Thank you, and good morning, everyone. Welcome to Insignia Financial's FY 22 results for the year ended 30 June 2022. On behalf of Insignia Financial and in the spirit of reconciliation, I respectfully acknowledge the traditional custodians of the lands across the country on which we meet today, and I pay our respects to the elders, both past and present. Presenting our results today are Insignia Financial's Chief Executive Officer, Renato Mota, and Chief Financial Officer, David Chalmers. I'll hand you over to Renato.
Thanks, David, welcome everyone to our full year results and our first full year results as Insignia Financial. Before diving into the presentation, it's worth reflecting on the significance of this. Becoming Insignia Financial is more than simply a name change, it reflects the creation of a new organization, bringing together IFL and MLC with a shared focus, a shared purpose, and a shared culture.
As Insignia Financial, we're driven by our ambition to create financial wellbeing for every Australian. As we stand here today, we're confident we've got the necessary capabilities, economic diversity, and scale to deliver on that ambition. We're being clear in our strategic intent, and as we review the results, you'll see that firstly, we've delivered on our commitments. Doing what we said we would do across platforms, advice, and asset management.
Secondly, our strategic decisions have driven a significant turnaround in our flows. Pleasingly, it's through the disciplined execution of our strategic priorities during the year that we've delivered a strong result, and also established solid foundations for future growth. It's worthwhile seeing the scene also strategically as Insignia Financial as a diversified financial wellbeing company, set in the context of one of the world's largest and growing retirement savings pools.
As we know, the superannuation system exists to support an aging population and one that represents one of the wealthiest per capita populations in the world. Super is expected to double over the next 10 years and nearly triple in size over the next 20.
Alongside that, we also know the majority of Australians have unmet advice needs. In fact, the unmet need dwarfs the current size of the existing industry and presents a significant opportunity.
Against this backdrop, Insignia Financial represents a business with economic exposure to the three main drivers of financial wellbeing value chain. Being advice, platforms, and asset management, with a diverse range of channels to market across the industry. This economic and channel diversity translates both to business resilience and competitive advantage.
We see a real competitive advantage in the network effect of running these three businesses side by side. Insights and knowledge developed in one segment shared across the other two, providing us with an ability to get closer to our clients.
For example, it's the insights and interactions with advisors as our licensees that helps inform our platform and asset management development. While there's value in this network effect, it's also pivotal that each segment has a value proposition in its own right and a sustainable economic model to match.
As we walk through the results, you'll see three businesses with clear strategies providing collective benefit to the organization as a whole. Reflecting on the last twelve months, it's evident that the MLC acquisition has provided a strong foundation for competitive advantage and positive momentum, and we've delivered a strong result across the board.
That's translated through to an underlying net profit after tax increase of 59%. This result was supported by strong synergy realization with AUD 78 million of in-year synergies for the 2022 financial year. As well as that, we've delivered on the breakeven goal for the ex-ANZ aligned licensees. We integrated the MLC advice under Bridges with a refreshed brand, unifying the culture and common technology.
Really, this represents the first steps towards our goals of advice sustainability for the MLC business. We've delivered a significant turnaround in platform flows alongside an ambitious platform simplification agenda, where we've delivered two system migrations during the year.
In asset management, we've delivered a strong performance in 2022, which is really pleasing, adding to the already strong long-term performance, as well as integrating the two investment capabilities into one, and that's certainly well underway now.
As we announced earlier in the week, we also delivered on the sale of AET, and this provides further focus and simplification benefits. As David will touch on briefly, the group's also completed the debt refinancing during the year.
We achieved carbon neutral status for Insignia Financial, and this really is a clear sign of our environmental intent and our commitment to uplifting our ESG capabilities across the organization. In summary, not only have we delivered a strong financial outcome for the year, we've made significant progress to underwrite the future success of this business in years to come.
If we turn to our segments, kicking off with platforms, we've been able to simultaneously deliver on that, deliver on simplification and growth. This has been largely achieved through enhancing our client experience. It's worth focusing on the breadth of our platform business, which is three main pillars. Firstly, we have a competitive presence in the advisory space via our wrap platforms. In addition to that, we're also one of the country's largest workplace super providers.
It's been pleasing to see the growth across both of these channels, not only in FY 2022, but pretty importantly also with strong pipelines for the current financial year. During the year, we saw AUD 2.8 billion in net funds flow into the Evolve wrap platform, under advisory and certainly in the workplace business.
It's been pleasing to attract 15 new employer plans, which represent over AUD 500 million in FUA opportunity. In addition to these two intermediary channels, they give rise to an important and valuable opportunity to directly engage in our personal business. Which aligns strongly with our digital financial well-being strategy. This channel represents over AUD 30 billion in funds and nearly half a million members. We see this as a really important source of future growth going forward.
What underpins each of these three channels is an enterprise commitment to service and technology. This is in turn amplified through our simplification program, and all of which culminates in improving client experience and growth momentum. We turn to Advice. The reshaping of the Advice business is having a meaningful impact on the earnings, the sustainability and the quality of advice outcomes.
We recognize Advice needs to exist on a continuum of different models, and we see tremendous opportunity to improve the financial well-being of Australians by extending our reach across this continuum and making advice more accessible.
This needs to involve utilizing technology in support of our advisors across all three of employed, self-employed and self-licensed models. While we've seen a reduction in advisor numbers, this reduction has been broadly in line with the reduction in the industry as a whole.
