Thank you for standing by, and welcome to the Insignia Financial Ltd FY 2022 results briefing. 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 via the phone, 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 it into the ask a question box and hit submit. I would now like to hand the conference over to Mr. Andrew Ehlich, General Manager of Capital Markets. Please go ahead.
Thank you. Good morning, everybody. Welcome to Insignia Financial's H1 2022 results presentation for the six months ended 31 December 2021. Presenting today's results are Insignia Financial's Chief Executive Officer, Renato Mota, and Chief Financial Officer, David Chalmers. Today's presentation will take approximately 30 minutes, followed by the opportunity to ask questions. I will now hand over to Renato to begin.
Thanks, Andrew, and I'd like to extend my welcome to everyone on the call. Not only is it our first half for the 2022 financial year, it's also the first set of results for Insignia Financial, following on from our rebrand from IOOF. It's a pleasure to be here today with David to walk you through the business performance as well as an outlook. In many ways, the renaming of IOOF to Insignia exemplifies our commitment to ensuring we position ourselves for growth. It captures the rich history and unifies our people in building a stronger future. It's also part of leaving no stone unturned in ensuring we solidify our position as an industry leader in an industry that continues to have positive fundamental growth dynamics. The role of Insignia Financial is as important internally as it is externally.
Internally, it's the bringing together of two organizations with proud histories of serving the community, where historically there've been different structures, different identities, different ways of doing things. Under Insignia Financial, there'll be one. Externally, Insignia Financial's ambition is to actively contribute to the financial wellbeing of Australians, either directly through our products and services or indirectly through our role in the broader industry and communities we serve. This ambition is supported by a single-minded focus on delivering value to our clients, shareholders, and our people, and there are really three key traits that support this. Firstly, it's our focus on client outcomes. Our products and services are really a means to an end, and that end is the financial wellbeing of our clients. This mindset is what we call client first.
We're investing in interactions and capabilities which allow us to get closer to our clients than ever before. Secondly, it's our scale and simplification. We're of a size now where our scale is being used to drive down the cost to serve while continuing to invest in better experiences and functionality. Where for some, complexity is a source of increasing costs, for us, complexity is actually a source of value because we continue to remove it. Thirdly is our focus on proprietary technology. Technology is both a capability and a mindset. For Insignia Financial, embracing and leveraging this way of thinking will continue to drive our agility and innovation. While we mark the beginning of Insignia Financial, today's results really are a demonstration of our progress on this journey and our ability to deliver against our commitments.
Our focus is on continuing this momentum and driving the necessary change to make sure we realize the potential of the business. Turning to the first half highlights, the performance of the first six months of the year is best described as delivering on our commitments, just doing what we said we'd do. If we consider the five key categories of these commitments, starting with synergies and integration. In the first full six-month period of MLC ownership, we're able to deliver AUD 66 million in annualized synergies in the half against the annual target of AUD 80 million to AUD 100 million. This positive progress has led us to upgrading our full year 2022 synergy target for a run rate of AUD 100 million to AUD 120 million for the full year.
This has also given us greater confidence in our ability to deliver the entire synergy program 18 months earlier than expected, and we're now targeting completion of this program to be largely executed by the end of this calendar year, 2022. Also pleasing is the completion of the Evolve21 program, which saw the transition of AUD 42 billion in assets. The size and scale of this transition really gives us confidence in our ability to successfully manage large-scale transitions and deliver these transitions alongside continuing to deliver better outcomes for our advisors and investors. Having bedded down the MLC acquisition in the early part of the half, the second quarter of 2022 really provided some positive signs with respect to net flows.
We saw positive progress across most of the business, whether it's the IOOF suite of products, P&I and MLC, both across advice and workplace. We've also seen some positive momentum in retail asset management portfolio, which is then benefiting from the solid investment performance. Advice transformation is really a case of doing what we said we would do. The ex-ANZ licensees are on track for break even by the end of this financial year on a run rate basis, and we're also seeing some initial progress on the MLC advice. Finally, and importantly on remediation, we're confident that throughout calendar 2022, we will complete many of the programs currently underway. With advice, we expect to be largely complete by June of 2022, and with respect to the P&I product remediation, we expect to be complete by December of 2022.
Looking at the financial highlights, and David will delve into a bit more detail on these. It's clear to see the impact of the MLC acquisition through most of these metrics. Starting with gross margin now at AUD 778.4 million for the half. Underlying net profit after tax of AUD 117.9 million for the half, up 79%. Net profit of AUD 36.2 million, reflecting the integration and funding costs associated with MLC acquisition. I think what's particularly pleasing with these financial results is this progress not only on a statutory basis, but more importantly on a pro forma basis.
When you look at these numbers on a like for like basis, what we see is strong growth in earnings, both from growth in gross margin as well as reduction in costs. This really provides us the evidence that the transaction is really delivering on its commitments. From a business driver perspective, the AUD 325.8 billion is reflective of the scale of the opportunity Insignia Financial now has, benefiting both from MLC as well as positive investment markets. There's clearly more work to be done from a net flow perspective, but we're seeing really positive progress in Q2. We're also a long way along in terms of the reshaping of our advice network.
On a per share basis, this translates through to AUD 0.182 per share in terms of underlying net profit after tax. Today, we're declaring an AUD 0.118 per share dividend for the half. It's pleasing to see the strong fundamentals supporting our dividend. The dividend also recognizes the capital needs of the business with this accelerated synergy profile, and Dave will go into that a little bit further. In summary, as well as delivering on our strategic commitments, bringing forward future benefits, we're also delivering strong economic results for the half. Just before handing o ver to David, I thought it's worth highlighting the businesses that make up Insignia Financial.
