Thank you for standing by, and welcome to the AUB Group FY 2024 R esults Call. All participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Mike Emmett, CEO and Managing Director. Please go ahead.
Good morning, and thank you for joining Mark and I as we discuss the AUB Group results for FY 2024. Before I speak to the highlights of these results and our outlook, allow me to briefly recap on where we have come from as a group and what fundamentally drives our success. FY 2024 marks the 5th full year since AUB Group embarked on an updated strategy. With a refreshed leadership team, ambition, and clearly defined strategic priorities, since FY 2020, we've achieved compound annual NPAT of 33.9% per annum and an annual EPS growth of 22.1%. Today, we place over AUD 10 billion in premium for our clients, having expanded our traditional broking capabilities to include a diverse and significant portfolio of underwriting agencies, InsurTech businesses, and a strength in wholesale broking, particularly within the Lloyd's market.
Our global footprint now spans 16 countries, with approximately 5,500 dedicated professionals serving about 1 million clients to place and manage risks with the world's leading insurers. AUB Group is now ranked as the 18th largest insurance broking group in the world. Despite this growth, our commitment to clients and partners remains at the heart of our business. Our owner-driver model is fundamental to our success, allowing key partners to retain a significant equity stake in their ventures, preserving the entrepreneurial spirit of each business we invest in and fostering a sense of family within the AUB Group. Our mindset is that we are working with and for the interests of a host of fellow family members, who are united to successfully support clients while expanding and growing.
Our portfolio of about 100 unique brands, each with its own culture and history, are united under the AUB Group umbrella. This proven go-to-market strategy has consistently delivered outstanding results across multiple jurisdictions, driving our success year after year. On Slide 4, we summarize financial performance for FY 2024. We delivered another year of revenue growth and operating leverage. Underlying revenue grew by 19.8% to AUD 1.33 billion, while the NPAT grew by 32.5% to AUD 171 million, benefiting from an expansion in the EBIT margin to 34%. Underlying EPS of AUD 1.568 per share grew by 21.2%.
The board is proposing a total dividend per share of AUD 0.79, an increase of 23.4% on the prior year, and this representing a payout ratio of 52.8%, in line with the group's long-term dividend payout practice. Slide 5 highlights the key components contributing to the 32.5% growth in FY 2024 NPAT. Our strategy is to deliver profitable organic growth and complement this with accretive acquisitions in our core businesses that bolster our scale and capabilities. The strong organic growth of 20.9% was significantly bolstered by profits from acquisitions, which added an additional 17% to NPAT for the year. This growth was slightly offset by a 1.5% reduction due to the divestment of non-core assets, along with the 3.9% headwind from higher funding costs due to increased borrowing levels.
Slide seven. This highlights the performance across AUB Group's divisions in FY 2024, marked by good revenue growth, margin expansion, and profit growth. Notably, the underwriting agencies and New Zealand broking divisions saw significant revenue increases. Particularly pleasing are the profit before tax growth rates for the agencies and New Zealand divisions, which achieved 57.9% and 59.2% growth on prior year, respectively. It's important to mention that we're not comparing Tysers's performance to the previous year, as the prior period reflects only nine months post-acquisition, which would artificially inflate the growth rates. Moving to Slide eight. Australian Broking remains a core part of the AUB Group. Over the past year, we have optimized our portfolio by completing eight bolt-on acquisitions and one disposal.
Additionally, we restructured a broking portfolio, made five equity step-ups, and supported succession planning across the network by reducing our equity in four brokerages. As highlighted on the Slide, we achieved strong single-digit revenue growth consistent with our long-term average. Simultaneously, we continued to enjoy positive margin jaws by effectively managing costs across the portfolio, making solid progress towards our medium-term margin target of 40% for Australian Broking. During the year, we observed a 6% rise in premium rates within Australian Broking. It's important to note these figures are based on comparable data using a same client, same cover, same insurer metric within our portfolio. On this basis, average premium rates have risen by approximately 7% per annum over the past five years. We are very conscious of the impact on clients of premium rate increases.
To mitigate this, we've reduced our effective commission earn rates and passed these savings on to clients. Over the past three years, the impact of this is that our effective earn rates in Australia have decreased from 16.7% to 16.2%, despite an increase in commission rate entitlements. As a result, we are confident that should an accelerated slowdown in premium rates occur, we would be able to increase this effective commission rate to offset any potential negative impact. Slide 9. In FY 2024, BizCover achieved revenue growth of 15%, accompanied by a margin expansion to 42%, resulting in EBIT growth of 20.5%. Robust expansion of the Australian EBIT margin more than counterbalanced the ongoing costs associated with the company's offshore market expansion. BizCover continues to make strategic investments to enhance its platform, ensuring sustained growth and customer satisfaction.
