment OpEx, which will cover investments made into our business into new capability or one-off incremental investments. Now importantly, we have different expectations for the trajectory of the spend for each of these types of OpEx. We expect base OpEx to materially decline over time and the opportunity we see, as we set out last November is to lower base OpEx from around $880 million, $890 million in FY '26 to low to mid-800s in FY '28 and then low to mid-700s in FY '30. Across the same period, we expect the average spend of $60 million to $80 million a year for reinvestment OpEx to effectively remain throughout that period. We will report this breakdown of OpEx from FY '26 onwards with FY '25 being a little bit of a hybrid year because we've established OpEx on a total basis. And so for simplicity, we've only reported one item as being in reinvestment OpEx for FY '25, that being the early start of the SS&C-related spend, which was flagged at the first half results. For FY '26, we expect total reinvestment OpEx of circa $80 million, the largest amount being for the next phase of the migration work with SS&C, which represents approximately 40% of the FY '26 reinvestment spend. We continue to invest in simplification projects, which will generate future cost efficiencies, including investments in AI and data, uplifting our anti-money laundering and counterterrorism financing capability, custody simplification and rationalizing our corporate structure as well as continued enhancements on the Expand platform. Slide 17 leads to the last slide and illustrates the changes we'll bring to the reporting of below-the-line expenses from FY '26, again, consistent with the approach we outlined at last November's Strategy Day. Because significant items -- cash items such as transformation, separation and remediation have been recognized below the line, the difference between reported UNPAT and NPAT was almost $402 million in FY '24 and $238.7 million in FY '25. Moving forward from FY '26 onwards, we expect to see $20 million to $30 million of cash items adjusted, principally being some of the expected redundancy costs linked to cost-out work and a further $50 million to $70 million of non-cash items, which is principally the amortization of acquired intangibles such as the customer records of historical acquisitions, including those made by [ IOOF ] such as Shadforth, ANZ P&I and MLC. We see the benefit of this new approach being twofold. Firstly, that there'll be greater clarity on the costs required to run and invest in growth for Insignia. And secondly, we're bringing this approach in at a time when the expected spend on cash items below the line will be a fraction of what they previously have been, meaning that the gap between UNPAT and NPAT will significantly reduce. As a practical example of this, the investment in the next stage of SS&C migration that I referenced earlier is forming part of our $80 million of reinvestment spend for FY '26 would previously have been reported below the line. And so from FY '26, it will be part of OpEx and therefore, above the line. Moving now to cash flow. Slide 18 highlights both the actual cash flow for FY '25 and really identifies the opportunity for growth in future free cash flow. We're pleased to see the improvement in the second half cash flows compared to first half '25, which is always -- the first half for us is always a period of high level of cash spend. As a reminder, our first half '25 cash flow was minus $239 million, and we set a target to improve second half by more than $250 million. Pleasingly, due to better-than-expected earnings, better working capital management and slower remediation payments, free cash flow improved by over $400 million across the period, meaning for the year, free cash flow was minus $71 million, funded through a draw in corporate cash predominantly and some on the debt side. It's worth noting that free cash flow in FY '25 was also supported by the pause in dividend payments and the fact that we're not expecting to commence regular income tax payments until FY '27. The opportunity for free cash flow from FY '26 is clear with expected remediation spend approximately half of FY '25 and the completion of the transformation and separation projects at the end of FY '25. Following on from cash flow to net debt and cash funding. The first pleasing thing to note is how much simpler this chart is than in previous years when there were far higher levels of future spend required on transformation and remediation relative to available funding. The improved free cash flow profile in the second half of '25 reduced senior leverage to 1.1x net debt to EBITDA with a reminder that the calculation of EBITDA used for our banking facilities is different to the EBITDA I outlined on Slide 14, mainly to some IFL subsidiaries being excluded from the calculation of the syndicated debt EBITDA. For FY '26, our future funding requirements are the final legacy remediation amounts of $87 million as well as the repayment of the subordinated loan notes in May 2026, the early repayment option on which was exercised by NAV in March of this year. In order to ensure sufficient financial capacity to cover the peak funding requirements and capacity in FY '26, we've recently increased our total facilities by $100 million, which will enable the SLMs to be repaid from existing cash and bank facilities. We expect FY '26 leverage to stay within our target range before reducing from FY '27 onwards. Turning to dividends. As Scott mentioned earlier, as part of the terms agreed with CC Capital, there will be no dividend declared under the terms of the scheme implementation deed unless the scheme has not become effective by the 22nd of July 2026, after which we have the potential to pay a special dividend on a monthly basis at 50% of monthly UNPAT, so long as that's subject to a range of conditions, most notably that net debt remains less than [ $500 million. ] Finally, looking back to the guidance we have for FY '25, it's pleasing to note that all guidance metrics were either met or exceeded. For FY '26, we're giving guidance on the same basis as FY '25, noting that the biggest movement in FY '26 is expected to be at Master Trust with margins expected to reduce to 51 to 52 basis points as the impact of the pricing changes made to MasterKey will begin to impact margin. Given the scale of this impact, it's worth summarizing these changes. As we previously noted, the impact of the pricing change made in October 2024, so therefore, a 9 month period in FY '25, impacted approximately $50 million of revenue with this reduction being fully funded through fund reserves. In FY '26, there will be a full month impact, meaning an additional $15 million of revenue impacted and the reserve funding will reduce also by an additional $15 million, meaning a negative impact to revenue and therefore, margin of approximately $30 million. In addition, there are other pricing changes impacting Master Trust, most notably the impact of Smart Choice allocations to alternatives, which has been flagged for some time. In wrap, the reduced guidance reflecting -- reflects the loss of revenue from the exit of a small IOOF alliances business with other pricing changes largely being offset by other revenue drivers. Asset Management will be impacted by Multis reprice, which impacted about $6 billion of FUM from the $42 billion Multis portfolio. We also expect performance fees to moderate given there was an element of fee catch-up in FY '25. And in Advice, we expect the recent momentum to continue at both Shadforth and Bridges with similar revenue growth to FY '25. While FY '26 has a number of important repricings and margin give up, it's important to note that the timing and quantum of these is in line with what we expected as part of the 2030 vision and strategy. And then finally, as I noted earlier, we expect base OpEx of between $880 million to $890 million with reinvestment OpEx of approximately $80 million. With guidance covered, that concludes the financial section. So I'll pass back to you, Scott.