After a period of acquisitions and bringing together our capabilities, what we've created is a group of diverse and discrete businesses, all of which align to a single mindset and focus on financial wellbeing. Each of these three businesses are tasked with ensuring that they're focused on building more meaningful relationships with clients and utilizing clients' system thinking and technology to create simpler, more efficient infrastructure to support the businesses. I think in a lot of ways, we're really fortunate to have three businesses, each with their own independent scale, which is independent of each other. While there continues to be more to be done in each of these businesses, we've got very clear strategic accountability and a path towards better client and shareholder outcomes.
In some cases, these business models look very different today than what they've looked like in the past, and we think this is a necessary part of making sure we're not beholden to previous organizational designs or structures, and rather we're setting ourselves up for future success. Ultimately, we're also in the privileged position of looking after over two million Australians with a commitment to see this number grow. I would like to hand over to David to walk us through the results before closing out with some commentary on outlook.
Thanks, Renato Mota, and good morning, everyone. Before I step through the financial summary, it's worth noting that the comparison of the statutory prior periods is heavily shaped by the inclusion of contributions from MLC, which was acquired on the 31st of May, 2021. Specifically, this means that in the first half 2021 results, there were zero months of MLC. In the second half 2021 results, there is one month of MLC contributions. In the first half 2022, there is six months of contributions from MLC. Therefore, in order to provide more insight into the underlying financial performance, we've included a first half 2021 pro forma set of financials, adding in the actual MLC results for the period. For the prior...
For the period ending 31 December 2021, we delivered AUD 778.4 million of gross margin with OpEx of AUD 569.2 million. Net profit after tax was AUD 36.2 million, with UNPAT of AUD 117.9 million. The UNPAT adjustments of AUD 81.7 million for the period are set out in the appendices, with approximately 75 million of this amount due to transformation integration costs and an increase in remediation provisions as we invest in additional resources to speed up the process.
Perhaps the better indicator of financial performance is comparing these pro formas, which shows gross margin up 5%, thanks to an 8.5% increase in pro forma FUMA, while at the same time, OpEx being reduced by 3.7%, as the early benefits of acquisition synergies are realized. EBITDA versus pro forma is up 39%, while UNPAT is up on a pro forma basis by 21.4%, with a 2 basis point increase in net operating margin compared to a pro forma gross margin reduction of 1 basis point. This reflects our overall strategy of ensuring that any diminution of gross margin is at least matched by cost reductions to ensure growing net operating margin over time.
It's also worth noting that in line with the advice given at the FY 2021 full year results, we've implemented a tighter approach to making adjustments to NPAT to deliver our underlying number. Had the old approach to UNPAT been taken during the period, the first half 2022 UNPAT would have been approximately AUD 10 million higher. Turning now to segment performance, we've simplified it. We spent a lot of focus over the last six months on simplifying the reporting of the business. The first phase was to bring our FUMA reporting with a common set of definitions and a common approach.
Over the last few weeks, we've been working through aligning on segments and making sure that we can present not only a clarity and a simpler message in terms of segments, but also one that reflects the way that we run our business. We've reduced the number of reporting segments from seven to four, the four being Advice, Platforms, Asset Management, and Corporate. The restatement of each segment's historical performance and explanation of these changes was released to the ASX on the eleventh of February and can be found on the Insignia Financial website. Starting with the Platforms segment. First half 2022 FUA increased by 18.6% on a pro forma basis, mainly driven by a 9.5% increase in funds under administration and the benefit of changes made to P&I products in April 2021.
These benefits were partially offset by repricing down of other products, of which there will be greater impact in the second half. We also had the benefit of synergies in the period, helping to reduce OpEx costs in the platform segment. There's more work going on in the second half in relation to platforms. It's worth noting that the strong funds under administration growth during the period was driven not only by favorable financial markets, but also a significant improvement in net flows on a pro forma basis. The advice segment now includes the loss-making former ANZ Aligned licensees and the loss-making MLC Advice business on a pro forma basis. Advice unpacked by 3.4% or just under AUD 1 million.
However, it's important to recall that the first half 2021 pro forma includes AUD 15 million of revenue for the BT contract that was terminated in late 2020. Meaning that removing this and looking at it on an underlying basis, there was in fact top line growth in the advice business. Thanks to a good performance from Shadforth and growth in revenue for the self-employed channels, thanks to repricing as part of Advice 2.0. Now, an important part of Advice is the profit improvement initiatives underway, both at the former ANZ licensees and also MLC Advice. There was pleasing progress on both fronts during the period. If we turn first of all to the ex-ANZ aligned licensees, that improved to, for the period, an NPAT loss of just under AUD 6 million.
We're on track for this to reach break-even basis by the end of FY 2022, as the fee increases that were put through in October flow through over the second half. MLC Advice losses are a total of AUD 31.3 million UNPAT for the half, an improvement of AUD 4.2 million for the previous period on a UNPAT basis. Turning now to asset management, where there was a strong UNPAT growth of 66%, thanks to a 6.1% growth in funds under management from first half 2021 pro forma and a AUD 4 million positive benefit from semi-regular private equity fees received in this business. OpEx was down 8% on a pro forma basis, meaning a 40 basis points improvement on net operating margin, again, on a pro forma basis.
Finally, the corporate segment saw a significant increase in costs, again, on a pro forma basis, and that's due to both the increased funding costs. As you may recall, the previous period we had net cash as a result of the capital raise for the MLC acquisition. Interest costs have increased over the period from just over AUD 3 million to now AUD 13.6 million. Certainly an increase in amortization, which is kept inside the corporate segment, mainly due to the addition of MLC leases and also an impairment made during the period. The next slide shows a bridge from the reported first half 2021 unpacked to first half 2022 unpacked. Again, as Renato mentioned, highlights the contribution made by the additions of MLC.