In other words, the reshaping of our business model, the removal of subsidizations, has been achieved without a significant reduction in market share, all the while improving the quality of our advice and our advisors. We're focused on expanding our capability of technology in the way we shape client experience and drive personalization.
Not only is this important for advice, it's also important in pursuing the opportunity to reach those people who currently don't interact with the advice industry or don't have a financial advisor. With the addition of the MLC advice network, there remains more to be done from a sustainability perspective. However, the track record and experience with the ANZ business gives us real confidence and expertise that we have a clear plan for what is required.
In our Asset Management business, we continue to deliver strong performance across multi-asset and direct capabilities. During the year, we had 87% of our funds under management exceed their five-year objectives. In June of this year, the MLC and IOOF multi-asset teams were integrated under a single chief investment officer.
Importantly, all research houses reaffirmed their ratings across retail and corporate product suite. This really was a vote of confidence not only in the people and the capabilities in those teams, but importantly, the change management process that we're working through as a business.
With a presence across the multi-asset portfolio construction, single asset class strategies, real asset capabilities such as private equity, the depth and breadth of this business provides access to new pools of clients and an economic resilience through diversification of earnings.
Utilizing technology in new ways to package and distribute investment outcomes remains a key opportunity. In many ways, technology is a key theme also for Asset Management, both in terms of expanding into the IMA, SMA space, as well as through reporting and insight tailoring via our Investment Central service.
As we've already touched on, we're particularly pleased with our ability to turn around flows, the flow trajectory, and this certainly bodes well also for the 2023 financial year. In FY 2022, we experienced a significant turnaround in flows with an AUD 3 billion improvement on the prior year on a pro forma basis. This is quite an achievement in the first year of acquisition, particularly considering the other competing priorities that we've been able to execute on in parallel.
This improvement in flows was the result of strategic decisions taken to enhance the competitiveness of our offer, as well as the improved strategic clarity and focus that comes from being a specialist business.
Pleasingly, the improvements have been across all three operating models, whether it be continued improvement in the IWD model and the Evolve Wrap, the MLC product range, which has benefited from some recent product enhancements, or in fact, the OnePath suite of products which benefited from some pricing changes last year.
The uplift is also evident by channel. Whether you're looking at the advisory channel, the workplace channel, or in fact improved retention in the personal book, it's been great to see that there's been a strong contribution across the board.
We continue to focus on executing our priorities and anticipate that in the financial year of 2023, we'll actually become net funds flow positive, which I think is a great milestone, and certainly something we'll look to build upon in years to come.
On the Asset Management side of the business, and we've discussed this before, the lumpy nature of institutional flows mask what are really healthy net funds flow growth in the retail space, and particularly in the on-market product suite, where we've had some strong momentum, and we expect this to continue in the coming years. I'll hand over to David now.
Thanks, Renato, and good morning to everyone on the call. Starting with an overview of the statutory result, FY 2022 UNPAT, including discontinued operations, was AUD 234.5 million, the result of gross margin of AUD 1.48 billion and operating expenses of AUD 1.05 billion.
Net profit after tax for the period was AUD 36.8 million, with a series of adjustments to arrive at our UNPAT, and these adjustments are set out in the appendices, the most significant of which are transformation costs of AUD 96 million and remediation costs of AUD 70 million. When comparing FY 2022 results to the previous period, we provided both FY 2021 actuals and an FY 2021 pro forma.
Because the acquisition of MLC was completed on the thirtieth of May 2021, there's only one month of MLC financials in the FY21 statutory result. Therefore, the FY21 pro forma is a better basis for comparison as it's been adjusted to include or to assume the full 12 months of MLC's FY21 performance.
When comparing to the pro forma FY21, the strength of the FY22 result shows through with gross margin up 2.6%, OPEX down 3.9%, which taken together have led to a 26% improvement in EBITDA and a 9.9% increase in NPAT. We also note here the movement in some of our key ratios. We've talked here about group gross margin and group net operating margin or EBITDA margin.
Group gross margin was down 2 basis points and net operating margin up 3 points. I'll stick to the drivers for these shortly. One of the other key metrics we look at is our cost to income ratio, which improved from almost 79% on a pro forma basis down to almost 74%, and certainly one that we're gonna continue to target as we move forward.
Moving on to looking at segment performance, it highlights Renato's point about the benefit of our diversified model that we operate with each of our 3 operating segments delivering double-digit NPAT growth versus FY21 pro forma. Starting off with platforms, versus that pro forma FY22 saw a 1 basis point decline in gross margin from 49%-48%, but a 1 basis point increase in net operating margin from 18-19 basis points.
The 10% increase in NPAT was driven by this reduced OPEX and a 14% increase in average FUA, which more than offset the balance of pricing changes made throughout the year. In advice, NPAT grew by 16.2% despite a drop in year-on-year gross margin.
As a reminder, that's really because FY21 includes AUD 16 million of income from the former BT relationship that ceased at the end of calendar 2020. Costs in advice were reduced by AUD 31.4 million as part of the Advice 2.0 strategy, which as Renato mentioned, has led to the breakeven of the ANZ or former ex-ANZ advised licensees.
In fact, over the period, there was effectively a zero loss for the period and a small run rate profit for those businesses as we head into 2023. Finally, asset management gross margin increased from 24 basis points to 25, mainly due to the mix of our funds over that time.