Notably, the insurer panel was strengthened during financial year 2024 with the addition of Chubb and HDI, expanding the range of insurance options available to customers. Additionally, the relaunch of BizCover's cyber insurance offering has shown encouraging growth. Technological innovation is central to BizCover's strategy. The expansion of Blaze, the company's cutting-edge technology platform, is driving efficiencies, enhancing service delivery, and simplifying integration with other platforms, such as those used by insurer partners. The integration of AI tools into daily operations is yielding significant benefits for both customers and team members, and the use of this includes proactively reducing churn rates by assessing customer sentiment, also enhancing insurance fit by improving customer occupation classifications, and finally elevating agent-client interactions with live call transcription and analysis using AI. Slide 10 highlights the pleasing performance of our agencies division.
Over the past year, the division delivered over AUD 1 billion in premium, making significant strides towards our medium-term margin target of 45%. All components within the agencies division performed very well. The general commercial segment, operating under the 360-branded family of agencies, continues its rapid growth and reached a milestone of AUD 500 million in premium during FY 2024. Our strata portfolio is also performing strongly, with existing strata agencies, SUU and Longitude, now complemented by the newly launched Rubix Underwriting, a commercial strata agency. Additionally, the specialty agencies under the SURA brand have had a successful year, while the acquisition of Pacific Indemnity, effective from 1 July, will further bolster our growth in FY 2025. Slide 11 provides an overview of Pacific Indemnity, the underwriting agency we invested in as of 1 July 2024.
This Slide is an updated excerpt from the materials we used to announce the strategic investment. The addition of Pacific Indemnity to our specialty portfolio significantly enhances our scale and capabilities, opening new avenues for growth. While it is early days, we are pleased to see this new business continuing to perform well. Slide 12 highlights profit growth achieved in New Zealand for FY 2024. Revenue growth of 25.6%, combined with a 740 basis points margin expansion, resulted in an EBIT growth of 57.4%. After several years of challenging profit performance in New Zealand, we are pleased with the progress made in recent years. FY 2024 saw organic profit growth of 26.3%, further bolstered by a 10.5% profit increase from acquisitions.
Additionally, a reduction in spending on Lola, our major technology platform investment in New Zealand, contributed an additional 22.4% increase in profits. It is important to note that this profit boost is not expected to continue, as we anticipate increased spending in Lola in FY 2025, reverting to FY 2023 levels. During the year, we completed nine acquisitions in New Zealand and took various portfolio actions, including one equity step-up and two equity step-downs. Slide 13 highlights the performance of Tysers during its first full year under AUB ownership. On a normalized basis, the underlying EBIT grew by 14.1% for the year. This takes into account constant currency, some one-off items, and the fact that Tysers was only owned for nine months in the prior period.
We continue to realign portfolios and business areas, enhance broking teams, and also reduce costs to boost the long-term profitability of the business. Looking ahead, we will refer to this division as international, which will include Tysers Wholesale, as well as the new U.K. retail division and any other investments made outside of Australia and New Zealand. Moving to Slide fourteen. When we announced the acquisition of Tysers in May 2022, we set a target of achieving AUD 25 million in annual synergy benefits on a run rate basis by the end of FY 2024. I'm pleased to report that by the end of June 2024, we exceeded this target.
We delivered AUD 11.2 million in revenue synergies, primarily through the placement of AUB agency binders with Tysers, along with ongoing cost savings of AUD 16.9 million, largely due to reductions in headcount and other expenses. Going forward, we will no longer reference synergies and simply account for these as BAU. Slide 15. We have also delivered a step change in the execution of our U.K. retail strategy. Last year, we announced our intention to establish a significant U.K. retail broking business by leveraging our owner-driver business model, coupled with the successful strategies we've honed in Australia and New Zealand. I'm pleased to report promising progress over the past few months. Our investment in Momentum Broker Solutions, announced in June 2024, was completed on the 31st of July.
Additionally, earlier this week, we reached an agreement to acquire a significant equity stake in the Movo Group, subject to regulatory approval. Momentum operates a network of over 100 non-equity brokers, managing approximately GBP 90 million in premium. The Movo Group, comprising a network of more than 100 brokers, both equity and non-equity, places a further GBP 100 million in premium. In addition, Movo also owns a stake in an innovative quote bind issue software platform similar to ExpressCover . Together with our existing Tysers retail operations, these developments mean we now have a stake in a U.K. retail operation with more than 200 broking partner businesses, placing in excess of GBP 300 million in premium. This provides AUB Group with substantial retail scale in the U.K. and significant opportunities for growth. I'll now hand to Mark.
