Thank you for standing by, and welcome to the IOOF Holdings Ltd FY21 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, you will need to press the star key followed by the number one on your telephone keypad. I'd now like to hand the call over to Mr Renato Mota, CEO. Please go ahead.
Thank you. Good afternoon, everyone, and welcome. It's great to be here today with our CFO, David Chalmers, to present the full year FY 2021 results. Just before getting into the presentation, I do want to acknowledge and recognize that for large parts of Australia, for many people right now, it's a particularly tough environment, personally and professionally, juggling lockdowns with dependents and on top of work pressures. Our thoughts are with everyone. It's probably also a good segue to take this opportunity to recognize just the amazing efforts from everyone across IOOF and MLC who have done an incredible job in these conditions. I think much of that's reflected in the results we're presenting today, which I think were a strong set of results achieved against the backdrop of the global pandemic and much uncertainty.
Just jumping into the presentation itself, I'll start off at slide two in the pack. As we work through the pack today, I think there are really three themes that consolidate all of our achievements over the last 12 months. I think firstly, with the completion of the MLC transaction, we're now at the scale we need to be to support our ambitions and the repositioning of the business as an industry leader. Not only does this translate into a position of industry leadership, it also translates economically into improved growth prospects and net operating margins. In terms of the synergistic commitments we've made, it's pleasing to say that we are well and truly on track. Not only are we delivering on the P&I, but importantly, we've also set ourselves up and have a high level of confidence around our MLC commitments.
Thirdly and importantly, we've got a clear focus on the deliverables in terms of growth for this business, both in terms of the addressable market, but also in terms of revenue growth for the business. If we jump into the business overview and starting at page four, we really do see today and these results as representing a new IOOF. If we're looking at the financial highlights, reporting AUD 147.8 million of Underlying Net Profit After Tax from continuing operations, which is up 19% on previous year. After the non-recurring, we've reported a net operating loss of AUD 143 million as a result of goodwill write-down as well as some integration costs. David will touch a little further on these. We've achieved AUD 56 million in cumulative run rate synergies to date, and we're on track on our commitments both on P&I and the MLC acquisition.
There's also a AUD 12 million already has been crystallized, AUD 12 million from the MLC transaction already crystallized in the FY 2021 year. Reporting total dividends for the year of AUD 0.23, with the final dividend being made up of the AUD 0.095 ordinary and the AUD 0.02 special dividend. The final comment on the financials, David will delve into this a little further, is that on a pro forma basis, with the inclusion of MLC, this is a very different business to the business it has been in the past. It translates into an opportunity set that provides some significant opportunities from scale and a real competitive advantage in terms of the capability set and our ability to drive down the cost to serve.
To the right-hand side of the slide, you'll see some business highlights, and it's pleasing to report that despite the uncertainty of the environment we're in, we've not only delivered on the strategic initiatives, but also completed MLC within 12 months of announcement. I think that's a particularly pleasing achievement relative to other proposed transactions that are currently in the marketplace. We've continued our progress against the Advice 2.0 transformation and the Evolve21 migration, having completed the first half of the Evolve migration during the FY21 year and on track to complete that program in December of this year. Alongside this, we continue to build on our foundations of strong governance and culture centered around the client and our conduct.
Whilst it's important to recognize the benefits of the business through this transformation, the ultimate success measure for us as a business and a management team is delivering both growth through efficiencies, but also top-line growth. In this regard, it's pleasing to recognize the net flows into our contemporary offers, particularly our retail advisory platform, which is really building momentum in the marketplace. Alongside this, we've also seen really strong growth in our financial advice business in an organic context. Alongside the repositioning of this business that sees us be an increasingly important contributor to the economics of the business. If you flick onto slide five, it's not only the size and scale that we think is particularly relevant strategically, but it's also the economic diversity of the new group that we take quite a degree of comfort in.
I'd particularly like to call out the diversification that's attained through the inclusion of the asset management business into IOOF, which is a different business to our traditional asset management or investment management business, as we used to call it. It brings with it real depth of capability and also breadth. I think it actually provides a diversification in terms of growth opportunity going forward. I'd like to say that it's still relatively early days with respect to the completion of MLC and having only had control of the business for the last three months. The early signs are quite positive, both from a capability perspective and people perspective, but also our ability to deliver on our commitments in terms of synergies and simplifications.
It's been pleasing to see much of those assumptions and hypotheses be validated in a relatively early period, and we continue to learn more about the business. I think as an integrated business, what we've built is a really mature approach to supporting change. Whilst we're going through a lot of change at the moment, it does give us confidence that we'll be able to meet our commitments with respect to simplification, reaching a cumulative run rate synergy realization of AUD 136-AUD 156 across the combined groups. In terms of our transformation achievements for the year on Slide six there, really focusing on the priorities that we've laid out for ourselves over the past 12 to 18 months, it is pleasing to report that we've made significant progress on all. In fact, we're on track on all.
Having completed everything we thought we wanted to do, it's actually pleasing to sit here now with a much higher level of conviction around certainty around some of these outcomes, which are laying the foundations for that translation into economic benefit. From an Evolve21 perspective, beyond the simplification of the current environment, it provides a real opportunity to then continue the work in terms of the product roadmap more broadly and the continued simplification of the product set that we now find ourselves with, not only the three platforms that have come from MLC, but also the two to three platforms that we've inherited from the ANZ P&I business. We'll touch a little bit more on this a little later. The introduction of the MLC Asset Management business, as I said, does change the nature of our asset management capabilities.