Net operating margin increased from 8 to 11 basis points due to cost reduction, and NPAT was up 36% when we put these two together, and in terms of what's been, we think, a really good year for that business. Turning back to the group result, the next slide shows a bridge from FY21 NPAT to FY22 NPAT. After adding back the MLC NPAT contribution, you can see that FY22 performance is really driven by two factors.
The increase of almost AUD 80 million in FUMA related uplifts across both the MLC and IOOF ex-MLC portfolio, and the net OPEX reduction of 42.6, which I'll cover off on the next slide. Offsetting these gains has been a reduction in product margin due to pricing changes of AUD 34.1 million.
Most of these relate to our platform segments and an increase in other costs, which include a full year of funding costs, lease costs, and again, also the BT third-party arrangement that I mentioned earlier. Moving on now to look at the cost bridge. This is the breakdown of the 42.6, and you can see here how we have the synergies delivered in year of AUD 73.1 million being offset by mainly by our sort of salary increases of AUD 22 million.
That AUD 22 million is pretty typical for what we see in terms of increase in our wage bill. It's typically between AUD 20 million to AUD 25 million. In terms of the way we see that for 2023, we do see higher salary costs coming through as we look to 2023, but we will offset these inflationary impacts through additional cost savings so that the net salary increase line continues to be in the AUD 20 million-AUD 25 million range as we head into FY23.
Focusing on synergies, FY22 was a real watershed year for the delivery of the synergy program with AUD 124 million of annualized synergies delivered, taking the total annualized amount to AUD 180 million and reducing the amount to be delivered by the end of calendar 2022 to AUD 38 million.
More pleasing than these annualized numbers was the translation of these annualized synergies into a P&L benefit, where we saw a benefit of AUD 78 million, 73 from cost and 5 from revenue synergies. Now we expect the flow through into FY23 to be approximately an additional AUD 85 million, principally from initiatives that have already been realized.
That will just be the full year impact that flows into 2023, with the balance then expected into FY24. While we do think that there will continue to be synergies from the acquisition beyond the 150 million dollar commitment, we will continue to report on synergies through at a minimum the first part of FY23. We will soon move to talk about overall cost reduction initiatives as a single number rather than splitting them into the various initiatives.
We won't do that until we've been able to demonstrate that the full synergies have been delivered through the P&L. Moving on next to remediation. Also a year of significant progress on remediation with our two programs, paying out more than AUD 300 million to impacted clients.
Firstly, the advice remediation program saw AUD 186 million in payments made with a net provision raise of AUD 62.4 million, leaving a balance at 30 June of AUD 191.8 million. Now we expect a further AUD 48 million in cash payments to be made by the end of September 2022, when the fee for no service element of the advice program is expected to be concluded.
That will really leave the quality of advice work left, which relates to approximately 16 advisors that we need to do to wrap that program up. Price remediation also progressed well, particularly on the P&I side, with AUD 121 million of payments. The P&I element of that is largely complete, leaving the MLC program that will continue on into calendar 2023.
Moving now to corporate cash and debt facilities. The slide sets out here our senior leverage as at 30 June 2022, which was 1.1x net debt to EBITDA. Slightly lower than we had anticipated, and again, that's mainly due to that delay in remediation. The remediation payments will continue to. The timing of those will continue to be a significant factor in terms of the timing of our peak in leverage.
We expect that peak now to be pushed back into the first half of 2023, before coming back into our target 1-1.3 range. That's senior leverage by FY 2024. Renato mentioned also that we've successfully completed a refinancing of our debt facilities across the last few weeks. We've increased the size of the facility marginally from AUD 920 million to AUD 955 million.
Importantly, the tenors have been extended from what were 2-3-year revolvers in the former facility to now 3-4-year revolvers, also with a four-year term tranche. The details of those are in the appendices, but we're certainly pleased to have the support from our banking group and the available funding that we need to execute on our business plan. Dividends.
Directors have declared a dividend of AUD 0.118 per share for the second half of 2022, which represents a 66% payout ratio. This is the same dividend cents per share as the first half, bringing total FY 2022 dividends to AUD 0.236. As with the first half, we're offering shareholders the flexibility of a dividend reinvestment plan, and again, continuing the same 1.5% discount as offered in the first half.
Lastly, I wanted to make a few comments on the outlook for 2023, which has certainly started with increased volatility in equity markets as evidenced by our 6.7% drop in closing FUMA for FY 2022. Renato mentioned we're targeting positive net funds flow for FY 2023, building on the momentum of the last few quarters.
Now, we do see a contraction in our group gross margin of 1.5-2.5 basis points. That's mainly driven by platform repricing, and much of which represents the full year impact of price reductions and decisions made in FY 2022. In terms of our net operating margin, and based on a return to more normal market conditions, we see this being broadly in line with FY 2022, thanks to the various cost initiatives underway.
In conclusion on the financials, we think it's been a strong set of numbers delivered for FY 2022 and we think that these also lay the platform for FY 2023, despite what in the early stages have been more challenging market conditions. Back to you, Renato.
Thanks, David. Just before addressing the outlook for Insignia, it's important to reflect on where we've come from as a business and all that's been achieved over the past two years in creating this opportunity for growth. The acquisition of MLC was part of an ambitious strategy to transform IOOF and position us at the forefront of the industry disruption, ahead of many of our competitors, and it also recognized that the industry was at an inflection point.