Thanks, Mike. Slide 17 shows the AUB Group funding and interest update. Funding initiatives during FY 2024 included a AUD 225 million dollar equity raise and restructuring our debt with a new AUD 850 million dollar multi-tenor facility and a 260 basis point reduction in interest margin. On 30 June 2024, the head entity had AUD 171.3 million dollars of cash on hand and AUD 300 million dollars in undrawn debt. The 1.28 times leverage ratio is well below the covenant maximum of 3 times. At 31 July 2024, the leverage ratio had increased to 1.62 times, as cash and undrawn debt had reduced to AUD 337 million dollars due to acquisitions which completed in July.
As of 30 June 2024, on a look-through basis, AUB Group earns income on AUD 1.1 billion in trust and operating cash, while its share of debt stood at AUD 653 million. By 1 January 2025, after outflows for the FY 2024 final dividend and currently known M&A activity, this balance of cash and debt will be approximately equal, and as a result, any change in interest rates after January 2025 will have no P&L impact. To round out this matter, prior to 31 January 2025, if interest rates globally reduced by 25 basis points for the period 1 July 2024 to 31 January 2025, i.e., for seven months, the impact on underlying NPAT would be a reduction of AUD 400,000. Slide 18 sets out the mix of currencies that Tysers is exposed to.
60% of Tysers' income is earned in US dollars, while expenses are mainly incurred in pound sterling. To mitigate this risk, we have in place a multi-year series of monthly forward contracts to sell 65% of Tysers' US dollar income for pound sterling. On Slide 19, the top graph shows the pleasing EPS growth over the past three years of 12.3% in FY 2022, 33.7% in FY 2023, and 21.2% in FY 2024. The board has proposed an increase in the final dividend to AUD 0.59 per share, resulting in a full-year dividend of AUD 0.79 per share. In FY 2023, an additional metric, the three-year average return on invested capital, was added to the AUB Group long-term incentive scheme.
We have included on this Slide what the three-year average would have been for the periods ending on each of FY 2022, FY 2023, and FY 2024. The three-year average to FY 2024 was 12.7%. The one-year ROIC for FY 2024 in isolation was 11.8%. Slide 20 highlights progress with our ESG ambitions. Our natural and inherent strength relates to the governance pillar. As an organization, we're good at recognizing risks, finding a balanced approach to measuring and managing them, and then taking action to govern and mitigate these risks. It is important to note that we are preparing our compliance with the new Australian Sustainability Reporting Standard one, leading to our ESG report being audited for FY 2026. We're pleased, during FY 2024, to once again be accredited as a great place to work and to receive a double A ESG rating from MSCI.
I'll now hand back to Mike.
Thanks, Mike. Turning to Slide 22. With operating leverage being a key earnings driver, I'd like to reaffirm our medium-term margin targets. We've consistently improved margins across all AUB divisions over several years. However, there remains significant opportunity to enhance these margins further. By continuing to execute the initiatives already underway in each division, we are confident that we can achieve our medium-term targets. Taking this earnings potential theme further, Slide 23 shows the multiple long-term profit growth levers for AUB Group. We've outlined the expected impact of each lever across three key divisions: retail broking in Australia and New Zealand, including BizCover, the underwriting agencies, and the newly named international division. I'd like to draw your attention to a few high-level themes. Firstly, M&A, new business growth, and technology. These are the top priorities offering the highest potential impact across all divisions. Secondly, consolidation and specialization.
This remains a crucial initiative, particularly within our Australia and New Zealand operations. And finally, cost reduction, which continues to be a key focus for our international division. Turning to our outlook and guidance. As Slide 24 shows, we expect another strong year of earnings growth. The Slide shows the forecast for AUB Group's FY 25 NPAT, which is expected to be in the range of AUD 190 million-AUD 200 million. This represents growth of 11.1% to 16.9% over FY 24, driven by organic growth of 7.2% to 10.1% and acquisition growth of 6.7% to 9.6%.
To determine this forecast, we have factored in anticipated net headwinds, including the cost of new broking teams and the timing impact of realigning international bonus cycles to match the AUB Group financial year. At the bottom of the Slide, we also show the forecast growth in EPS for FY 2025, reflecting the full year impact of the increased share count from equity raises during FY 2024, which reduced the forecast growth in EPS for FY 2025. I'll now hand back to the moderator for questions. Thank you.
Thank you. If you wish to ask a question, please press star then one on your telephone, and wait for your name to be announced. If you wish to cancel your request, please press star two. And if you are on a speakerphone, please pick up your handset before asking your question. The first question comes from Scott Hudson at MST. Please go ahead.
Yeah, good morning, Mike and Mark. Just a couple of questions. Mark, I was expecting to see some funding costs benefits in 2025, given the lower margin. Is that, I guess, negated by the increased borrowings?
Did you hear me? Sorry. That's correct, Scott.
Okay, and then just in relation to the Australian broking business, can I understand why we are seeing lower seasonality than historically across that division?