As I said, I think we've acquired some really impressive capabilities that are complementary and are additive to our growth prospects. Finally, just touching on remediation programs. It's pleasing to see that the rigor and the urgency that's being applied to these means we're making meaningful progress both across the product and the advice remediations. We expect to largely be complete on advice by the end of FY 2022 financial year, the current financial year, and are making good progress on the product remediations. As we've mentioned in the past, that there are some matters that have come across with MLC that we'll be remediating as well, and these have been provided for by NAB. Equally as we've said in the past, there are no advice related matters that we've inherited from the MLC transaction. Just touching on synergies before handing over to David.
We felt it was an opportune time really to bring together the two programs of integration across both the ANZ P&I transaction, which is more progressed, and obviously the MLC transaction now with the completion of MLC. We've taken the learnings from the ANZ program, which had been running for longer, and we've really looked to adapt it to the increased size and scale. The observation I'd make is that the complexity of issues are very similar across both. However, there's no doubt that the MLC integration is of a larger scale, and therefore we look to support our transformation team and capacity with an increased level of rigor around method. Also it's been pleasing to be able to incorporate some knowledge and expertise that have come across from MLC. We're confident we've got the right structure.
I think reporting this through the lens of one integrated program, I think is more representative of the way it'll be managed going forward. Specifically, I'll call out the FY 2022 run rate synergy target of AUD 80 million-AUD 100 million. This is on top of the AUD 12 million that's already been delivered from MLC in the first month or so of ownership. Supporting this is approximately AUD 300 million remaining integration costs. We feel we're well placed to deliver on our promises and really simplify the business both to the benefit of shareholders, but importantly also to the benefit of the members. In terms of synergies, we're on track.
Which given the context of all the transformation we've undertaken, the context of having worked through another acquisition and in the context of COVID, I think it's a great achievement through this process and look forward to continuing to report against these milestones and targets. David, I might hand it over to you.
Thanks, Renato, and good afternoon to everyone on the call. I'm starting on slide 9 with the overview of the FY 2021 financial summary. As Renato mentioned, the year represents a significant transformation period for IOOF with the inclusion for the first time of a full 12 months contribution of the P&I business and one month of MLC's financial results. The combination of which helped to drive a 31% increase in revenue to AUD 769.9 million for the period. Adding in these two businesses also saw a similar percentage increase in the expense base, although BAU expenses were tightly controlled during the year, aided by delivering the AUD 16 million in year cost synergies from the P&I acquisition.
As Renato mentioned, these cost synergies will deliver a run rate of AUD 26 million of full year savings, taking the cumulative cost synergies from the P&I acquisition to AUD 44 million over the last two years. That's from the reference of the AUD 68 million that we committed to over three years at the initial time of the acquisition of P&I. Moving down through UNPAT. UNPAT increased by 19% to AUD 147.8 million, with a statutory loss of AUD 143.5 million. The net profit result was impacted by the write-down of AUD 200 million of non-cash intangible assets, as we announced in our Q4 business update on 28th of July, and approximately AUD 50 million of integration costs relating to the MLC acquisition.
Despite this increase in UNPAT earnings per share fell by 29% to AUD 0.251 a share, reflecting the capital raise in August and September of 2020 to support the MLC acquisition, but with that transaction not completing until 31st of May 2021. Moving over the slide to an overview of our business units, I'll skip through each one of these in turn. If you look at advice delivered an EBITDA of AUD 20.8 million, with a reduction of gross margin of 37.8% on FY 2020. The majority of that coming from legacy open architecture arrangements that are counted inside our advice segment. There was also an AUD 6.7 million margin impact from the end of grandfathered commissions, which we've been talking about for some time. It's important to note that this result also includes a loss for the ex-ANZ Aligned licensees at around about AUD 19 million.
With cost and revenue synergies already in place that will reduce those losses to a run rate break-even position by the end of FY 2022, with a small in-year loss expected for that part of the business inside FY 2022. That's consistent again with what we've been committing to, which is to get those businesses to a break-even position within three years of acquisition. Moving through now to portfolio and estate management, which delivered AUD 76.3 million of EBITDA with a 5% or AUD 11.3 million reduction in gross margin, principally due to margin contraction in our flagship employer super product, and also an impact of AUD 4.5 million from the end of grandfathered commissions. The P&I business includes 12 months of results for the first time compared to five in the previous period.
It's important to note that when we talk about this delivered through the P&I acquisition, most of the benefits of those synergies are counted inside this segment, including also there's an additional AUD 8.7 million of revenue synergies. They're accounted for in this segment, even though in effect that the impact of these synergies is delivered much more broadly across the business. Nevertheless, they're recognized in here from an accounting perspective. MLC. What you see here with MLC is obviously just the one month of earnings, we provided a couple of different pro forma numbers for the full year.
Those are found on page 32 of the appendix, which not only gives a pro forma for MLC for FY 2021 rebased to a June year-end, but it also compares that to the numbers that we gave you almost 12 months ago, which was our estimate of the full year 2020 headline financials for MLC on a standalone basis. Finally, investment management business achieved EBITDA of AUD 51 million in the period, a 9% reduction on FY 2020, with the key drivers of that being some of the reduction in gross margin from cash products, and also reduction from some of the capital guaranteed products that we have inside the Friendly Society. Moving through to the next slide. The next slide brings together all of those drivers into a consolidated picture showing the bridge between FY 2020 UNPAT of AUD 124 to FY 2021's AUD 147.8.