Importantly, the growth in NPAT, driven by FUMA increases at both MLC and in IOOF ex-MLC businesses over the period, as well as the impact of the cost management that we've been working through over the last six months. Offsetting these gains are reductions in margin, mainly, and this is mainly the repricing of the MLC platform in early FY 2021, the end of the BT agreement that I mentioned earlier, and other cost increases, including interest costs and impairments. Because these impairments are below our threshold, the impairments of AUD 8 million are not adjusted out of NPAT. Similarly, we can also look at expenses in the same way, again highlighting the impact of the inclusion of MLC and the benefit of the tight cost controls across the period, including incremental synergies of AUD 22 million and tight control over other cost lines.
As flagged at the full year 2021 results, employee expenses have returned to a more normalized level of growth following a freeze on salaries increases in FY 2021. Renato mentioned it upfront, and one of the really pleasing aspects of performance over the last half was the delivery of significant synergies, which has allowed us to both increase our expectations for FY 2022 annualized synergies and to materially accelerate the timeframe for delivery of the full program. The commitment we made at the FY 2021 results was to deliver AUD 80 million to AUD 100 million of incremental annualized synergies in FY 2022, and as noted in the first half of 2022, we delivered AUD 66 million, of which AUD 56 million were cost synergies and AUD 10 million were revenue synergies.
Based on the pipeline we see, we've increased our FY 2022 target from AUD 80 million to AUD 100 million of annualized synergies to AUD 100 million to AUD 120 million of synergies. Although the FY 2022 in-year benefit of them, of this increase is modest due to the timing. The total target for the synergy program, as a reminder, is AUD 218 million, being AUD 68 million from the acquisition of P&I and 150 from the acquisition of MLC, the latter of which we committed to deliver after full three years of ownership, so by May 2024. We now believe this target will be largely achieved by the end of calendar 2022, being 18 months ahead of schedule.
Now it's important to note with this acceleration of the synergy program, it also means an acceleration of spend associated with the delivery of synergies, the impact of which I will cover shortly. The last six months also saw positive progress on remediation, with total payments to clients of AUD 86.4 million. Starting with advice remediation, we did find that payments in the first half slowed as the focus was on completing assessment of case files. Pleasingly, we've seen a significant increase in the rate of payments to clients in the early part of calendar 2022, and we remain on track to largely complete the program by the end of FY 2022. It has been a challenging period. We have experienced some COVID-related delays, and so we've increased the resources to work towards this timing.
In terms of what we think will be remaining at the end of FY 2022, it's likely to be some elements of the IOOF program that commenced after the original program design and a small number of files related to the former ANZ-aligned licensees. These will be concluded in the first part of FY 2023. Turning to project remediation, there was great progress on the P&I program, with payments of more than AUD 50 million at the half, and we continue to expect the P&I element of the program to conclude by the end of the first half 2023 or the end of calendar 2022. The MLC program, as we flagged, will take longer and extend into FY 2023. Turning now to corporate cash and debt facilities. We've updated this for the period.
Senior leverage for the period closed at around about one times net debt to EBITDA, but we expect this to increase across the calendar year, peaking at around about 1.5 times net debt to EBITDA, before returning to our stated target range of 1.1 to 1.3 times by mid-FY 2023. Now the reason for this increase in peak leverage is twofold. Firstly, the acceleration of the synergy program to be largely complete by the end of calendar year 2022 brings forward the timing of integration budget spend. Although to be clear, there are still elements of that spend that will extend to FY 2023 and 2024, specifically some of the amounts set aside for IT spend. The second element is that, as Renato will cover shortly, we're commencing the next program of platform simplification.
As we flagged earlier, the platform simplification comes at an incremental cost, but one that delivers incremental benefits, and we'll cover that shortly. It's this increase in expected leverage across FY 2023 that has helped shape our thinking on the dividend. While we see good short-term payback for the increased spend over the coming months, we're mindful about the potential for increased market volatility and therefore we're cautious around allowing leverage to increase too significantly. As a result, our dividend payout ratio, we've reduced to 65%, with directors declaring a fully franked dividend of AUD 0.118, an increase of AUD 0.003 above the first half and second half 2021 dividends, both of which were comprised of an ordinary and a special dividend.
While this is still inside the 60% to 90% dividend target range, we are mindful of the importance of dividends to our shareholders and believe that these initiatives, combined with the acceleration of the synergy program, offer good prospects for future dividend growth. We're also keen to ensure ongoing flexibility for our investors, and so we're pleased to announce the introduction of a dividend reinvestment plan, with a 1.5% discount for FY 2022 interim dividend, the details of which can be found this afternoon on our website. Finally, at the FY 2021 full year results, we set out some of the key financial drivers and targets that will shape the business over the medium term. The majority of these remain on track, I just did wanna call out two changes.
The first one on synergies I've talked about, in terms of what we're expecting on the acceleration of synergies, even though we will be seeing an increase in our transitional service fee during the period. Again, we expect that to be sort of normalized out again by the end of calendar year 2022. Certainly an acceleration on the synergy front. The other point that's worth calling out is the third one down in terms of P&I product pricing changes. We made the comment at the full year that we expected the impact of the Smart Choice reprice and the OneAnswer reprice to broadly offset on an annualized basis.
That's still our expectation, but to be more specific, what we mean about that, we think that the OneAnswer revenue reduction will be around about AUD 8 million in the second half of 2022. That covers all I wanted to in terms of summary of the financials, and very happy to take any questions after Renato has concluded. Back to you, Renato.