Scott, I think the seasonality is slightly lower, but not materially. You know, part of it is just, you know, an element of timing around small, you know, some of the bolt-on acquisitions, so they're not material, but they do slightly shift the seasonality.
Thanks. And then just on the U.K. retail strategy, does the guidance capture any, I guess, benefits from expected cost savings from, I guess, the costs within Tysers allocated to retail broking at this point?
They don't, but before everyone goes away and gets carried away, so I think a couple of things. The first is that, obviously, the Movo acquisition or investment that we, you know, announced to the press two days ago, that is subject to regulatory approval, and so we have to get the regulatory approval. We have to complete on that before we can start the process, and so it's very early in the cycle. So I think we should imagine that FY 2025 is about putting the platform in place to then deliver benefits in FY 2026. I think that is probably the safest way to think about it, Scott. And obviously, there's some, you know, upside potential in the second half, depending on timing, but there's equally some downside risk, depending on timing.
Thanks. And then just last one from my perspective. Mark, the operating cash flow performance in the statutory account looks quite poor. Historically, you've converted quite a high portion of NPAT to cash, but things particularly low this period, anything, I guess, negatively impacting that?
I'm not really sure of the question, I'm afraid, Scott. Are you referring to the Slide in our deck of Slide 42?
No, I was looking at the operating cash in the-- I can take it offline. I'll get back to you later.
Yeah. If you look at Slide 42, there's a conversion of profits to cash, and it singles out the acquisition and other one-off costs in 2024 that impacted that. And once you factor that out, you'll see that the adjusted operating cash flow increase is pretty well in line with the increase in statutory profit.
Appreciate it. Thank you.
Short, short answer is the impact is primarily the Department of Justice payment.
So thanks, Mike.
Thank you. Your next question comes from Andrei Stadnik, from Morgan Stanley. Please go ahead.
Morning. Very quick one. To just double check, and the Movo acquisition itself is included in guidance?
Yes. Correct, Andrei. Obviously, with some assumption. I mean, effectively, it's included in guidance for the second half. There are assumptions around timing. You know, we obviously don't want to get ahead of ourselves in terms of presupposing when regulatory approval will come through. But yes, we have made an assumption around that, you know, for the, at least the second half, we will be, you know, we will have completed on Movo.
Yes. Thank you. And then, on the agencies division, in with the Pacific Indemnity deal now complete, and we're there for the full FY 2025, are you expecting, you know, further progress on the EBIT margin in, the agency division in 2025? And also, you know, progress in terms of just, you know, building out, you know, that business, you know, as a platform with broader capabilities?
Yeah. So, I guess short answer, yes, but if you said to me, what are the tailwinds and headwinds in agencies? I think the first is just a general sense of the agencies have been performing exceptionally for several years. Obviously, you know, it's very dangerous to get a bit, you know, blasé and go into a new year assuming that it's going to be another year of exceptional performance. So, there's an element of building that in, not simply extrapolating FY 2024 performance. The second unknown is the profit commissions. And so you might note that in FY 2024, we had a, you know, if our average budget assumption is a 50% profit commission outcome, we had a better than traditional budgeted outcome in FY 2024.
In 2025 or for 2025, we've assumed we've reverted back to our 50% assumption on maximum potential profit commission. So it's just impossible at this stage for us to know whether we're going to be better or worse than that. That's the second piece, Andrei. Clearly there's upside, but there's also downside risk on that. The third piece is obviously with Pacific Indemnity, which is very, very so recent after completion on that. You know, it's too soon for us to extrapolate in terms of what the growth prospects might be beyond our acquisition case, and also what the margin improvement opportunities are.
Again, our assumption is, I wouldn't say it's conservative, but it's sensible in terms of assuming that they will achieve the acquisition case, assuming that there will be no incremental margin improvements in the rest of our agency's business as a result of that acquisition in FY 2025, but rather that those will flow through in 2026. Going back to the profit commission, we'll revert back to our standard budget assumption or forecast assumption at this stage of 50% of maximum potential.
Thank you. Thanks so much.
Thank you. Your next question comes from Siddharth Parameswaran from J.P. Morgan. Please go ahead.
Good morning, gentlemen. A few questions, if I can. Mike, I just want to clarify your comments around the pricing cycle. I think you mentioned 6% is what you were seeing as the rate, as the premium rate growth. Was that for the full year? Because I think you said 7% in the first half, so that implies some pullback, and I was hoping you could just make some comments on the outlook and, you know, particularly, the conditions that you saw at thirty June.
So, because the business is so second half weighted in Australia, Sid, you can't take our first half number and then just, you know, average it out. So I think the 6% is our observation about a, you know, a full year weighted average. And then my other comments were, over the last five years, in three of the five years, the same risk, same clients, same insurer, or same, you know, risk coverage, I should say, you know, was in the 6%-7% range. Only in two of the five years was it higher than that.