Thanks, David. I'd like to take a moment to discuss our 2030 vision and strategy, which we announced last November. Thanks to the early completion of our previous strategy, we've been able to get a head start on several key initiatives. The strategy outlines how we intend to succeed across each business, and we're already making strong progress across the group with several initiatives tracking ahead of plan. We're driving revenue growth in Advice through improved efficiency, client acquisition with both initiatives progressing well. In wrap, we returned to market with confidence, promoting our service strengths, closing capability gaps, innovating to enhance customer outcomes and enhancing advice practice efficiency. Most initiatives are on track or ahead of plan. In Master Trust, our focus remains on simplification to reduce costs, launching our AI-enabled digital direct acquisition channel and scaled engagement of existing members and preparing for a significant investment and relaunch of the MLC brand. In Asset Management, we are well positioned to capitalize on strong demand for SMAs and accelerate institutional distribution of our unlisted capabilities with both initiatives on track. One of the most important strategic initiatives is the simplification of our Master Trust business. In FY '25, we successfully transitioned our Master Trust technology and operations functions to SS&C, an important milestone in our transformation journey. This move involved nearly 1,300 people, 4 platforms, premises and supplier contracts. Between now and 2028, we'll be partnering closely with SS&C to transform the Master Trust business, streamlining to SS&C's contemporary Bluedoor platform, one way of working with a strong focus on innovation. Our first migration is planned for first half '27. This transformation will deliver industry-leading customer outcomes, uplifted member experiences and a lower cost to serve. With more than 2.5 million Australians retiring over the next decade, MLC wants to redefine what retirement means for Australians and superannuation's role in it. Australians are rethinking retirement, working longer, scaling back gradually and embracing more flexible personal journeys. The traditional split between accumulation and decumulation no longer reflects how people live and the super industry needs to evolve to meet these challenges. MLC Retirement Boost is a key part of our holistic retirement strategy designed to deliver better outcomes and greater confidence for our customers. The 2 phases, the saving phase launched in the first half of '26, has already been launched and the retirement phase launching in the second half of FY '26. It enhances access to aged pension benefits and provides income for life. To support this, MLC has formed a unique partnership with both TAL and Challenger to establish a center of excellence featuring technical distribution specialists and tools like Retirement Boost Optimizer to help clients visualize their full retirement income picture. Challenger will also support distribution through its market-leading retirement team. This is just the first step in MLC's offering in this space, and we're excited for what's to come over the next 12 to 18 months as we continue to enhance MLC's Retirement Boost to provide advisers with more options and flexibility to deliver personalized retirement income strengths to their clients. Embracing AI is central to executing on our 2030 vision with a domain-led approach aligned to strategic priorities with a focus on advice and wrap in FY '26. We're combining generative AI, automation and robotics to deliver end-to-end solutions supported by strategic partnerships to accelerate innovation. With our central AI center of excellence will underpin this transformation, delivering enterprise-wide platforms and robust governance. Some of the key initiatives currently underway include a tool that transcribes advice conversations into adviser file notes, a statement of advice to new business solution that allows advisers to upload and isolate information to open accounts on MLC Expand straight through process and the client service agreement feature enabling advisers to upload client service agreement forms that automatically populate fee amendment requests within our online services. And finally, in FY '26, our focus remains on executing our strategic priorities. We're planning for our first Master Trust platform migration to Bluedoor, relaunching the MLC brand, driving growth by rolling out MLC Retirement Boost and increasing net flows into wrap. We're focused on embedding high-performance culture, reducing net costs and leveraging AI to help deliver our 2030 vision, ensuring that we stay ahead through innovation and efficiency. I'll now turn to the moderator to open up for questions.