You can see there is a positive contribution from higher fewer balances, which were offset by the decreased margin of AUD 20.5 million, with the majority of this decline coming from reduced margins in the portfolio at estate business, which as I referenced earlier, is mainly to do with the repricing of employer super and grandfathered commissions. There's a AUD 23 million UNPAT movement in the open architecture as part of our business, with the majority of this being the termination of contract that we had with BT that was announced in December 2020. It's important to note there was also a net cash settlement in respect of that contract of AUD 52 million, when the contract was terminated, but this amount is not included in our UNPAT. It's normalized out from that result. Moving through to the three key drivers of increased UNPAT.
We've got the synergies which we've talked about before, also the additional in-year contributions from both P&I and from MLC. Turning over the slide, there's a similar bridge on the expense side of things. You can see there that particularly on the labor cost side, it was a very modest year in terms of labor cost increases. We did make some further investment in IT and in overall governance side of things. It's worth noting that within there, we did not apply any general salary increases in the FY 2021 year due to the uncertain operating environment. We are returning those to normal for FY 2022. You should expect to see those return to a more normalized level of increases as we get back to a more normal level of operating.
Then again, you see the offsetting impact there of the cost synergies as well. Moving on to slide 13, which focuses on remediation. We've reorganized the way that we manage this internally, and we now run two distinct programs. Advice remediation, which includes IOOF remediation advice, and remediation for the former ANZ Aligned licensees, and product remediation, which covers P&I and now also includes MLC. Probably I think most important achievement with regard to remediation for FY 2022 was that we made AUD 144.4 million of payments to clients during the year. When you look at the pace of the program, payments in the first half of 2021 were AUD 28.5 million. The second half had more than AUD 115 million of payments and shows the increasing pace of the program as we're moving through and getting towards completion.
We did have an increase in remediation provisions across both programs of a total of AUD 70.6 million. This is a result of updating, I guess, our sort of assumptions and assumed rates to sort of actual experience. Also, we've had a couple of months of delays in one of the programs, which has increased interest costs and also some change to the WACC as well. While those provisions have increased, it's important to note that the further we progress the process, what we're actually doing is turning a set of assumptions around past style metrics into actual data, which gives us greater confidence overall in terms of the overall provision number.
Renato mentioned that we expect to have the advice remediation largely complete by the end of FY 2022, with product remediation program extending further, targeting to complete the P&I aspects by the end of calendar 2022, and the MLC program will go further into FY 2023. Speaking of MLC, it's important to note that product remediation provisions, including the MLC remediation provisions, were funded on the balance sheet as at completion, although are subject to the usual purchase price adjustment process. Turning to slide 14, which sets out our corporate cash and debt facilities. Following the completion of the acquisition on the 31st of May, we've got drawn senior debt of AUD 475 million, which represents a senior leverage ratio of 0.6 x net debt to EBITDA.
That's slightly below our estimate when we announced the transaction, where we thought we were going to be at around about one time net debt to EBITDA. The difference between that is largely timing. I mentioned before that some of the remediation programs had slipped two months, still inside the delivery windows we talked about both six months ago and obviously talked about now. Nevertheless, there is a timing aspect in terms of that leverage. We do expect leverage to increase over the coming 12 months as those payments are made, peaking towards the top end of our 1 to 1.3 x sort of target range before declining as cash flow grows from normal business operations and also the delivery of synergies.
We've also set out some of the medium-term funding commitments, including remediation, and also the integration investment that we're making, which obviously will deliver some of those returns in terms of synergies. Looking out further to FY 2026, we've got the subordinated loan notes that were issued to NAB as part of the MLC acquisition. Those had a face value of AUD 200 million at issue. We've reviewed those and will be at each accounting period. The current fair value as at 30th June was AUD 205 million for those subordinated loan notes. Important to note that from a debt facility point of view, those are excluded from the definition of senior debt. Moving on to slide 15, where we talk through the dividends.
Consistent with the first half of 2021, we declared an AUD 0.115 dividend made up of an ordinary dividend of AUD 0.095 and a special of AUD 0.02 per share. That special dividend, just as it was in the first half, is there to reflect the fact that the capital raise that was completed last August and September, but there was only one period of additional MLC earnings in the period. As we had freed up some cash from divesting a couple of non-core assets, there was the capability to extend a special dividend to smooth out those overall dividends for investors over the period. The ordinary dividend per share for the second half 2021 and the final dividend represents 75% of UNPAT, so midway through or at the midpoint of our overall dividend payout policy, which is at 60%-90%.
Turning to the next slide, which sets out a bit of a pro forma for the new IOOF. This represents IOOF for FY 2021 ex the one month of MLC contribution on the left-hand side. We've then done a pro forma for MLC June to June for FY 2021 to produce an overall group pro forma for FY 2021. It does really talk to the scale of the business with revenues of close to AUD 1.5 billion and UNPAT of AUD 213.3 million. Importantly, we're also flagging there some changes to our reporting that we will work through in FY 2022. The main ones there are really around reviewing our operating segments to consolidate down to four segments, which will be advice, platforms, investment management, and corporate. Full integration of both MLC and P&I into those segments.
We're also looking to review our FUMA methodology for October, which is when our Q1 FY 2022 FUMA report will be out, just to make sure there's consistency in the methodologies that are used between IOOF and MLC. There have been some historic differences there in the past. Also updating our cost allocation model as well. The last one I'd draw your attention to there is in relation to the way that we calculate UNPAT. We've introduced and reviewed the way that we adjust from in between NPAT and UNPAT. We've introduced a minimum threshold for adjustments and made other changes to sort of really tighten that up. The net impact of that will be that there'll be FUMA items that we normalize in between those two lines going forward. Moving to slide 17.