And I guess there's a piece which is around. From our point of view, it's not materially different to our long-term average, and therefore, you know, I guess there's a piece around saying, "Look, we don't believe there's a material impact on the business from premium rates. Even if there were, we don't believe that there is a material shift in the rate cycle." If you look at the insurer results, on balance, you know, we don't see evidence that, you know, there is actual commercial rate trends that you know we see as you know of any materiality or significance, and so apart from some pockets, our view is the rate you know the rate rises are in the long-term average range that we have experienced, and you know that's our observation.
Sorry, and just a specific question around 30 June and what you were seeing lately, because, you know, that's a good indicator as to what we might actually see going forward.
So, in general, over the last five years, what we've observed is the June rate is about 1% lower than our average. And so, where, you know, the average for the year was 6%, then June would've been 5%. But that's no different to the differential on average over the last five years.
Okay. Okay, thank you. If I could just ask about the, the long-term levers Slide as well, where, there seems to be less in the dark green segment than there was, six months ago. I was hoping you could comment on a couple of the pullbacks. I mean, it does look like, you know, the premium cycle chart, I think has been, has been scaled back in terms of level of greenness. And, also, I think just some of the commercial arrangements as well, they're, they're also a bit less green. I was hoping you could just comment on, specifically what you've changed in terms of, in terms of, your-
Probably the most pertinent set of changes are that the categories are slightly different in terms of the divisions. I know that's unhelpful when we do that, but maybe I was too subtle in calling it out earlier. So Retail Broking, only Australia and New Zealand BizCover, doesn't include U.K. Broking, which the classification six months ago did. And International is not just Wholesale Broking, it's all international. And so that drives a series of changes rather than changes in the actual types of potential.
Okay. Just, a final question, just-
You're right, you're right. So just in terms of, apart from that, I think premium rate is probably the one where, you know, previously, I think probably, to be honest, we were more swayed by the consensus argument that premium rates are a tailwind. We don't actually believe that, to be honest. So this probably more accurately reflects what we've observed for the last five years, frankly.
Yeah. Okay. And just, so one final question, which is just around the organic growth guidance that you're targeting at 7.2 to 10.1. I was hoping you could just help us unpack where you're seeing some of that growth. And, you know, the particular question I have relating to this is also, just one of your listed competitors, has really called out pressures on the agency segment, around costs rising, you know, increased requirements from underwriters, and whether you're factoring that in, into that growth guidance as well.
Not particularly. I mean, I think. You know, there's an element to that, but there has been an element to that for a couple of years now. So, you know, we built that in last year as well. So, it's probably worth emphasizing that at this stage, if you, if you go back a few years, on average, every year, the combination of organic and acquisition growth, if you exclude the Tysers one quarter, you know, which was a timing differential on acquisition. So if you exclude Tysers, for the last four years, the organic plus acquisition growth that we show in this at the time of the results, is in a 10%-15% range, technically 9.5%-16.8% range over the last, including this one, four years.
So the 11.1%-16.9%, or actually, if you just take organic and acquisition of 13.9%-19.7%, is actually quite bullish. Our, you know, guidance for us at this stage, so I was intrigued to read some of the early notes where people were saying, you know, it's a pullback or soft guidance, you know? We actually think it's exactly on, in line with what our traditional guidance approach has been at this, you know, at this early stage and at the start of the year.
Okay. But in particular, just that question about underwriting agencies, where I think, you know, quite a few in the market have been very clear that there's increased expectations from insurance companies, you know, with some of the new regulatory requirements that are there that are placed on them. Is that Are you saying you're not seeing any of that?
But there has been. I mean, they're not new things for FY 2025, right? I mean, those are, those have been in place for the last 12 months. I mean, in fact, we started implementing many of those changes in FY 2023, not just FY 2024. So I guess there's a piece which is around, you know, if you said, what will affect the pace of growth in the agency profits? Well, firstly, we're much bigger, and so there's a natural, you know, at a percentage level, in absolute terms, the dollar improvement might, you know, perpetuate, but the reality is, at a percentage level, it appears to slow, purely because of scale and significance. And the second one is: we have built those costs in, but they're not differential for FY 2025. You know, they, they were in FY 2024.
Yeah. Okay, thank you very much.
Thank you. Your next question comes from Julian Braganza at Goldman Sachs. Please go ahead.