Thanks, David. Just before taking questions, we'll just spend a few moments just really commenting, providing some commentary on the outlook and maybe just starting with the industry context. It's important, I think, important time to do this given the level of disruption that has occurred in the industry over the past few years. When you look at some of the key statistics surrounding our industry, it's clear that the fundamental drivers of our industry continue to be incredibly positive. I think the compounding nature of superannuation and rising contribution levels means that Australians are growing increasingly wealthier, and the superannuation pool is expected to grow by two and a half times over the next 20 years. Alongside these increasing levels of wealth, we're seeing increasing demand for financial advice.
on top of that, we've had an unprecedented contraction in the number of practitioners or advisors that are operating in the space, with fewer people able to access the help that they need, and the help that they seek. Putting all this together, this is as clear a picture as I've seen in my career, that there's a gap in the market to address the unmet needs of the community, which is supported by rising levels of wealth. It's those that can solve this equation in providing assistance, whether it's advice or other forms of assistance, that will be the net beneficiaries of the positive dynamics for years to come.
From an Insignia Financial perspective, we think we're very well placed to play to these dynamics and actually meet this unmet need which currently exists in the marketplace. To flesh this out a little further, I just want to spend a few moments stepping through some of our key strategic imperatives and deliverables that underpin our belief that we can both build deeper relationships with clients, as well as develop a leading cost to serve. Just starting with platforms and our focus on simplification. We've stated on many occasions that we believe that lower cost of service is a result of discipline simplifications of products and systems. In many ways, IOOF has emerged over the last decade off the back of this discipline.
As the chart shows on the bottom right, we've been able to radically reduce our cost to serve as a result of this simplification effort. That know-how and capability really is part of Insignia Financial's DNA today. Most recently, this has been on show through the Evolve21 program, where we've successfully completed one of the largest migrations in the market over recent times. With Evolve21 now complete, as well as accelerating the profile of the integration synergies, we felt the timing was right to bring forward the next phase of the simplification program associated with the acquired platforms. While these benefits of further simplification have always been a clear objective, prior to today, neither the cost of execution nor the benefits have been accounted for.
What we're sharing today is the next major milestone of simplification, which we expect to be the key deliverable over the next 18 to 24 months. We're calling this program Evolve 23, which follows on from Evolve 21, and we'll see another AUD 40 billion to AUD 50 billion transitioned to more modern technology with more contemporary user experience, and result in the decommissioning of one technology environment and removing approximately 10 products. We expect there to be significant benefits in terms of reducing our operational cost base, as well as benefits to members by way of more contemporary pricing. Importantly, on a net basis, we expect this to contribute to improving our net operating margin. This phase of the program is expected to cost AUD 40 million to AUD 50 million all up.
However, it'd be misleading to attribute all of this to Evolve23, as part of this spend is also benefiting the following transitions and simplifications to come. We're calling this component of the spend as the foundation investment, if you like, that will allow us to realize benefits not only through Evolve23, but future transitions also. I think what's particularly pleasing about this stage of the development is that we're in a position to accelerate this platform simplification as a result of the great progress we've made on the integration to date. Ultimately, we expect Evolve23 to lower our cost to serve, provide enhanced functionality for advisors and investors, result in a simpler, more contemporary fee structure, and ultimately also provide support for our net flow momentum.
Just moving on to advice and reflecting on our advice journey over the past two years, there have really been three key deliverables we've been working on. Firstly, we're focused on improving our governance standards and controls. Secondly, with a desire to build a more sustainable economic model that recognizes advice as a standalone business. Thirdly, we're focused on building greater efficiency and effectiveness in the advice process. It's certainly been pleasing to see the progress across all three fronts, but particularly governance and the sustainability of the model. There remains more to do with respect to efficiency of advice processes, and this continues to be an area of focus, but it is an area of focus building on the foundations of governance and the economic model in place.
In relation to the ex-ANZ licensees, we remain on track to see the subsidized nature of this model eliminated and this business to break even by the end of this financial year on a run rate basis. The knowledge and the experience that we've developed through the repositioning of the ANZ licensee model also provides a really strong template for the right sizing the MLC Advice business that we're embarking on. Both across the professional services model or the employed model, as well as the self-employed model. What's particularly exciting, I think, is the combination of the MLC employed advisors into Bridges, and that really provides an opportunity to create a leading middle-market professional services advice model over the coming years, which will see us have both Bridges and Shadforth as two of the leading advice models in this country.
While simplification, lowering cost to serve, enhancing our client offering, they're all fundamental to our strategy. It's all in the interest of growing our business and serving more Australians. Certainly in that regard, net flows remains a really important measure of that progress. As we've touched on already, I think it was really pleasing to see the positive trajectory of that across the portfolio and particularly evident in the second quarter. I think it's worth breaking down the latest six-month period or the latest half into a quarter-on-quarter analysis because it is really a function of a story of two quarters within the most recent six-month period.
I think on reflection, when we think about the six-month period, it's fair to say that the first quarter was one where we were focused on bedding down the MLC business and the MLC acquisition. Whereas I'd categorize the second quarter of having greater focus in what I would call more traditional business activity and more proactive engagement with clients or prospective clients. In the P&I book, the first quarter of the year suffered for some one-off transitions, and the revised pricing that David alluded to didn't come into effect until Q2. I think that tale of two quarters is most evident in that P&I book.
I think the performances of the IOOF platforms are certainly worth highlighting and the trajectory there really provides us confidence that we're on the right track with the development of Evolve. We're reaching more advisors. We're having them deal with us more often. We've also seen some positive interactions post-migration and conversations with advisors, where we're reactivating relationships that some of which may have become dormant. We're seeing similar dynamics across MLC, both in the advised book of business as well as the workplace offer, where we're seeing healthy pipelines and new opportunities and proactive engagement. As we've touched on in asset management, in some ways, the flows here are camouflaged, the retail flows are camouflaged by the institutional flows, where we've seen some really positive momentum in retail funds flows supported by strong performance.