We also want to set out some selected key financial drivers and targets as we look out across the period. I won't step through each of these in detail, but the first few relate specifically to earnings drivers over the period, with the net result of those being that we're targeting growth in net operating margin despite an anticipated decline in gross margin due to the benefit of synergies being realized across the period. I talked before about the change in UNPAT methodology. If we applied that approach to FY 2021, UNPAT would have been approximately 3% lower. It's important to note that none of this does anything to change statutory NPAT or cash flow. It's simply fewer items being adjusted in the UNPAT number, but important to take into account as we go forward.
Finally, when we look at all these factors combined, we're targeting increasing EPS through full year's contribution from MLC and in addition to the benefit of synergies coming through, which when looked at within light of our dividend payout ratio, will help to drive future ordinary dividends. I'll hand it back to you now, Renato.
Thanks, David. Just to spend a few moments, in terms of our outlook and priorities going forward. Just worth reflecting on page 19, some of the industry dynamics that we find ourselves in, and certainly there's no denying that our industry plays a really important role in supporting the financial well-being of Australians. We find ourselves in a fortunate position and privileged to have been supported by an expanding addressable market by the way of increasing rates of super contribution. Whilst it does come with responsibilities, it does also create a vibrant market for competition and continued growth. That's something certainly we're looking to exploit going forward. Alongside this, we're in a unique place where we're facing an advice market that's never been more dislocated in terms of demand and supply. Now, we actually think this creates a really positive tension to be resolved.
It's pleasing to see all the stakeholders in the system, whether it's policymakers, regulators, as well as commercial enterprises such as ourselves, looking to solve for this tension. That is how do we increase the supply of advice or advice-like services into a market that is clearly seeking more and more assistance and support in an increasingly complex world. Again, the dynamics for financial advice, we think have never been better. Albeit that the starting point does require some re-engineering and repositioning of the industry as a whole. We look forward to working with our other stakeholders to really not only provide a valued service into the community, but importantly, do so in an economically sustainable way, where the owners of the business are rewarded for the deployment of capital.
If we move on to slide 20 and try and contextualize this in terms of, well, what does this mean for IOOF? I think where we find ourselves is on two horizons of transformation. I think the 1st horizon of transformation, so the 2019-2021 horizon, are really those initiatives that we've committed the last few years of management attention and resources towards making progress on. It's pleasing to say that we've made considerable progress on all of these, whether it's Advice 2.0, the Evolve, and also the importance of acquisitions in achieving the scale that we felt was required to ensure we can continue the transformation journey and continue to exploit the market opportunities ahead. Importantly, however, it's also important to look past that 1st horizon and to the next horizon, which is an extension of the existing themes.
Whereas Advice 2.0, we've got a high degree of confidence around our ability to meet our commitment of net flow positive in relation to the self-employed models. There is a continued opportunity to firstly extend that logic and extend that desire across the MLC advice businesses, but importantly also to challenge ourselves to solve the problem of the unaddressed advice market and looking to extend that. We're really calling that our achievable bank capabilities and business model. In the Evolve program of work, I think as we see that come to a conclusion later this year, it really opens up and clears the path for our product simplification exercise that really we think will release significant value for the business.
Having now reached a point where we feel we're at that point of critical mass with respect to scale, I think the acquisition focus now turns into an organic growth focus that revolves around engaging with our clients and building strength in our reputation. Whilst we're not losing sight of the fact that there is work to be done on the first horizon, I think it's really important that we look beyond that and we look to set ourselves to continue this evolution to ensure that we're optimizing the rest of the opportunities ahead. If I look to dissect that a little bit further and really focus in on that advice aspect of that transformation. By any measure, and I think the research that we ourselves have done and others have done, there is no doubting the value that the advice industry and advice itself delivers to clients.
The challenge is, however, in the reach and the scalability of that advice. I've previously described the advice industry as a binary industry, and that is you pay a significant fee and you receive a holistic, personalized proposition, or you pay nothing and get nothing. That is part of the problem. There is no glide path. There is no modularity to advice, and I think that is certainly a challenge that is solvable and one that we will commit ourselves to solving. We think there's a significant opportunity in embracing a digital-first mindset and leveraging concepts like cash flow management, like goals planning and financial education to create a more engaging coaching style interaction with our clients, particularly younger demographics. That may in fact extend out to a more modulated or episodic nature of advice.
We've seen similar models emerge offshore and believe that we've got a fantastic opportunity to make ourselves more relevant to our client base and our members through more meaningful experience. Certainly, one data point that brings this to light in our minds is that with the acquisition of MLC, we'll have over 1 million members that are unadvised in our superannuation products. There's a terrific need and frankly, an opportunity to build more relevance and build more value into our interactions with them. We're in the process of currently incubating some new capabilities in what we call financial wellbeing sphere. We think this venture can actually add significant value through improved net funds flow, improved client lifetime value, as well as potentially exploring new revenue models.
This is on top of our existing and continued commitment in terms of improving the quality and sustainability of the traditional advice model that we've spoken about before. As we've highlighted, we've committed to remaining on track to have the self-employed businesses break even by the end of FY 2022, those that were acquired as part of the ANZ transaction, on a run rate basis. We're also committed to the same outcome for the MLC businesses that have been brought across in the last few months. Just to put this opportunity into context, with the inclusion of the loss-making infrastructure of MLC, the combined losses of these subsidiaries in support of self-employed advisers is just shy of AUD 100 million. It's a significant opportunity. We're certainly confident that the method to capitalizing that opportunity has largely been designed through the thinking we've done in support of the ANZ challenge.