This is all designed to allow us to benefit from the structural industry growth over the coming years. This plan was not without execution risk, and we acknowledged that at the time. However, we've delivered to the milestones we set ourselves, and this gives us greater confidence about the future and our ability to execute on the emerging growth opportunities.
For the growth of Insignia Financial, there are three pillars which describes our effort to create the leading financial well-being company in Australia. The first pillar, which we describe as becoming Insignia Financial, is really focused on building a culture and a reputation, both internally and externally, that aligns to and reflects the needs of the communities we serve.
This is key to building a culture centered around our clients and a commitment to agile ways of working, bound together by a common purpose and ambition. The second pillar, simplification, remains a core part of our strategic opportunity and underwrites our agility, our improvement in client experience, our investment in service excellence, and ultimately, our growth prospects. The third pillar is financial well-being, which we've traditionally described ourselves as an advice-led business.
In reality, the opportunity is far greater than just the advice arena as we know it today. Financial well-being is about ensuring we've got the right insights, the right tools and partnerships to all Australians at the right point in time, importantly. Whether they have complex intergenerational needs or are simply looking to learn more about their options as they start a new life.
Underpinning this financial well-being journey is a commitment to technology, data-driven insights, and a purpose centered around the needs of Australians. It's pleasing to see the progress we've made across the spectrum of environmental, social, and governance factors. This recognizes the importance and opportunity for Insignia Financial to better reflect the needs of the communities we serve and directly contribute to the well-being of our society.
As a business, our clients are entrusting us on a promise of future benefits, and it's really important that we demonstrate that we understand and place importance on the same things they do. For Insignia Financial, our success begins with our people and clarity around our conduct and purpose.
It's for that reason that we've put a lot of effort into developing and immersing our people in the client-first principles, which provide the foundations of everything we do. Keeping in mind much of this work's been done during COVID and lockdowns, it's been really pleasing to see our people galvanize around our principles, and this will continue to be an area of focus. We've touched on the work we've done around and continue to do the environmental space.
While we think the measuring stick in this arena will continue to be reassessed, it's important we remain attuned to societal expectations, ensure our conduct is in line with our stated ambitions for 2030 and 2050 targets. We pride ourselves on being a belonging culture, so diversity and inclusion is a key area of focus for us.
In addition to that, the Insignia Community Foundation has played a pivotal role in supporting people in need for over 20 years, and it continues to play an important role for Insignia Financial today. Finally, on governance. As our organization evolves, so too does the governance environment that supports it. There's been a renewed focus on ensuring we have a common set of standards and practices to support the business, as well as ensure that the fiduciary mindset is embedded in everything we do.
Alongside the simplification of the business, we're reviewing a governance model to ensure it adapts to our new size and scale and reflects the risks and opportunities of the change in the operating environment, particularly as we work towards a simpler final state. Simplification remains a key feature of our strategic intent and a major source of value and growth for us.
As we've stated in the past, our experience, having reduced the main systems down to two prior to the acquisition of P&I and MLC, is that there's significant improvement in cost to serve as a result of these benefits from scale.
We see the same relationship evident across the industry, which really reinforces our belief that converting size into scale is one of our strategic opportunities. As the chart on the right shows, the bringing together of IOOF and MLC has created size.
However, converting this into value from scale is the opportunity that we'll tackle over the next 3-4 years ahead of as part of our simplification program. We're developing a comprehensive program to map out the path to our final state of 1-2 platforms and simplified operating structure.
Our expectation is that this program will take 3-4 years, and one of the end results of this will be an organizational cost and income ratio in the low-to-mid 60s. It's important to note that these benefits from simplification weren't quantified at the time of the MLC acquisition and represent value over and above the acquisition thesis.
While we've always pointed to these benefits from a qualitative perspective, it's particularly pleasing to be able to tackle this opportunity ahead of our expectations from a timing perspective.
While we recognize and certainly believe that scale improves cost to serve through consolidating into newer, more contemporary systems, it also translates to an improved advisor and client experience and ultimately improves our growth prospects. This has certainly been the experience with Evolve 21, which we completed in December, and we expect the same to be the case with Evolve 23, whereby we're taking one of the acquired platforms and consolidating it into our proprietary Evolve platform.
This transition provides the Evolve platform with significantly more scale, making it one of the largest contemporary advisor wrap platforms in market with a clear path to continued development, which will be based on agility towards advisor feedback and leveraging proprietary technology for service excellence. Not only does scale improve economics, it also fundamentally improves the experience and therefore the growth prospects of the business.
Our strategic commitment to advisors, I think, been consistent and clear throughout, as has our intent to make advice more accessible and affordable. This has meant deliberate changes to our operating model as we adapt to the changing industry. With the foundations of improved governance and economics, as a result of the ANZ licensee business now in place, we have a blueprint for the continued reshaping of the MLC advice business.
We also believe we're well placed to capitalize on potential changes to industry settings coming out of the quality of advice review, as well as the increased demand for advice that's emerged over the past few years and continues to emerge. A clear focus on advice remains improving the productivity of advisors through improved processes and technology deployment, enabling greater focus and client engagement.
as we've touched on, financial wellbeing is more than just advice. It's about the interactions that lead into or complement advice. It's about combining humanistic as well as digital interactions.