As we've discussed previously, the lumpy nature of institutional flows is certainly evidenced in some of the outflows in the first half of the calendar year. Having owned MLC for seven months to December, we've certainly learned a lot about the business in this first period of ownership. It's with this deeper knowledge comes greater clarity on timing and the totality of the opportunity that we've tried to illustrate on page 23 of the deck. What we've outlined here on the left-hand side, what we see is the pools of value that we see ahead over the coming years. Starting with the bottom pool, which is the accelerated completion of our integration synergies.
Having achieved 112, we've got 96 remaining to reach our target of 218, and we are committing to having that largely complete by calendar 2022. On top of that, you've got the completion of the breakeven target for the ex-ANZ licensees, again, by the end of FY 2022, which represents AUD 70 million annualized on a pre-tax basis. On top of that, and as discussed previously, we see the MLC Advice breakeven opportunity representing AUD 60 million to AUD 70 million in pre-tax benefit. Again, with a target of reaching that by FY 2024 on a run rate basis.
Today we've introduced the net benefit of the first or the next phase of platform simplification of AUD 5 million to AUD 10 million, which includes both reduction of operating expenses as well as gross margin adjustments, which resulting on a net improvement or a net benefit of AUD 5 million to AUD 10 million. In some ways, the size and scale of this opportunity in our core business does emphasize the importance of focus and the importance of having a disciplined approach to how we manage our portfolio of businesses. In this context, we're today also announcing our intention to commence a sale process for our AET business. Whilst it's not the first time we've considered this, it...
There is very strong strategic merit in having this capability as part of a financial well-being stable. The specialist nature of this business requires focus, and that focus risks diluting our efforts in our core business. It is something that we'll be commencing in the near term. Just to wrap up before opening up the questions and maybe some final thoughts. As we've discussed this morning, over the last six months, alongside delivering strong financial performance, delivering on our commitments at the time of acquisition, and accelerating the simplification benefits, we've built a really clear strategy and focus centered around three key businesses and a single-minded focus on financial well-being that's powered by a purpose-led culture.
If I was to leave you with three messages today, they'd be, one, that our business will grow off the back of delivering outstanding client outcomes that are more personalized, tangible, and measurable. Second is that we've got the scale and the track record of simplification. This is gonna drive our lower cost to serve and improve the competitiveness of our offer. And thirdly, the proprietary technology is the driving force behind our agility and innovation in how we understand and solve our clients' problems. With that, I'd like to thank you for your time this morning, and I'll hand back to Andrew.
Thank you, Renato. We'll now hand over to the moderator to take questions from those on the phone lines.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. If you wish to ask a question via the webcast, please type it into the ask a question box and hit submit. Your first phone question today comes from Kieren Chidgey with Jarden. Please go ahead.
Morning, guys. A couple of questions, if I could. Maybe just starting on the platform simplification you've talked about today. This year you're at six platforms at the moment, and it sounds like under sort of the revised strategy, you're only looking to reduce that by one. I'm just sort of wondering, you know, whether or not there are going to be further stages to this platform simplification initiative. And also, I guess what you feel you need to be able to achieve in terms of the OpEx basis points of FUA to compete on a go-forward basis over the next few years, particularly as we see, you know, some pretty significant cost reduction programs coming through some of your larger traditional competitors.
Sure. Kieren. Look, I might have a go at that and I'll get David to maybe provide some different commentary. To answer your question, are there further phases beyond this current phase? The answer is yes. If I refer to page sort of 19 of the pack there, our insight is fundamentally a far simpler business that yeah has ideally one licensee, one fund, possibly one to two technology environments and representing approximately 20 products. There is more to do. I think the key message here today is that we're getting started on this work sooner than we initially would've expected or projected. That's a positive.
As these phases unfold, we will, once we have greater clarity and certainty on the sequencing of this, and the impact, both in terms of OpEx and potentially gross margin, then we will come back to market, and we'll certainly make sure that we're keeping our stakeholders informed. Certainly today what we're talking about is that next phase or the first of the acquired platforms in many ways. In terms of where do we need to get to, look, I think we sit here today running a profitable business that's competing with a really strong profile of lowering cost to serve. I don't see it so much as a need to lower the cost to serve as an opportunity.
I think we've got a terrific opportunity. Are others potentially on a similar trajectory? Possibly. I think that there are probably few that are sitting here with a proven track record and embarking on this now. I think they're probably potentially a year or two behind where we are today.
Kieren, just to add to that, yeah, look, I think that we do see those opportunities there. The AUD 150 million in terms of costs out, we've talked about some incremental costs out as a result of Evolve23. I think the key element there for us is that as we look forward, we see nothing that sets us away from our commitment to increase net operating margin. That is critical over time. We think we've got the levers there. If you go back, I mean, that's really been the history of the business for a long period of time. We certainly know that this is a never ending, if you like, sort of process to make sure that we continue on cost management.
That's why we've been stepping up over the last two periods that emphasis on growing net operating margin. In a way, Evolve23 shows how that can be done. Despite the expected revenue diminution as we sort of move on to the platform, despite the costs of it, we still see an increase in net operating margin, even taking into account that foundational spend in the first phase.
Okay, David, the accounting around this, the AUD 40 million to AUD 50 million additional cost to achieve that, I mean, how will you account for that? Also sort of related to that, as you move forward beyond 2023 towards this sort of target end state of one to two platforms, you know, should we also be allowing for additional significant one-off spend to achieve that further narrowing of the platform footprint?
In terms of the accounting, Kieren, are you referring to OpEx, CapEx splits?
Yeah, yeah. Yep.
Yeah, look, I. It certainly
In terms of above the line and below the line as well.
Yeah, yeah. There will be more elements inside. You know, historically, as you know, we've typically expensed the vast majority of IT spend. There will be some elements here, particularly, you know, physical data centers and things like that will require to be capitalized. We're not changing our tack in terms of having a preference for, particularly in terms of software development, of those costs continuing to be reflected through the P&L. I wouldn't say it's really a change from the past. It's more the things we're spending money on over the next 18 months are different to what we've been spending money on in the past. Yeah.