It's really a case of deploying the same methods and the same strategies across some of the MLC architecture to really achieve a similar sort of outcome and really on a run rate basis, break even by the FY 2024 year. A very similar three-year horizon. It is a big opportunity. Our experience with the ANZ transition and deployment to date gives us a really strong sense of confidence that this is achievable. If we move into the simplification agenda and certainly the extension of the Evolve21 migration. As I've already said, the completion of Evolve21, which we remain on track for, does clear the path for the continued simplification.
We are currently in the midst of a product review across the enterprise product suite, which now obviously includes MLC and ANZ P&I, to ensure we can map that out as efficiently as possible, optimizing the various factors that need to be factored in, both from a member lens, from a technology lens, from a client disruption lens, and from a feature functionality and pricing perspective as well. Not only in terms of capacity, but I think one of the things that Evolve has done for us, and certainly the completion of Evolve, gives us a highly contemporary, competitive offering in the marketplace, as well as having built some real capability in this area of product simplification. It is a relatively technical area and one that IOOF has had and has probably had more experience in than most others.
We're sort of entering a phase that Evolve21 is really flexing our muscles and allowing us to build some muscle memory around this capability, and we're confident that that'll serve us really well as we then look into the ANZ and the MLC product sets. Just to summarize the table on the slide there. On top of the completion of the Evolve, we're also forecasting that we would have, by the end of the FY 2022 year, simplified one other ecosystem out of ANZ by the end of the financial year. That will eliminate not only a platform, but also an RSE license and a fund as well. The journey with respect to rationalization or simplification has certainly begun.
Finally, in terms of growth and funds flow, it's clear that the addition of P&I and MLC has certainly created a challenge, but also an opportunity in terms of reversing what has been a declining funds flow profile for those businesses. If we reflect on the root cause of that funds flow profile, certainly it's our view that it's a lack of focus and investment under previous ownership that has resulted in this dynamic, and these are issues that have been certainly reversed with the acquisition of IOOF . Being a pure wealth management player whose only focus is in this sphere, I think is the starting point to reversing this trend. It's the ultimate migration to our in-market contemporary product capabilities that will provide an upgrade to members and really significantly improve our net flow profiles in this space.
In the intervening period, there are certainly levers we have available to ourselves to really look to improve the funds profile, and certainly that work's begun with ANZ, and working through that ANZ profile. Both in terms of functionality improvements, which we're certainly deploying into Smart Choice, but also price repositioning. I think between both of these, we're now targeting and expecting that the P&I product range will be net flow neutral by the second half of FY 2023. I think while MLC represents a similar dynamic, there are differences in the actions taken by MLC prior to completion and that are quite different to ANZ. For example, the MLC products have already gone through a significant improvement in terms of pricing. Which means there's less legacy pricing exposure, and therefore, we expect there to be a natural gradual improvement of MLC over time, all else being equal.
We're not in a position yet to have completed our price review for MLC. There's more work to be done by us and by management to really get to a final landing with respect to the options available to us to improve the net funds profile for this business. It's our full expectation that for both of these businesses, that the net funds flow profile does improve. As I said, I think having had more time with the ANZ products than the MLC products, we're further progressed on the ANZ likely path forward than MLC. Certainly, the MLC will come into focus and has already come into focus over the past few months. Just to close out, and on the final slide, on slide 24, before opening up to questions.
There are really three key messages that I'd like to leave you with. Firstly, is that with the completion of MLC, we're now at the scale we need to support our ambitions and the repositioning of the business. We're well on our way with respect to synergies, and not only does that allow us to Significant simplification benefits, both culturally and from a governance perspective. We've got a really clear focus on the deliverables in terms of growth, both in terms of addressable market and revenue. Ultimately, our success is going to come from serving more Australians through a business model that deploys market-leading technology in a way that delivers lowest cost to serve, and in supporting the financial wellbeing of all Australians.
Really, in this chart here, all we looked to provide you with is a scorecard against the progress against our key initiatives that we've discussed today and we've touched on today. Clearly, as I said, I think those that are on the first horizons, I think it's really pleasing to say we've made real progress in. We're now really starting to focus in on the next horizon, and of the key drivers to meet our ambitions. With that, I might thank you in advance for your time and pause there for any questions.
Thanks. If you'd like to ask a question, please press star then one and wait for your name to be announced. In the interest of time, please limit yourselves to three questions. Our first question is from Kieren Chidgey of Jarden. Please go ahead.
Hi, Renato. Hi, David. Just two areas I wanted to ask about. Firstly, in terms of the advice breakeven targets, both for the ANZ ALGs and MLC. Keen to get a sense of the contribution from cost out driving those outcomes. You've said severe loss. I think AUD 9 million, AUD 10 million from ANZ this year and about AUD 70 million from MLC and you're targeting breakevens in 2022 and 2024 respectively. Is that largely from cost out or are there other factors we should think about contributing to that? Specifically, just wanting to get a sense of how much, I guess, the cost out programs, particularly the MLC, AUD 150 million relates to advice as opposed to wealth.
Kieren, it's David here. If we go back and look over the changes that we've put through on the P&I business, that path to breakeven is approximately half revenue, half synergies. Our expectation at the moment is that It won't be exactly the same for MLC, but it will be similar. It's an important point you raise because Renato talked about that AUD 100 million cost improvement. That's not AUD 100 million + AUD 150 million of synergies. As you say, some of those cost improvements that will help get the business to breakeven, let's call it approximately half, are also cost synergies. There is an element of doubling up there.