These wellbeing interactions are designed to enrich the client experience, whether it's complementing advice or whether it's in fact just helping people who may otherwise not sit in front of an advisor improve their own confidence in decision-making through interactions with us. Advice has sometimes been described as a walled garden with high barriers to engagement for clients.
Our financial wellbeing strategy is really designed to lower those barriers, create more entry points, create complementary technology and insights to support financial wellbeing. Not only will new tools and interactions help non-advice clients directly, but will also significantly enhance the pipeline of potential advice clients, expanding it beyond the current 10% of Australians.
The one consistent message here is that there's an inherent value in professional financial advice, and we believe that there are community benefits and attractive financial returns by making it more accessible. The final piece of the puzzle from a financial wellbeing equation is really the delivery of outstanding and reliable investment performance.
The asset management business is one where people and culture are the driving force, and we're really fortunate to have an incredibly focused and capable team delivering outstanding outcomes both across multi-asset and the single asset classes. And there's no doubt in our mind there's a strong alignment between this business and our financial wellbeing philosophy.
Whether it be in support of our superannuation members or for institutional clients, whether they be offshore pension funds or domestic mandates, it's ultimately all about delivering investment outcomes to members according to an agreed strategy and agreed level of risk. That's entirely at the heart of financial wellbeing.
Over the past few months, we've brought together the multi-asset teams, which has provided for improved focus and alignment. It's also allowing for product and operational simplification benefits as well as creating scale benefits from our funds under management. Underpinning the investment performance ethos is a business strategy to improve how we leverage technology to new channels such as IMAs, SMAs.
As well as digital portfolio construction tools for advisors. As part of raising our ESG maturity as a corporate, we're increasing our focus and accountability around responsible investing on behalf of our investors, which we expect to continue to be an area of focus. To wrap up before opening up to questions.
Having successfully executed the key deliverables over the past two years, Insignia Financial now finds itself with a really clear path for developing a leading position in the industry and allowing it to capitalize and continue to growth across our three businesses.
It's our at-scale presence and expertise across advice, platform, and asset management that gives us confidence around our ability to build a competitive advantage. We're already seeing that translate into improved funds flows, and we expect that to continue.
We're building the foundations of our reputation and brand in market through our people and principles, and making sure this translates into organizational agility and leading technology and service through our simplification agenda. All of this ultimately goes to support our key competitive advantage of delivering financial wellbeing through a diverse range of channels and capabilities.
Addressing a basic human need across a broad spectrum of Australians. I'm confident we're creating a business that's relevant, it's resilient, and it's ready to seize on emerging growth opportunities. I'll thank you for your time and happy to take questions.
Thank you. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the ask a question box. Your first phone question comes from Andrei Stadnik with Morgan Stanley. Please go ahead.
Good morning. Can I just ask two questions? Firstly, on the synergies or in a further cost out, potential, you know, how should investors be thinking about the timing and the size of the opportunity there?
Yeah, Andrei, David here. I think it's one that, as I said, we've indicated previously that what we'll do is pick those up when we do the business cases for the platform consolidation opportunities. That's where we will pick those up. We've given you an indication on Evolve 23. Some of this is just gonna form normal costs out.
I think what we're keen to do is move away from at the moment we're sort of stratifying our cost savings into various buckets, whether they be synergies, whether they be business cases.
A bit like two years ago, we sort of brought together the P&I and MLC synergies and said there's one bucket. We'll be looking to do the same thing for cost reduction. That's where we'll see them.
They'll principally be inside the business cases for platform consolidation. You know, as we've also signaled, you should expect there to be continued focus on cost on a year-on-year basis as well.
Thank you. My second question, I want to ask around remediation. The ANZ cap has been breached. Can you give some color on, you know, that perhaps can give investors confidence and comfort that, you know, any further breaches will not have a material impact on the balance sheet?
You're right. Where we are there is the last stages of the ANZ program had higher fail rates than we'd seen in the first part. That led to an increase in the provision really late in the financial year in terms of the work that we've been seeing. That program is one that, as I said, the fee for no service element is one that we do expect to wrap by September.
There's a relatively short period of time there. The remainder of the program is quality of advice. Now quality of advice is more complex than fee for no service because the work you're trying to do is trying to replicate what loss a client has suffered had they not taken certain financial advice. Recreating that can be complicated.
Look, I think we've also got a few different sort of potential offsets in there if those numbers were to be a little larger. For example, at the moment, we're basing it on the total number of files, and we're assuming we need to open all of those files. As we go through sampling, it may well be there's an opportunity to open fewer.
And every fewer file you open has quite a material cost impact. You know, as I think I've said now for a couple of years on remediation, unfortunately, until we open the files, see what's there's always an element of risk around what we're gonna find. We certainly think that that sort of risk has been significantly narrowed through the progress that's been made across FY 2022.
Thank you.
Your next question comes from Kieren Chidgey with Jarden. Please go ahead.
Morning, Renato and David. A couple of questions on the outlook statement you went through earlier. Just maybe starting with the gross margin basis point contraction you flagged of around two basis points.
Yeah, that seems to imply around a 4% reduction. Just sort of keen for you to unpack sort of what's really driving that. Is that sort of the advice business revenue coming back again in the 2023 year? Or is it sort of new platform price changes that are due to flow through? Just noting that the platform gross margin in basis points was actually fairly flat in second half on first half.