You should expect to see a larger proportion of CapEx, but that doesn't reflect a change in policy. It's a change on what we're investing in over that time.
Okay. Maybe secondly, just on the advice business. The revenues there sort of on a pro forma basis, actually up on second half 2021, despite sort of the advisor attrition over the half. Just a couple of questions around that. Firstly, what is your current outlook around sort of advice practices and number of advisors? And secondly, can you just, I guess, talk through some of the underlying dynamics that have occurred there you know, beneath the surface in regards to the contribution from some of the repricing, as opposed to, you know, what looks to be, better retention of clients as you've lost advisors.
Yeah, look, I might start more on the contribution side and then I'll pass to Renato in terms of practices. You're right. What we saw as part of Evolve Advice 2.0, we increased the fees commencing in October. You see a small increase in the half in terms of the benefit from that. Most of that is what's gonna play through in the second half of 2022. When we look at what is it that is gonna turn that AUD 5.9 million NPAT loss to break even on a run rate basis, it's the flow through of that revenue.
However, as you've also correctly noted, we have lost some practices, which was anticipated because, as we put the prices up, there are some of those practices where it's not economic for us to continue supporting them. I guess that's the balance of how we see that all fitting together.
Kieren, I think just to add to that, or in addition, you're right. There is a reshaping, and the reshaping is simply that we're ending up with fewer larger practices. That's a combination of, as David pointed out, smaller practices feeling like this economic model just doesn't suit them. Equally, there has been quite a number of practices where they've merged in together. They've created, as I said, fewer larger businesses. That dynamic actually plays quite favorably to us as well. Because the cost of serving a larger practice, you know, on a marginal basis is lower than trying to serve a large number of small practices. All these dynamics, I think, and they are, I think.
Indicative of what we're seeing in the industry at large are that we're seeing the corporatization of financial advisors and the financial advice model. From our perspective, we're making sure that the licensee model supporting them is sustainable.
Right. Thanks, guys.
Thank you. Your next question comes from Matt Dunger with Bank of America Merrill Lynch. Please go ahead.
Gentlemen, thank you very much for taking my questions. If I could just start on Evolve23 and a follow-up to the previous questions. You know, you've previously flagged a consolidation from the seven platforms that you had post MLC. Is there a similar opportunity from platform rationalization to what you've called out on Evolve23?
See if I understand your question correctly. With Evolve23, we're really flagging the next phase of platform rationalization. That is the first of a number. When we talk about the rationalization opportunity, we're referring to effectively all of the acquired platforms. That's those that came across from P&I, as well as those that came across from MLC. I'm not sure if I'm answering your question directly or not.
I'm just wondering if this is the largest incremental benefit from this first platform reduction, or will subsequent platform reductions also give you similar benefits?
Yeah. It certainly isn't the largest. I might reframe the question. Is it the largest opportunity out of all of those that follow? The answer is no. You know, we decided to pick the product set that in some ways has the least amount of execution risk. There are other more complex product sets that frankly have larger opportunities, but also larger complexities, so we're working through that. No, it isn't the most significant opportunity.
Great. Thank you. Just on accelerating the cost savings. You delivered AUD 22 million of synergies in the first half of 2022 on cost. You know, what makes you more confident that we can see this run rate continue to rise and that the cost acceleration happens?
Yeah. Look, you're right. It's always. You've always got to look very carefully any time I think you put up an annualized number. We spend a lot of time and effort validating that number. You know, we look at what we see in terms of payrolls in December and January. We look at probably about 400 FTE and contractors that departed the business in the first half of FY 2022. That gives us good comfort in terms of these savings turning up on the P&L. We talked about the approach that we're taking in terms of synergies with our transformation team. There's a very well-established pipeline of very specific activities over the coming months.
We found with the first phases that we delivered in line with our expectations of those, and we're well progressed on those second ones. It's certainly not a hope. It's that there is a specific set of plans we will execute that gives us confidence we'll deliver that number.
Excellent. Thank you. If I could just ask a final question around the DRP and the gearing. You're talking about funding the platform consolidation. You know, it seems like FY 2023 is the peak of your debt burden. How are you thinking about the DRP beyond that, whether or not you can fund these incremental platform simplifications organically or not?
Yeah. Look, we believe so. I think the DRP was something that we'd always planned to introduce to give more flexibility. It's certainly not something that we intend to introduce for one period and then remove. The flexibility will be there in terms of giving shareholders that choice. You're also right in terms of where we see that sort of peak of gearing. You know, there's a lot of things moving at the moment. We've got acceleration of remediation payments, bringing forward synergy realization. We just felt that combined with what looks to be a less certain operating environment in terms of financial markets, that. That's why we've, as I said, just slightly reduced our dividend payout ratio to really balance all of those.
We'll continue to balance all of those objectives over the medium term. I wanna make the point that, as I said, we certainly understand the importance of delivering dividends to our shareholders, but we'll always do that with a prudent eye on those other metrics as well.
Thank you very much.
Thanks, Matt.
Thank you. Your next question comes from Andrei Stadnik with Morgan Stanley. Please go ahead.
Morning. I wanted to ask about the synergies firstly. Do you find the synergies can go above the AUD 218 million target? How much higher can they go? Can you give us any feel for that? And what about the integration costs that will be used to deliver that? Will those go higher?
What we're intending to do is, once we've completed the AUD 218 million target, we will close off that program. Now, that's not to say that that's the end of cost reduction opportunities, but more we will frame them up in terms of when we do platform simplification and we talk about the cost and benefits of those phases. We will roll those opportunities into that business case. Yes, we see amounts beyond the AUD 218 million, but we're not gonna keep running. If you like, a sort of synergy program.