Good morning, guys. Thanks for taking our questions. Just a first question on the just following on from the organic growth comments. So just in relation to FY 2024, where I think you're sort of saying of twenty, I think it's like-for-like 20% organic growth, and then now in FY 2025, sort of moderating down to 7%-10%. And I think even in, even in dollar terms-
First thing, you need to compare guidance with guidance rather than guidance with actual. There's a big difference in the risk and confidence profile of the year past versus the year ahead. So you have to go back and look at what was the guidance for FY 2024 in August 2023 versus the guidance for FY 2025 in August 2024. In FY 2023, the guidance expectations, you know, let's call it one quarter extra, was 13.7%-16.8%. And on a comparative basis, if you take organic growth and acquisition growth, it's 13.9%-19.7%. So the guidance on a like-for-like basis is the same to marginally better. And very different between. You know, you could apply that same logic to every result we've had for the last five years, 'cause every year, guidance is up.
Now, that doesn't mean you can now say, "Well, ignore the guidance." It's just that it's a fresh slate, right? You're starting a new year with new dynamics, new market conditions, et cetera, and you're looking after the future. Obviously, what we're hoping to do, and will endeavor to do, is to, you know, come in at the top or even beat guidance. But, you know, at this stage, on balance, it's 100% in line with our approach that we've applied for the last five years to determining what we think is gonna happen in the year ahead. And, you know, it's consistent with our ambition of, you know, always delivering, you know, double-digit profit growth.
Okay. Now, thanks for, thanks for that. And, I mean, in terms of just FY 2024 versus FY 2025, is there anything materially different in terms of how you've in terms of what you're factoring in for FY 2025 on the organic growth front? That y ou mentioned New Zealand, lower technology costs, but is there anything else that could be, could be coming into the FY 2025 numbers?
No, you know, I mean, I think if I, you know, if we go through it, probably the main one that we had as a tailwind in 2024 would be the lower the spend, where we think it'll revert to FY 2023 sort of spend levels. So that will, you know, reduce the profit growth in New Zealand. Apart from that, I think there's also a piece which is around, you know, some of the levers we have, which is around how quickly these succeed. The reason we call, for example, the new broking teams, they're not broking teams in Australia or New Zealand or in retail in the U.K. These are wholesale broking teams.
If you were just looking at them on a twelve-month basis, you would never recruit any of these teams, because in the first twelve months, they have restraints. You can't. They don't generate any or much income. In the second year, they normally break even. In the third year, they are, you know, highly accretive. So it's about more the balance and the pace. It's the same phenomenon for wholesale broking teams as it is for MGAs and seeding new MGAs. And so the interesting dynamic for us is, how quickly do we build those teams and businesses, knowing that they have a dilutive effect on the first 12 months or in the year results, but actually are, you know, an important part of our growth in year three and four and five? And so I think we're quite good at balancing that piece.
The reason I call this out is because above and beyond the normal, ordinary component, this is a, let's call it a non-underlying, you know, piece, and therefore we call it out. We're not saying that it's not, you know, an impact. We're not trying to make excuses, but it's just so that people get a feel for what we believe the underlying, profit growth potential is of the business.
Okay. No, thanks, thanks for that one. Just a second question. In terms of the debt headroom, post Movo, what would that look like, just post that?
We're not saying much, we're paying for Movo.
So, not attributing a specific. It's not, you know, from our point of view, it's not a category that is material enough to warrant disclosure.
There will be plenty of debt headroom, and don't forget also, there's the Tysers earn-out in January, and we do have the ability to upsize our facility.
Yeah. And then just based on the latest assessment of just that earn-out payment, is it the full l ike, just where you're thinking that based on performance as to what that earn-out could be? Hello? Hello?
Your next question comes from Jason Palmer at Taylor Collison. Please go ahead.
Oh, yeah. Good morning. I'll ask the same question that wasn't answered around the earn-out payment. Is that the current financial liabilities amount of 162 on the balance sheet?
Pardon me, this is the operator. We have temporarily lost connection with the presenters. Just please hold the line and we will reconnect shortly. Pardon me, this is the operator. We have recommenced. Thank you.
Hi, sorry, everybody. We're not quite sure what happened there. So Julian, I'm afraid I missed the second part of your question. Do you mind repeating?
Just, just one moment. I'll just bring Julian back online. One moment. Thank you.
Hello?
Thank you, Julian. Your line is now live. Thank you.
To the Tysers earn-out payments and just where you think, based on performance of Tysers over the period, just where you're landing in terms of that earn-out payment.
Yeah, so it's a premature thing to call that, Julian. Just as a reminder, it runs for a twelve-month period to the end of September, and it's payable in, you know, determined, and payable at the end of January. So I think it'd be premature for us to call it at this stage.
Okay, understand. And then just... Sorry, just a last question from me in terms of just that heat map you have at the back of the deck. I noticed that retail broking, the focus on cost reduction has shifted from high to medium, if I got that correct. Can I just understand the rationale behind that? I would've just thought there'd be more focus on cost there going forward. But yeah, just to kind of understand that move there from high to medium.