Okay. just for MLC, for example, the AUD 70 million full run rate in MLC advice.
Yeah.
Of losses at the moment. We should think about half that AUD 70 million improvement by FY 2024 coming from cost out.
Correct.
Okay.
Yep.
Yeah. Secondly, just keen to talk about platform pricing. There's a number of significant changes across, I guess, the three different sort of corporate groups. Historically, platforms, the employer super repricing you've highlighted is a AUD 6 million impact. I think I saw somewhere mentioned that was fully backdated to the start of the financial year. Was that all booked, however, in the second half? Was there a heightened margin impact in the second half from that?
Correct. All booked in the second half, but you're right that it was backdated to the start of the financial year.
Okay. All right. Secondly, around the Evolve transition. The impacts you called out, I think, are sort of AUD 9 million for phase I and AUD 17 million for sort of once phase II is complete. How do we think about sort of when that AUD 17 million run rate is actually effective?
What we've talked about there is that we've given you a sort of FY 2022 number and then a post-run rate. The AUD 17 million is really post the completion of the migration in December 2021. The majority of that is going to be in the second half of FY 2022.
Okay. All right. Then just thirdly, sort of on the MLC business. I think there was a comment somewhere saying they undertook repricing initiatives prior to completion. I was just wondering if you can elaborate on that. Does that refer to their significant repricing on MLC Wrap more than 1 year ago, or is that something more recent? If so, what impact will that have into the 2022 year?
Yeah, look, it's something I think we noted at the time when we talked about the acquisition, was that there'd been a period of repricing over MLC over the last, well, now 12-18 months in terms of some of the key products. We had seen that in terms of the impact, in terms of declining EBITDA. That was in line with our expectations through due diligence. I think that when you look out across MLC and think about what FY 2022 looks like for MLC, I would more be looking at the pro forma as being the better indicator of the starting point, rather than, for example, taking the 1 month of June and multiplying that by 12.
Okay. All right. Then maybe just finally on the ANZ repricing. I know you're yet to finalize the legacy repricing. Based on the commentary, we should just think about, in broad terms, that that will offset the higher repricing in Smart Choice, so we shouldn't see any material net impacts from a gross margin point of view as that flows through?
Yeah, that's our expectation on a full year basis. The Smart Choice reprice went through on the 1st of April. OneAnswer will be later on this year. There'll be a small benefit in the first half of FY 2022. If we look at it on an annualized basis, those two, obviously depending on flows and how those sorts of things evolve, we think they'll broadly neutralize each other.
All right. Great. Thank you.
Our next question is from Anthony Hoo of CLSA. Please go ahead.
Good afternoon, guys. Just a couple of questions for me. Firstly, you mentioned that looking at revenue synergies in the P&I business, you mentioned a number of what, AUD 9 million. Just wondering if you can give us some more insight on this, how this was achieved, where it came from, and then, do you expect further revenue synergies from here?
Hi, Anthony. It's David here. Those synergies, yes, there's AUD 8.7 million of revenue synergies in the period. A lot of those came through consolidation of scale, if you like, and renegotiating with some of our external partners, is where that came through. Look, we do think there are additional revenue synergy opportunities. There is a small amount of revenue synergies included in what we talk about for next year in that AUD 80 million-AUD 100 million. That's always been the case. If you go back to last year when we talked about AUD 150 million of synergies, there was a small element, about AUD 10 million, of revenue synergies in there. We certainly think that they're there. I guess our focus has always been principally to talk about and focus on the cost side of things, given that those are probably more tangible in the long term.
We're certainly very much looking at what we can do to combine the scale and breadth of the business to negotiate better terms with some of those external suppliers. There is an element of that inside that AUD 80 million-AUD 100 million.
That, the number that you mentioned, roughly AUD 10 million within the AUD 80 million-AUD 100 million, is that AUD 10 million from MLC or P&I?
Well, the 8.7 was delivered in FY 2021. The go-forward basis of 80-100, that's an annualized number for FY 2022. In terms of where it comes from, look, to be honest, as we bring the businesses together more and more, because what we're doing is really harnessing scale, we can't really attribute that to any one particular part of the business. It's because of the collective scale of P&I and IOOF and MLC altogether that delivers those outcomes. That's really why we've brought together the synergy programs into a single program. Likewise, with our reporting, we'll talk about segments in a much more consolidated way.
Okay. Thanks. Then my second question was around MLC. Perhaps just following on from Kieren's questions, but with your MLC numbers, you provided some pro forma numbers on slide 16. Looking at the revenue base, in particular, is a little bit weaker than the historical FY 2020. Can you give us some more thoughts around, do you think that revenue base is a good base going forward, or should we expect further impacts just from pricing, gross margins, so there's more impact going forward from here?
I would say that if I go back and look at our assumptions when we priced the acquisition and when we went through due diligence, while the revenue number has fallen in FY 2020, the revenue number is ahead of our expectations when we did the modeling. We're pleased with the performance of MLC in FY 2021. Strong market certainly helped in terms of delivering that revenue number. I think that I'm happy with the result. It's certainly in line with our expectations. Yes, I think it is a reasonable base, but it's certainly fair to also mention that some of that outperformance on the revenue side was down to some of the strength we've seen in equity markets over the last 12 months.
Okay. All right. Thank you.
Oh, Bank of America. Please go ahead.