Yeah. Kieren, it is as we look into 2023, it is predominantly platforms repricing. What that is is the largest, in fact, is a flow through from decisions that were taken this year. Take Evolve 21, that migration was in at the end of December 2021. There's only 6 months of that impact inside the financial year.
Likewise, there was a benefit in FY 2022 of the timing of the various changes around OneAnswer and Smart Choice. Smart Choice provided an increase in revenue. OneAnswer was a decrease in revenue. There was a timing difference there that gave a benefit in 2022. That will reverse inside 2023. We'll also see the first stage of price reductions for the Evolve 23 program. Again, there's some margin there.
It's principally in platforms and principally through that sort of repricing side of things.
Okay. Thanks, David. I mean, can you offer sort of any guidance as to how significant that is sort of within the platform division compared to its 48 basis points? Is it fairly similar in terms of, you know, 2 basis point type reduction?
Yeah. Look, if I think about other things impacting gross margin for 2023, asset management, we would expect. I talked last time around private equity fees, which we received some private equity performance fees in the first half of 2022, nothing in the second half of 2022.
At this stage, we're not expecting anything in the second half of 2023, just given where sort of IPO markets are. That will impact the advice. Sorry, the asset management gross margin. Other than that, most of that gross margin impact will be inside the platform segment.
Okay. All right. It's clear. Just moving on to costs, just keen to sort of pick up on your comments earlier, you know, that the salary inflation probably still within that AUD 20 million-AUD 25 million range you had this year.
Obviously there's broader CPI pressures as well. Putting aside the incremental synergies due to come through, you know, what are you thinking in terms of BAU overall sort of cost growth across the organization?
Look, it's reasonably modest, Kurt, because most of our costs are people costs. That's really where we see most of the impact. You know, I think of our billion-dollar-plus cost base, you know, about AUD 700 million comes through in people cost. So that's the majority of the cost base.
It's the main area we've been seeing it at the moment, and that's really why, you know, given we've got our transformation office up and going and running through synergy programs, that's why we're confident that we can effectively save those overs that inevitably will be there on the salary bill. At this stage, not seeing too many non-labor costs increase. That's where we see the main pressure.
Okay. Finally, just on the sort of EBITDA margin being flat into next year, are you taking into account sort of the strongest start to markets we've seen post thirtieth of June into that? Or are you assuming a fairly normal market over the course of 2023 in that statement?
We assume every year that markets grow by about 5.5%. We kind of ignore, I guess, you know, what's happened in between the time we set our budget on the first of July through till today, because just because they're up today doesn't mean they'll continue to be up for the full 12 months. It's based on what I call a sort of normal year, which is starting from the first of July, a 5.5% increase in markets across the 12 months.
Perfect. All right. Thanks, guys.
Your next question comes from Anthony Hu with CLSA. Please go ahead.
Oh, good afternoon, guys. I just had 2 questions. Firstly, looking at your advice business, can you talk a bit more around the outlook here? I know previously you have mentioned that you expected a stabilization in advisor numbers from July this year. I'm wondering if you can give an update on that and, you know, what that means for the revenue outlook here over the next, you know, 2-5 years.
And then secondly, just a question on your outlook statement for positive net flows next year. Wondering if you can give a more granular outlook in terms of, you know, if you look at the platforms business, are we expecting positive flows across, you know, the P&I, MLC platforms as well individually?
Sure, Anthony. I might start with the advice business and advisors. You're right, we said we certainly expected a more stable advisor number environment. I think that's still the case. The only caveat I'd put on that is with the extension or the introduction of a couple more exams for advisors into this financial year, we still have a pocket of advisors, probably 30 advisors, that are yet to pass the exam.
Obviously, if some of those advisors fail the exam, then there'll be departures as there would be in the broader industry. I would say that we expect the losses to moderate into FY 2023. That's certainly still the case.
With respect to the earnings and the growth sort of with a medium-term horizon over the next three years, I still think the greatest opportunity is a job to be done around the MLC advice cost base.
Clearly there is still more to be done there, and that is something that we are tackling right now. That I think will provide an economic return by tackling that current loss position. I think in many ways, our ability to grow advisor numbers, which we do expect to grow over that period of time, is also a function of the advisor numbers in the industry.
By that I mean, I think I don't expect a significant growth in advisor numbers in the industry over the next 2-3 years. I think we will enter a period of a stable number of advisors. Yes, we'll obviously always look to build market share, but I don't think advisor numbers are rocketing back anytime soon.
That's on the advisors. On the net funds flow. Look, what I can say, we expect both the platform and the asset management segments to be net funds flow positive in their own right. Albeit, I think, you know, we're, you know, I still call it a relatively moderate, modest net positive net funds flow. On aggregate, I think it makes a really meaningful contribution to the group as a whole. I think it's come a long way from where the funds flow was two years ago.
Okay, great. Thanks a lot.
Your next question comes from Matt Dunger with Bank of America. Please go ahead.
Yes. Thank you very much. If I could just follow up on the turnaround you've delivered in flows, Renato. I understand you're winning some new business in workplace, but just across the retail and advice segments, you talked about better net flows. With the advisor numbers down 19% year-on-year, can you talk about where you're winning business or if you're seeing just less outflows?
A great question, Matt. The short answer is we compete in the open market. I think there's a bit of a misnomer that our fund flow is inextricably linked to our advisor numbers, which is certainly not the case.