It's just the scale of the opportunity going forward that has reduced proportionately. Obviously, as we feel that we are getting to a point where y ou know, it doesn't mean that our focus on margin expansion has reduced, but, you know, we just remain confident that we can maintain costs at a lower rate of growth than the revenue, which is different to cost reduction.
Okay. But in terms of the opportunity for cost out within retail broking, do we think about that as being less of an opportunity going forward, given that move? Is that what you're calling out there?
In Australia and New Zealand, yes. You know, We think this is all about managing costs now while we grow revenue, versus in the international businesses, whether it's retail or wholesale, we do see a continued, you know, large opportunity for us to reduce cost.
Okay, great. Yeah, thanks, thanks so much for that, guys. Thank you.
Thank you. Your next question comes from Tim Lawson at Macquarie. Please go ahead.
Hi, guys. Thanks for taking my questions. Just one, in terms of the renaming of Tysers International, is that just to accommodate U.K. retail versus Tysers? Are you flagging that you anticipate opportunities in other markets, particularly, continental Europe?
Tim, it's really to avoid y ou know, so we may make decisions. So for example, we invest in a business called Mexbury, based out of Miami, and effectively, that's replaced what Tysers used to be, an operation that Tysers had in Miami. Now, you know, we prefer to invest in businesses in that owner-driver style model, than to have sort of branches and, you know, locations, et cetera, of the business. And we may make a decision about whether it should be owned by Tysers or by another subsidiary. To us, that's, you know, much more about, you know, structuring and currency and legal decisions than it is about, you know, a business operating model. So for us, it's about, let's not get caught up on the technicalities of whether it's a subsidiary of Tysers or not.
The fact is, we're running these, either we're running an international portfolio of wholesale brokers and MGAs, or we're running a U.K. retail business, and that umbrella, you know, let's just call it international rather than get hung up on the technicality of what's part of the Tysers legal entity.
Okay. Thank you.
Thank you. Your next question comes from Andrew Adams at Barrenjoey. Please go ahead.
Hey, Mark, Mike. Just to kick on, sorry, I dialed in late, so I might have missed it earlier. But I guess high level guidance looks in line with what we expect at this stage of the year, but just that, that red bar on the new teams and bonus changes, does that w hat divisions does that go into? So is that a permanent step up in costs, and where does it go?
No. So, Andrew, the reason for including it, so firstly, it is, you know, the bonus piece of it is a once-off adjustment to the way in which we accrue bonuses in the international part of the business. And the reason for that is because, previously, the Tysers and other international businesses had a calendar year bonus accrual period, and because some of the bonuses are deferred, so they're paid in March and September of the following year, so effectively had an accrual over an eighteen-month period, we've aligned everyone to the AUB financial year, so that is to June each year. Now, obviously, one option was to move it to an 18-month period, or secondly, to pay a once-off six-month bonus.
We decided on the latter, which is better for staff, but it means that it's effectively you're accelerating the accrual of that portion of the bonus. And so it's a once-off, 'cause after that, it'll then, you know, go revert to the normal accrual profile. So part of that
And how much of that four point one is that? Or is it half, quarter?
We're not splitting it, but half is a reasonable assumption, yeah.
Yeah.
And then the second piece is really around. There are a few that we're not there. There are bits around the wholesale brokers, where effectively, you recruit them knowing that they have 12-month restraints, and you're bringing them in specifically because you believe that over a three- to five-year period, there's a strong business case. But in the 12-month period, you wouldn't do it because it's all cost with no revenue. And so-
So that's all in the Tysers division, that recruitment?
Correct. Correct. Now, what they haven't done-
Is that an annual, or are they recruited over the years, so that number might be a little bit higher next year?
Yeah, except next year we'll get the revenue, right? So-
Okay.
So effectively, the revenue will flow in roughly 12 months after the recruitment.
Yeah.
This is not normal. I'm not talking about where we're recruiting one broker or replacing a broker. This is where there's some particular areas that we've identified, we wanna bring in a small team, and this is the net effect, net headwind effect of that team in the FY 2025 results.
Yeah. No, totally makes sense. Thanks for that, guys.
No problem.
Thank you. Your next question comes from Jason Palmer from Taylor Collison. Please go ahead.
Yeah, thanks. Good morning, Mark and Mike. Thanks for your time.
Good day.
Just the financial liabilities under current 162, now that sort of neatly matches off against the Department of Justice payment, which will take you up to 200. Is that a fair assumption of what your earn-out component is? I mean, you've obviously calculated it for the accounts.
Where are you looking, Jason?
On the balance sheet, financial liabilities, AUD 116 million of current liabilities.
Yeah, that's part of it. I think the number's a bit coincidental, Jason. I think given the call, we'll come back to you. Can we deal with that directly and separately?