[Operator Instructions] Our first question comes from Siddharth Parameswaran with JPMorgan.

Just one question first, if I can. Just on the scheme, in the MAC clauses, it does make reference to a reference EBITDA -- sorry, EBITDA and a potential reduction of 15% as triggering the MAC clauses. I was just wondering if you could help us understand how that arrangement was struck. And is it referencing '25? Is it referencing a forecast? If you could just help us understand that, please?

Sid, it's David here. What I can say is that, I guess, bearing in mind that we sign the CD in FY '26, you might expect that the reference EBITDA is a forward-looking view of profitability rather than a historic one. I probably can't go into much more detail than that, but that's how I think about it, a forward-looking view of EBITDA.

Okay. So just to be clear, the guidance that you're giving is broadly consistent with that.

So certainly, we had a pretty good view in terms of both budgets for FY '26 and our FY '26 plan as well as the FY '25 results when we negotiated around that 15%. So you can take into that, that -- we're pretty comfortable in terms of where that was set. And as I said, with a forward-looking view of EBITDA.

Okay. Okay. And given that I'm only allowed one follow-up, I just wanted to check just on the timing for regulatory approvals, particularly APRA. Just wondering how long does that -- are you expecting that to take?

Yes, we expect that to take approximately 6 months. So circa February next year. But it will depend on APRA's process, but that's the sort of indication that we have on engagement with APRA.

Okay. And is there any concern that they have around private equity or anything like that? Just keen to understand where the questions they -- what questions they have?

Look, not particularly. And certainly, they're looking at this from -- specifically from the point of view of CC Capital, which is not your typical PE approach. So no, not that has been called out.

Our next question comes from Nigel Pittaway with Citi.

Just wanted to ask a bit more about this retirement income product and why you consider it to be innovative? And to what extent does it rely on the sort of low deeming rates at the moment, which obviously the government is already suggesting it's going to focus on moving forward?

Yes. It's certainly -- look, it's certainly innovative. We're a fast follower to what AMP has done, but we have additional features to our solution that will be launched over the coming 6 to 12 months. And so it does provide a substantial uplift to retirees outcomes if they do save through the phasing saved in effectively deferred income structure within superannuation and then draw down at least in part with the longevity solution. The government's changes were not surprising, they recently increased the deeming rate by 0.5% from 2.25% to 2.75%. It has a minor impact on the benefits to customers that change.

Okay. But obviously, they're suggesting that's the first of several, but...

Yes. It would have to go a long way to remove the benefits of the solution. I mean it would have to go literally up another 5%, which is highly unlikely.

Okay. Fair enough. And then just as a follow-up, just in terms of the cost savings...