The reason for not running those two alongside each other is that practically when you make a saving, if you're running a synergy program and you're running a simplification program with savings attached, you're facing this question of, well, I made a saving, which bucket does it go into? Of course it doesn't really matter so long as it's all captured and all hits the bottom line. That's the way we're thinking about it. Savings beyond AUD 218, as we flag, yes, they will come at an incremental cost, but they are an incremental benefit. Those will be picked up when we talk about phases of platform simplification as we have done this time.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone or type it into the ask a question box and hit Submit on the webcast. Your next question comes from Nigel Pittaway with Citi. Please go ahead.
Oh, good morning, guys. Just first of all, talking about synergies and buckets. In terms of sort of the remaining synergies, presumably most of those are gonna flow through the platform division, but is it 100%? You know, give us any guidance on the divisional split of those synergies.
No. Look, I wouldn't say that. What I would say is if I look back over the first half, something like 85% of those synergies were delivered between the advice and the platforms part of the business. Now that's not necessarily an indicator of what I would expect going forward, but that was the delivery inside the first half. You know, I think there'll continue to be a broad base of savings in the remaining period. You'll see them in asset management, corporate, in addition to being in those other areas. I wouldn't call out platforms ahead of other parts of the business.
Okay. There's no sort of indication about what we can expect in terms of divisional splits. We're just gonna work that out, I guess.
No, look, I think we look at this as a fully, you know, what we're focused on is the total dollars. And so at different times it may well be it's a bit less here and a bit more there, which is why we're not giving a forecast on segments. Happy to talk about it in terms of what's been delivered in the past, but we wouldn't give a forecast for segment splits.
Yeah, Nigel. I agree with David. I think that the other way I think about it is the synergies are more likely to appear where the greatest overlap is in terms of businesses between MLC and IOOF. You know, I think there's strong overlap in the advisory, in the workplace space, strong overlap in advice. I think that might help you sort of try and sort of pro rata that, if you like, or proportion that across the segments.
Yeah. I mean, I guess you've got the separate targets for advice in any case. Once you've stripped those out, it sounds like a fair amount of the remainder will go into platforms, but.
Yeah.
Yeah. Okay. Just moving on. In terms of the sort of product rationalization, I mean, the initial phase of Evolve21 was meant to sort of bring the products down in legacy IOOF down to sort of a pretty low number. Did it actually do that?
Yeah. I think if you look at the sort of transition platforms remaining in IOOF, I think it certainly has done that. I think in our reporting that the transition platforms, for lack of a better term, probably P&I for example. Certainly you'll see far less representation of IOOF. Yes, it has. The feedback certainly to date, post-migration, has been quite positive. As I alluded to earlier, there's actually been some opportunities to reengage some relationships there that may have gone a bit dormant.
Okay. I think it's pretty obvious why, but exploring your comment that advisor numbers will stabilize from 1 July 2022. Presumably that's just a facet of the fee increases having flowed through by then and, you know, you expect it to settle down. Is that the right interpretation of your commitment there or-
Oh-
Is there something else at play?
Oh, there's maybe a couple of other things. That's certainly one of them, Nigel. The other one is, we're still seeing the flow through of education standards. That is sort of an external dynamic that's still playing out. The third dynamic is also clearly we're doing a lot of work around MLC Advice. You know, when you're moving pieces of the business model, and you know, I think we've always got to be a little bit cautious around commitments we make. I certainly think post- 1 July onwards, we'd expect stability. Between now and then, there might be a bit of movement.
All right. Okay. Maybe there's a bit more in MLC Advice for the next few months. Okay. Maybe just finally, I mean, obviously you've referred to the positive turning flows in the second quarter. I mean, does that in any way sort of bring forward your expectations for when, you know, outflows might cease from ex-ANZ and ex-MLC?
Look, our focus right now is building that momentum. We're not getting too far ahead of ourselves. Yes, we were pleased with the second quarter. We're spending a lot of time, and the team are doing a lot of work making sure we build on that momentum. The pipeline, I think in some parts of the business is healthier today than it's been for four or five years, and that's really pleasing. Our focus is really making sure that Q3, Q4 and beyond, we're delivering some good momentum. We haven't gone back and tried to forecast when do we think that break-even point is. Other than to recognize this is a momentum business. I think we've got some good momentum now, and it's just building on that.
Okay, great. Thanks very much.
Thank you. Your next question comes from Anthony Hoo with CLSA. Please go ahead.
Morning, guys. I just got a couple of questions. First, looking at slide 20 with your AUD 40 million to AUD 50 million investment spend, you know, the net benefit is AUD 5 million to AUD 10 million. I'm just wondering, so to what extent is this investment spend really a catch-up to your competitors given, you know, it seems like a small net benefit, you know, what cost savings are there? It's largely offset by revenue impacts.
Yeah. Look, it's a good question. I mean, I wouldn't describe it as a catch-up per se because if what it recognizes is that the heritage of these businesses and the success historically means that you inevitably have product sets that are more complex and product sets where pricing may not be at the contemporary level. Certainly from a functionality perspective, I think we're competing well. This isn't sort of a catch-up in that regard. It does recognize. Some of this spend does recognize that there are nuances around the products that we're looking to migrate that we need to cater for. That could be tax engines. It could be other pieces of functionality, SMA functionality, for example, that we need to upgrade, absolutely.
I think most importantly, if you focus on the OpEx reduction, it's also helping deliver a significant improvement in OpEx. If you're alluding to the fact that it, well, it feels a little bit underwhelming, I'll go back to the initial point that some of that spend is not just for this program but the programs that follow as well. I think that's the important point, that foundational spend is not simply for the benefit of the Evolve23. It will benefit further pieces thereafter.