Yeah, thank you for taking my question. If I could just follow up on MLC. I'm looking at AUD 108.5 million of FY 2021 EBITDA, but AUD 22 million or most of EBITDA for one month. June month seems to be annualizing a lot higher than the FY 2021 pro forma. How does this interact with the MLC gross margin falling over the same period?
Look, the best advice I can give for when you look at the June 2021 number for MLC, I would not be using that as a basis, as I said earlier, for thinking about FY 2022. A very unusual month, obviously, given the first month of a transaction completing, in addition to MLC's traditional year-end has been September. We've moved that year-end to June. There's a lot of movement in those numbers in the month. That's really why we would absolutely emphasize the pro forma as being the best baseline. I would not be taking June and multiplying it by 12.
Okay. Thanks, David. Just a second question. You're flagging the downward revenue pressure from migration. How much margin pressure are you expecting here, and how are you managing the business, to increase the net operating margins from here? Are you able to quantify some of these margin impacts?
I think for those, we've given the AUD values rather than sort of talking in terms of margin. I think we've given a fair bit of information in terms of some of the AUD drivers and the impact of some of that margin that we expect to see. If I follow through to the second part of your question around net operating margin, a lot of that really comes from the synergies. That's really what is driving that divergence in terms of continued gross margin pressure. Increasing net operating margin comes down to delivery of synergies, not only in terms of even if you just look at from the P&I side of things. AUD 16 million in a year, but an annualized AUD 26, so we get that benefit inside 2022. We're well advanced in terms of delivering on the first wave of synergies from the MLC acquisition.
Those factors will all combine to help sort of, enhance the net operating margin.
David-
Sorry, the only other thing I'd add is that as you look forward and as you look to model or to predict what happens when you rationalize further systems, what we haven't spoken about in the benefit number or quantified yet is actually the economic benefit of simplifying and rationalizing those systems. The system rationalization from product simplification isn't included in the AUD 150 and would be on top of. It's just important to keep that in mind.
Thanks. Can I just confirm you're saying that you're managing net operating margins, excluding synergies, to start to increase from here? Is that what that guidance slide is telling me?
Sorry, firstly, it's not a guidance slide, so I just want to be cautious on that one. No net operating margin does include synergies. What we're saying is we expect net operating margin to improve. The basis of that, I think what Renato is calling out, is that in addition to synergies, there are also some simplification benefits as well.
Thank you. I'll leave it there.
Our next question comes from Lafitani Sotiriou of MST. Please go ahead.
Thanks for my question, guys. Good afternoon. My first question is in relation to slide 32, the MLC pro forma. Can I just clarify whether FY 2020 and FY 2021 is under the same accounting standard? If it is, can you explain the AUD 37 million drop-off in EBITDA only translating to minus AUD 8 million odd what the difference is?
Hi, Lafi, it's David here. No look, at the moment we've done those, we have not yet harmonized accounting policies. That is simply taking MLC's existing approach on a 12-month basis and applying that. No, there hasn't been that sort of similarity there.
What would you say is attributed to that difference in that trajectory for those?
Yeah, look, some of it is in relation to what you're seeing in terms of depreciation and some of the different approaches that are taken, across the group in there. Obviously from an interest point of view as well, there's no interest that sort of sits inside the MLC business, but there is inside IOOF.
Okay. Just moving on to slide 17, and just a follow-up question in relation to the Evolve21, AUD 17 million odd run rate post December. Could you just clarify which legacy businesses are contributing to that AUD 17 million run rate reduction? I think there was a comment by Renato suggesting that you have yet to do the review of MLC's product base and even though they've had some price cuts, that there still may be some on the cards.
The AUD 17 million there relates to the IOOF migration, of our existing systems onto Evolve.
There's none, nothing factored in for any of the ANZ legacy business in terms of margin decline.
We talk more about the ANZ pricing changes two or three lines above, where we talk about the P&I product pricing changes. We've separated both of those out. There's nothing in there for MLC. As Renato talked about, we're, you know, given we've only had the business a couple of months, we're still going through reviewing those. The AUD 17 million is in relation to Evolve21 specifically, which is around IOOF. Above there you see, what we're expecting in terms of P&I.
Sorry, can you just clarify? I can't see it right now. What's the P&I expected impact?
Beg your pardon. The P&I price, that is the net impact of Smart Choice reprice and OneAnswer, which we're expecting on the annualized basis, the ups and downs of those two reprices to broadly be neutral.
Got it. All right. Thank you.
From Andrei Stadnik of Morgan Stanley. Please go ahead.
Good afternoon. Could I ask a couple of questions? Could I ask around the payout ratio, firstly? Given the better cash position and the consecutive special dividends, are you signaling that the payout ratio should be closer to 80% than, say, rather 70% into FY22?
No, I wouldn't take it that way. I would take it that, as I said, we've aimed to give consistency of dividend over the period. Obviously, we'd like to be able to grow that over time. The 75% represents the midpoint of our range. That's what we've done on the ordinary. Actually, why we've split it between an ordinary and a special rather than, for example, just giving it and calling it all an ordinary. I think calling it all an ordinary, which would be a payout ratio of over 100%, would be sending the wrong signals. That's why we've split it between an ordinary and a special.
Thank you. In terms of advice for gross margin revenues in the second half of AUD 70 million, down from AUD 82 million first half and AUD 85 million PCP. How much of that was from advisors exiting versus other external factors such as lockdowns starting to impact face-to-face advice meetings?