Yes. No, no problems. Okay, I'll move on. Lola, you said you'll sort of revert back to last year's spending. That was about AUD 3 million you've called out, or thereabout. Is that project going to deliver benefits now into 2026 , or will that be a first half cost of roughly half of that, and then a second half recovery of that cost?
Yeah, so we think the latter.
Okay.
So
It's a net.
Correct.
A net headwind of roughly half of that?
Correct.
Okay, so that headwind would then become a tailwind into 2026?
Correct. Now, what's difficult about this, obviously links to the pace. So you'll recall that we paused the project after two brokerages were live. The software vendor then made good on all the things that they needed to deliver. We remobilized the project in about April or May. We've already gone live with an additional two brokerages. It's too early to declare, you know, significant victory, but the fact is, you know, we know that the, you know, the updated components address many of the concerns that we had previously and some of the issues that we observed. Two of them are live, one as recently as last week. So if the pace at which these two went live, we're able to extrapolate that, it means we probably will have another eight to ten go live in the course of FY 2024.
Obviously, the operating cost goes up, but the project cost will be flat, and the revenue increment that we expect and the productivity improvements will flow through. And so, you know, our assumption is, you know, almost what we assumed originally for 2024, we're now assuming for 2025, which is headwind in the first half, tailwind in the second half.
Okay, that makes sense. So just going back to Tysers, you flagged that AUD 4 million relates to Tysers, and AUD 2 million of it is a one-off, so that'll come out in 2026. And then you've got some benefits to come into 2026 as well for that team that you've recruited. Does that mean that then, to some extent, the margin of Tysers will go backwards before it goes forward? Is that a fair assumption?
No, 'cause. Well, I think the margin will. So what's difficult about it is, I think the FY 2023 margin was artificial, right? So FY 2024 is the first time that I think the seasonality split and the margin is, you know, represents, if you like, a baseline. And so obviously, what we're gonna try and do is ensure that, you know, the margin is neutral or better compared to FY 2024. But, you know, lots of moving parts, but that's our assumption, Jason.
Okay. Thank you. Last one: I was intrigued by the comment you made, and I might have misheard it, 'cause the line was a bit hard at the beginning of the call, around commissions and how you could defray a reduction in the premium rate environment if it came with commissions. Can you sort of unpack that, please, a little bit more? And that's my last question.
Sure. So, so obviously, if you're a small commercial enterprise, and you, you know, your broker's saying to you, "Look, your premium is gonna go from," I don't know, I'll make up a number, "AUD 1,000 to AUD 1,500," and we're getting 20% commission, just for the sake of using round numbers. So out of that AUD 1,000, we were getting AUD 200, and we're now going to get, you know, you know, still 20%, so AUD 300. One of the things we can do is we can reduce the AUD 300 to AUD 250. We've still had an increase in our earn, in our absolute commission dollar, but we've also demonstrated to the client that we are sensitive and trying to ensure that they renew their policy with the right insurer, et cetera.
But effectively, the way it works is we get paid the, you know, pick the number, whatever the client pays us, and we pay them, you know, the net of commission amount to the insurer. We can flex. We can't flex up, right? It's not that we can get more commission just because we choose to, but we can certainly flex down to zero. We do that consistently when premium rates are going up, and what we have observed, if you look back, you know, over a ten-year period, is that when rates are soft, our commission earn rate is higher as a percentage of maximum, and then when rates are hard and, you know, increasing significantly.
Even though we have worked with insurers to increase our commission entitlement, partly through deploying technologies like ExpressCover , et cetera, new commission arrangements with insurers as we've increased our scale, et cetera, but actually our effective commission rate has reduced from 16.7% to 16.2% over the, you know, just a three-year period. And that's. And obviously, that's over a very large premium pool, so it's quite a big number. And so that's the lever that we were talking about. In addition, our fees, as a percentage of premium, have have reduced substantially over that same period. And so we have both levers that we can apply in the event that rates, premium rates were to, you know, significantly slow.
Thank you.
No problem.
Thank you. That concludes our question and answer session. I'd like to hand back now for some closing remarks.
Thank you very much, and thanks to all of you. Firstly, apologies for the technical difficulties. I'm very happy to recap afterwards, and anything that you missed, et cetera, feel free to reach out to us if there was anything that you missed, but fortunately it only affected the questions, and hopefully we picked that up. But apologies again. Look, this has been another year of expansion, growth, and rewarding shareholder returns. You know, we're excited about the range of opportunities that lie ahead for AUB in the coming years, and I'm pleased to observe continued strength in the performance across all the divisions. So thank you for joining us this morning, and Mark and I look forward to meeting many of you in person over the coming week. So have a wonderful day. Goodbye.
Thank you. That concludes our conference for today. Thank you for participating. You may now disconnect.