Okay. Thanks. Just a second question as well. On the advice business, you know, on slide 21, you're talking about, you know, you're still targeting breakeven for both ANZ and MLC self-employed channels. Just thinking beyond that, can you give us a sense of aspirations for those channels beyond breakeven? I mean, or do you think the self-employed channel is really ultimately more challenging than your corporate or employed channel?
Well, they're certainly very different economically. In the professional services, we are extracting value from the provision of advice, from giving investors advice. In the self-employed, we're extracting value from the provision of licensing services. The self-employed advisor is the one that is benefiting from the economics of advice. They are quite different. I think that distinction is really important. If I reframe your question about, well, what is the profitability of the licensing services, I think it's in some ways with the reshaping of the market and the industry that we're currently going through, we're yet to see what that looks like. Clearly these businesses have gone from being subsidized. We're putting a stake in the ground and saying we want these as a standalone business.
How we extracted value from those relationships and those licensing services thereafter is, I think something that's still emerging. It's something that we're working very hard to work through ourselves. We're certainly not alone. I think we're seeing very similar dynamics through that whole market.
Okay. Thank you.
Thank you. Your next question comes from Siddharth Parameswaran with J.P. Morgan. Please go ahead.
Good morning, gentlemen. Just a couple questions if I can. I might have missed it, but just I was hoping you could just flesh out just the profit contribution of AET or just the revenue contributions, whatever you can provide on that.
Let's call it sort of low double-digit AUD millions at the EBITDA line.
Low double digits EBITDA line. Okay. Okay.
Yeah.
Thank you for that. If I could ask a second question just around revenue margin contraction. Obviously planned some repricing on some of the P&I portfolio before. Just all your other products, are you happy with that there won't need to be any more repricing going forward? I mean, we've seen some price cuts from some of your peers. I was just hoping you could just give us some idea of where you think you're standing, whether we won't see any more reduction from here from the run rate that we saw in the first half.
I think there are a couple of different perspectives on this. In the advisory space, the advisory platforms in the go-forward market, you know, we're certainly not seeing a lot of pressure there. I think our contemporary offers, our go-forward offers are in market. There is a dynamic at play at workplace particularly, I think with the performance testing that is providing some food for thought around the pricing and ensuring that our offers, you know, are on a different performance after fees is where it needs to be. Again, that's different for different product sets. I can't give you a one answer that encompasses the whole book, but they're probably the dynamics. We're not seeing what I'd say contemporary pricing pressure.
We're not seeing that. We are seeing some dynamics around the performance tests. Obviously the starting point of some of these product sets, and the heritage of these product sets are actually leading to some of these dynamics. In some ways, some of these dynamics we've seen relate to the age of the products and how long they've been around for.
Okay. I mean, could you give any guidance as to what you're expecting in terms of revenue margin contraction on the platform side?
The best guidance we can give you is which relates to Evolve23, which I think we've stated pretty clearly what we expect as a result of that migration. Outside of that, as I said, I don't think we've got anything at the moment, but that's not to say that as you work through performance testing, et cetera, that there may be. I'd expect that to be at the margins.
Okay. Thank you. Can I just ask a final question just around you're putting up fees for advisors and cutting back some of the services that you're providing. I was just wondering if you could comment whether so far you've seen any action by the advisors, you know, in terms of utilization of any of your other products, just any of the platform products, whether you expect any of that. Also just the second part to that question, I think if I'm right, you have. You've held back on raising any fees on MLC advisors. So just wondering if you could comment whether we might see further reductions in advisor numbers on MLC once those prices start rising as you aim to break even.
I think there may be two different components here. There may be the licensee fees that we charge advisors. Just to be completely clear, we're not removing services. The removal of costs does not imply removal of services. We're simply delivering those services in a different way. I think that's a really important point to make. Yes, we have increased licensee fees. As we alluded to, some advisors have left as a result of that. That is simply a function more of the size of their business and the nature of their business. Keeping in mind that our fee levels are in line with market, so they're typically in line with what you'd pay anywhere else.
On the sort of changing behaviors, I'm not sure if you're alluding to some of the repricing of our platform products. For example, the reprice of the P&I set, the Frontier products, we have seen improved retention, we've seen improved new account openings. That has changed advisor behavior with respect to the product or the platform. More generally in relation to MLC advisors, I think we've bedded them down quite well. I think the conversations are really productive, really positive. No, we don't expect an exit associated with an increase in the licensee fees. That's certainly not what we expect.
Okay. Thank you.
Thank you. Your next question is a follow-up from Andrei Stadnik with Morgan Stanley. Please go ahead.
Thank you. Sorry, just got cut off before, got a chance to ask a prior time. I wanted to ask, actually, you coming back to the gross margins. I wanted to ask, were there any product mix benefits? Because in the platforms, on a pro forma basis, the gross margin pressure was quite limited, just one or two basis points. And in the asset management division, it looks like the gross margins increased. Yeah, were there any product mix benefits or anything else assisting that?
Sorry, you're looking at the pro formas or you're looking at the actuals?
At the pro formas. Yeah. The platform, the growth margin pressure was very limited compared to, say-
Yeah.
You know, some of your core peers. In the asset management side, it improved.
Yeah. Look, the only thing I'd call out on the platforms business, which I mentioned earlier, was some fees in relation to our private equity, you know, asset management capabilities. You know, those fees by nature tend to be lumpy. They're, you know, they're sort of performance fees based on whether it be on exits or things like that. So that's probably the only element that we'd call out as being, you know, semi-regular, if you like, in platforms. Other than that, there's nothing unusual we'd call out.
Thank you.
Thank you. There are no further questions at this time. I'll now hand back to Andrew Ehlich.
Thank you. We do have a couple of questions online, but in the interest of time, we'll respond to those individually. I'd just like to thank everyone for their attendance today and their interest, and we look forward to answering any questions you may have. Thank you, everyone.
That does conclude our conference for today. Thank you for participating. You may now disconnect.