The majority driver of the changes in the advice business was really due to the open architecture contracts such as principally BT. That is recorded inside the advice segment. That is the largest driver of the reductions in advice.
Got it. Thank you. If I can ask just a third question. In terms of the ANZ or the ex-ANZ gross margin, it's been steadily going up 35 basis points PCP, more price second half, this second half going up to 39 basis points. What's driving that? Is it just a mix, or is it the outflows coming from lower revenue products?
Look, it is a little hard to be looking at segments the way they currently are set up. You might have heard me mention earlier that the way we've recorded P&I synergies is effectively we've given most of the benefit of that to the P&I segment. That's not truly reflective if you think about it, because a lot of the synergies we've been getting have been across the group, but they are accounted for, and as with the AUD 8.7 million of revenue synergies inside the P&I segment. I think that's been helping. That's really why it's important that in 2022, we start to bring the segments together so that we start to get away from whether or not a benefit across platforms, for example, is recognized. Does that get recognized in P&I or in Portfolio and Estate Administration?
That won't be an issue going forward.
Thank you.
From Nigel Pittaway of Citi. Please go ahead.
Morning, guys. Just first of all, on the sort of platform IOOF legacy business, obviously, you've given the average is fewer, but obviously, given the Evolve transition took place sort of early June, your average won't be indicating much. My question is just the closing balance on that mix of platforms between flagship advice, flagship employer transition, and trustee. What would that look like if you gave us the closing balance at June?
Sorry, Nigel, would you mind just repeating that? Just go one more time.
Yeah. In your platform business, you've given us the average FUMA-
Yeah
for FY21, which obviously hasn't moved much from 1H21. There's been a bit of market impact.
Yeah.
It hasn't moved much because you did the transition onto Evolve, whatever it was, 9th of June or whatever.
Yeah.
In other words, what happened with that transition? How has that mix between your various platforms changed as a result of that transition?
What I would say is that the majority of transitions for Evolve are still to come. We have done some of those migrations across the period, but in the overall scheme of Evolve, it was a small, if you like, that went through at that time. The majority of the changes from Evolve will happen in the second half of FY 2022, principally with those December Well, actually, they'll be there for the 31st December FUMA dates.
All right. Okay. That second Evolve transition is bigger than the first one, is it? I thought it was.
Correct.
Yeah. Okay. Fair enough. Okay. Secondly, I think you may have covered this, but you're going on about the reposition of the legacy P&I suite. Just to be clear, is that totally just the repricing of OneAnswer or are there other things that you're hoping to do with the legacy P&I suite that doesn't involve repricing and therefore isn't isolated with that OneAnswer price change?
Yeah. We've looked at two key products when we've been through the analysis, ANZ Smart Choice and OneAnswer.
Yeah.
I wouldn't say we've just changed price. There's actually been a fair bit more to it than that. Smart Choice, we significantly expanded some of the investment options that were there, redeveloped the sort of online portal. There are changes beyond just moving a price up or down. You're right that when we talk about the P&I product pricing changes, we're specifically referring to Smart Choice and OneAnswer.
Okay. The other product that's in there's nothing being done to that?
Not this stage. We focused on where we think the bigger opportunities are.
Okay. Then you mentioned, obviously, that you're changing the definition of UNPAT, and that would have been 3% lower this year. What items are actually moving?
The main thing is we're introducing a threshold. At the moment, there's no dollar value threshold that would apply. We're going to introduce a dollar value threshold of around about AUD 10 million, which means that if there's movement below AUD 10 million, we're not going to adjust for it. That's the major change in terms of the calculation going forward.
Right. Okay. Significant items have to be AUD 10 million or above?
Yeah.
Yeah. Okay. Maybe just finally, a question for Renato. You're still obviously targeting this episodic advice. Do you think you need legislation change in order to be able to deliver that? Or is that something you feel that you've got within your capability as it currently stands?
I think much of that exists already within our capability, albeit there is room for improvement. I wouldn't preclude ourselves from working with regulators and policy settings or policymakers to change some of those settings that allow for an improved experience. Some of that is already in existence today.
Okay. Thank you.
Thank you. Our final question is from Siddharth Parameswaran of J.P. Morgan. Please go ahead.
Good afternoon, gentlemen. Just a question firstly, just on MLC. If I could just ask, just the repricing of the advice businesses just to get those towards breakeven, what timeframe will that happen over? Will it all happen right at the end in FY 2024? If you could just comment on just the cost out as well. Just the timeframe or the pathway for both repricing and also just cost out to get those to breakeven.
Yeah. Hi, Sid. Oh, sorry, Renato here. Sorry, I might just have a quick crack at it. This will have to be the last question, given in the interest of time. Thank you, everyone. Sid, that will happen progressively. There's not a drop dead at which we go from significant losses to breakeven. I would say there's a natural progression. Albeit, there's a period of what I'd say, if you take the three-year horizon, and we've used the three-year horizon consistently, both with ANZ and MLC. There's a period of the first year or 18 months where you've actually got to make the changes, and then you'll typically see those benefits flow through in the latter half of that three-year window.
Obviously, we're committed to reaching those goals on ANZ on a run rate basis by the end of FY 2022, and then the same again for MLC with that three horizon on a run rate basis, taking us to FY 2024.
Okay, great. Okay, thank you.
Thank you. Mr. Mota, there are no further questions. Back to you. Thank you.
Well, terrific. Thank you everyone for time. Apologies for being a few minutes over, but, we certainly appreciate your interest and look forward to catching up with you all soon. Thank you again.
Thank you. This call has now concluded. You may now disconnect your lines.