They are a source of net funds flow, but as is the rest of the open market, the IFA market. We've seen both an improvement in outflows, i.e., fewer outflows, but we've also seen a growth in new advisors using us or existing advisors using us more often. I think it's really important to recognize that our business, particularly the advisory business, competes in the open market with every other platform.
Fantastic. Thanks. Just if I could follow up on the new debt facility raising the capacity. Can you just explain the rationale given the remediation and integration commitments seem to be winding down as you show on slide 16. You know, why are you extending the tenor? Is there something in the business plan that you need optionality around that you're considering?
No. Look, I don't think so. I mean, it's a very modest uplift. It's up about AUD 35 million. So it's not, you know, it's not a significant uplift. That's really just there for enhanced flexibility. The tenor. Look, it was really just two to three years, particularly the two-year tranche. It just felt very short.
We were just looking to sort of push that out a little bit. So I wouldn't call it a substantial change in thinking on the debt. It's really, as I said, a little bit more debt, pretty modest amount. As I said, pushing out the tenor to give us a bit more security over that long-term funding.
You can see there by structuring it with revolvers and also a term facility, it gives us that flexibility to repay the term, keep the revolvers there. I just feel this is a more flexible facility than we sort of had before.
Understood. Thank you very much.
Your next question comes from Siddharth Parameswaran with J.P. Morgan. Please go ahead.
Good morning, gentlemen. A couple of questions, if I can. Firstly, just on just the advice profit trends. Renato, I was wondering if you could just comment on just the second half. The second half, the EBITA didn't really seem to improve much from the first half.
I was wondering if you could just give some color around why that is, given that I suppose you effectively said that you've broken even on the ANZ dealer groups, and you're obviously looking to get closer to breakeven on the MLC dealer groups as well. And also just if you could just also flesh out what your assumptions are for FY 2023 for advice in your comments around EBITA margins being flat at a group level.
Sid, over to you. I might take that if that's okay, and, or at least start off.
Sure.
What you don't see inside the advice result is that in the second half, there's around about a collective AUD 10-AUD 12 million of costs that didn't meet the threshold to be UNPAT-ed out, but are non-recurring. For example, we've written back a provision that we had there, that was there for a legal case. We've had some sort of write-downs as well.
There's about, as I said, collectively low double digits in terms of costs sitting in the second half that back in our old methodology, we would have UNPAT-ed out, but neither of those single items is above AUD 10 million and therefore it's not UNPAT-ed out. In terms of what we see in 2023, certainly, advice will continue to be a cost story.
We would expect there to be some uptick at the gross margin line, but the real story will continue to be on the cost side of things. Certainly, you know, advice makes up a healthy portion of what we see coming through the P&L next year.
Okay. I mean, is it just me or does it seem like there's a de-emphasis in this presentation versus the last one on breakeven on the MLC, on the MLC dealer groups? I mean, I saw it still mentioned, but it was, you know, it was quite prominent in the last one. It was identified as a clear additional source of savings.
No, look, it's still there. I think what we were trying to get away from was last time we mentioned six or seven different initiatives that you then had to sort of add up to get to an overall number as we were heading into 2022.
We tried to simplify it this time by going top-down and saying, "Well, look, here's what we see in terms of basis points." There's no change there. As you say, it's mentioned on the slide. I think it's about AUD 48 million at the UNPAT line of losses that we're still looking to remove. Nothing's changed. We're just trying to, I guess, give a simpler explanation for what we see in terms of the net movement across cost lines rather than, if you like, as I said, splitting the commentary up into multiple initiatives.
Yeah. To just add to that, Sid, I think you're right. Just for clarity, we're not walking away from that commitment at all, so that remains a key deliverable. However, our strategic thinking is now moving into well, how do we create value out of advice as well. I think strategically we're looking beyond just breakeven. That's not to detract from absolutely the job that still needs to be done around that.
Okay. Just one final question from me, just on your guidance around the EBITDA margin being flat in 2023. It does. I mean, 2023 is meant to be the year where you get it seems like the maximum amount of synergies hitting your P&L out of all the costs out to date. As we think forward, I mean, are you basically saying there's more to do, there's more of this stuff like advice breaking even, et cetera, that you can hold that margin flat from here? Like, is this the bottom on the EBITDA margin in your view?
Yeah. I mean, first of all, I think we're saying broadly in line rather than flat. I guess I'd point to a couple of different metrics. So Renato talked to the post-end state objective of our sort of cost to income ratio, low- to mid-60s%.
You look at that relative to where we are now, I think that clearly signals that, you know, we do expect there to be further cost out emphasis. So you know, yes, you're right in terms of next year. Next year there's the most significant amount coming through. On the gross margin side, you know, next year we're impacted at the moment by what is a lower opening FUM net position, given where markets have been.
Even if you roll that forward at what I talked about before, the 5.5% increase, you know, you still end up with a less of an uplift than we've had this year. Then I go back to my comments that the gross margin percentage line where we do see that pricing contraction.
The objective as we spoke to last time and we'll keep talking through, absolutely is to make sure that we can, at a minimum, hold on the, you know, over time, hold on the EBITDA margin line. EBITDA margin is obviously more influenced by markets than the gross margin line.
Thank you.
Once again, if you wish to ask a question, please press star one on your telephone or type your question into the ask a question box. Your next question comes from Lafitani Sotiriou with MST Financial. Please go ahead.
Good afternoon, thank you for my question. I just wanted to delve a little bit more into the platform gross profit margin. When you look at some of the moving pieces to get to that gross profit margin, the management and service fee revenue fell by about four basis points from first half to second half.
There was a corresponding quite a large drop in service and marketing fee expenses, as well as other direct costs of about over AUD 30 million. Can you just talk me through so I understand what those other direct costs and service and marketing fees are within that platform division?
Let me first start with first versus second half, Laf. The main difference between first and second half relates to the timing of OneAnswer versus Smart Choice. As I said, there was a benefit there in terms of the first half through Smart Choice that then sort of came back in the second half with OneAnswer and then also the impact of Evolve 21. That's what's going on first versus second half in terms of gross margin. Sorry, your second question was?
I guess there's two parts, right? There's the management and service fee revenue, which we've got the detail we're seeing now. 'Cause overall, you know, the gross margin is at 48 basis points.
When you look under at the cost line and the direct revenue, there's quite some large movements. I'm just trying to understand the step down in the cost, the service and marketing fees expense. Like, is that, is there some of that one-off or is that more sustained? 'Cause there's over AUD 30 million less in second half on the cost side.
Yeah.
Direct cost side versus first half, and I just wanna understand what some of those moving pieces are.
Yeah. No, look, we do think it's sustainable. When we go back through the synergies and how those were split across segments, in the in-year, the majority of synergies went to the platform segment. That is a sustainable step down that you're seeing there.
Understood. When we go to the guidance for the gross margin, and particularly a lot of it gonna fall in the platform division. To avoid any confusion, can you give us an idea of that quantum in actual revenue figures? What's the band that we should expect for the 1.5%-2.5% step down?
Look, I don't really wanna go into dollars. I think we've been careful how we've sort of crafted the outlook to give more than we normally have in terms of how we see that going. I don't really wanna peel below the group level commentary, other than to.
Well, how would you simply calculate it? Just 'cause there's a lot of moving pieces here, I wanna make sure that we're grabbing the right numbers. 'Cause you kind of avoided Kieren's question earlier on, does that 48 basis points go to 44? Does it go to 43? I mean, if you've got enough confidence to give the 1.5%-2.5% guidance, why are you sidestepping what the overall impact to revenue should be from that?
Well, I don't think I am. My answer to Kieren's question is that the majority I called out, that other than a small asset management movement, which I gave you the dollar number for of about AUD 7 million-AUD 8 million in terms of private equity fees. The majority of that contraction is going to be in repricing in the platform segment.
The quantum?
It's 1.5-2.5 basis points.
Are we looking at the 48? You're simply moving that 1.5 to 2.5 down within, and that should marry off. That should be enough.
No, that's a group.
Even on a group level.
It's at a group level. That is at a group level gross margin. It's not 1.5%-2.5% on platforms alone.
Sure. The platform has about 2/3 of the overall gross margin. Is it just a matter of grossing that up? Will it end up being? 'Cause I just wanna make sure we're calculating it correctly. Is it a matter of just grossing that up?
Correct. Yep. No, I think you're thinking about it the right way. It's just, as I said, we try to give this at a group level and, but the way you're thinking about it is right. Clearly there is a larger than 1.5-2.5 basis point contraction in the platform segment.
Okay. You gross it up, it's about 2.5 to about 4 basis points decline by the end of the year.
I think you're on the right path in terms of the methodology, yeah.
No worries. Just some comments on the franking. I haven't quite gone through it in detail, but does it look like now that you guys may not have fully franked dividends in the foreseeable future for some periods? Or can you just talk us through your expectations there?
Yeah, look, it's too early to tell. We've got a profit on sale, assuming that AET completes, that we need to sort of look at there. That's around about AUD 60 million profit on sale. You're right that those are getting tighter. Now quite what that means for 2023, it's too early to tell, but I think it's a correct observation that we don't have the same amount of franking credits in surplus that we've had in the past.
Excellent. No worries. Thanks for the questions.
Your next question comes from Marcus Burns with Spheria. Please go ahead.
Hi, guys. Thanks for the question. Just quickly on Simplify, Renato, you flagged obviously further platform reductions, and you sort of gave it some sort of long-term guidance as to cost-to-income in the mid-60s%. Is that group-wide mid-60s%, or would you say that's the platforms? Can you give some color around that, please?
Group. Yeah. Marcus, that'd be group.
Okay. That would translate maybe to 73.8 or something for this year. You're talking about 1,000 basis points or so, is that right? Across the group.
Yeah. I mean, yeah, ballpark, yes, that's right. Yeah, on a like-for-like basis, you're comparing it to the current cost to income of the group, yes.
Okay. How much of that would you expect to reinvest in sort of growth initiatives or, you know, IT upgrades, et cetera? Or is that sort of net number you think you could maybe put through to margin over time?
Yeah, I mean, keeping in mind it's, you know, it's a reasonably medium term target, but we view that as a net outcome. Yeah, when we look at the business, we look at the potential of efficiencies and obviously being realistic about the reinvestment that's required on an ongoing basis for our business. We think that range of low- to mid-60s% is a net outcome.
Okay. Thanks very much, guys.
There are no further questions on the phone line. I'll now hand back to Mr. Mota.
Thank you everyone for your time today. There's no questions through the webinar, so appreciate everyone's time and wrap it up there. Thank you.