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Edited Transcript of AUB.AX earnings conference call or presentation 20-Aug-19 12:01am GMT

Full Year 2019 AUB Group Ltd Earnings Call

North Sydney, NSW Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of AUB Group Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Shanahan

AUB Group Limited - CFO

* Michael Patrick Cheere Emmett

AUB Group Limited - CEO, MD & Director

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Conference Call Participants

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* Andrew Buncombe

Macquarie Research - Insurance and Diversified Financials Analyst

* Jason Palmer

Taylor Collison Limited, Research Division - Equities Analyst

* John Campbell

Avoca Investment Management Pty Ltd. - MD and Portfolio Manager

* Nicolas Burgess

Baillieu Holst Ltd, Research Division - Equity Research Analyst

* Scott Lyndon Hudson

MST Marquee - Senior Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the AUB Group Limited FY '19 Full Year Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Mike Emmett, CEO and Managing Director. Please go ahead.

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [2]

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Good morning, and thank you for joining Mark and I on the call this morning. I'll kick off with a summary of the results before handing over to Mark to run through some of the numbers in more detail. I'll then finish the call with a review of the business and provide an outlook for the year ahead before opening the call for questions. We'll be referring to the presentation we submitted to the ASX this morning.

I'll start by acknowledging that FY '19 was a year with a number of challenges for the group. Pleasingly, the core Insurance Broking and Underwriting Agency businesses delivered a solid performance. However, we faced significant headwinds arising from the challenges in health and rehabilitation components of the Risk Services division as well as the costs arising from remediation of the Canberra fraud.

Slide 3 reflects a snapshot of the financial performance for FY '19. Underlying revenue increased by 3.2% and adjusted NPAT by 4.1%. I'd like to highlight that if, and I acknowledge this is a big if, we excluded the impact of Canberra and Risk Services, then adjusted impact grew by $7.3 million, i.e., a normalized improvement of 16% on the prior year. Mark will reflect on this in more detail shortly.

The headwinds I've referred to resulted in a deterioration of the underlying EBITDA margin of 1%. We commenced a program to reduce corporate cost. The early impact of this is reflected in the reduction of the corporate cost to adjusted PBT metric, which has reduced from 17.4% in FY '18 to 16.5% and we anticipate further improvements to this metric in FY '20.

The adjusted EPS reduced by 3.1%. This is the result of the impact of the capital raise in November. In FY '19, the weighted average number of shares in issue increased by 9%, which diluted the 4% increase in adjusted NPAT. This will continue to have an impact in FY '20 due to the full number of shares issued in FY '19 taking effect for calculation purposes, which has a further increase of 5.6%. And finally, to the dividend. We are proposing an increase of $0.005 in the full year dividend per share to $0.46.

On Slide 4, we're endeavoring to explain the underlying performance of the business. On the left half of the slide, you'll note that adjusted NPAT from core insurance operations, namely broking and underwriting businesses, grew by $7.3 million, an increase of 16% and this was offset by the adjusted impact reduction of $5.4 million, a reduction of 12%, arising from the deterioration in both health and rehabilitation services and Canberra.

On the right half of the slide, we're showing the normalized impact of one-offs and the full year effect of actions we've already taken to reduce corporate cost. Normalizing for these items indicates an underlying improvement in adjusted NPAT of 14% year-on-year.

I'm not making excuses for the things that disappointed this year. However, I do want you to understand that the group has a very strong underlying business, notwithstanding that there are numerous remediation actions still to be taken.

I'd now like to hand over to Mark.

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Mark Shanahan, AUB Group Limited - CFO [3]

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Thank you, Mike, and good morning, everyone. Firstly, let me touch on the FY '19 divisional performance snapshot on Slide 5. In this slide, I'll cover off on each operating area in more detail. The underlying revenue and EBIT margin here represent the aggregated or 100% view of all our business holdings, whether controlled or associates, and then adjusts for noncontrolling interests to arrive at PBT attributable to equity holders of the parent. Firstly, Australian Broking. The profit contribution from the division was $52.8 million, up 3.7%. Excluding Canberra from both years, the divisional profit contribution grew 11%.

Underlying revenue grew 1.8% driven by organic growth in policies and increases in average premium rates. Excluding the Canberra result from both prior and current years gives organic growth in underlying revenue of 4.1%. There is evidence of average premium rate increases in the low- to mid-single percentages with variability across class and geography and between new and renewal business. Year-on-year broker expense growth, on an organic basis, was 2.6% versus 4.6% in FY '18. The Australian broking EBIT margin grew 20 basis points. Ancillary income increased 4.4% over FY '18.

Looking at New Zealand. The profit contribution from the division was $9.2 million, up 41.5%. This largely reflects the impact of the change of BWRS, one of our largest broking assets in New Zealand, from a 50%-owned associate to a 100%-owned subsidiary on 1 January, 2019. Underlying revenue grew 19.3% driven by acquisitions of Rosser Underwriting and Primesure, organic growth in client numbers and average mid-single-digit increases in premium rates. Excluding acquisitions from both prior and current years gives organic growth in underlying revenue of 7.7%.

Expense growth on an organic basis at 10% includes one-off step changes due to investment in people, processes and infrastructure, including technology, as the business expands. NZbrokers continues to attract new members and build its market presence as the largest broker management group in the New Zealand market.

The pretax profit contribution to the group from our Underwriting Agencies was $15.5 million, up 11.6%. Underlying revenue grew 8.5%, driven by significant revenue growth in a number of agencies, partly offset by the impact of insurer transitions in the Strata businesses, most notably in Longitude as well as continued strong underwriting results delivered to insurers.

Expenses were up 10%, or 8% if we exclude IT cost overruns related to the new underwriting system. The main reason for the expense increase were staff costs to support increased underwriting activity. On this last point, we are investing in the implementation of a new underwriting agency system which will improve efficiencies as it is rolled out.

The pretax profit contribution to the group from Risk Services was $2.4 million. The later-than-expected changes in the New South Wales workers' compensation market in FY '18 had a substantial impact in FY '19, with variable referral flows continuing throughout the year.

Altius and Allied, the 2 health and rehabilitation businesses, carried excess capacity throughout the year. Procare's core operations to deliver claims management and loss adjustment services to insurers performed well and forms a basis for expansion to deliver these services to Austbrokers' network clients.

I'll now turn to Slide 6 and the FY '19 performance breakdown by division. The group's adjusted NPAT grew 10% year-on-year if we exclude the Canberra results from both years. Increased pretax profits from Australian and New Zealand broking as well as Underwriting Agencies were partially offset by the reduced profit in Risk Services. 84% of divisional revenues come from areas exposed to the premium rate environment and this provides leverage to a hardening market.

AUB corporate expenses, net of corporate interest, were down 6.5% year-on-year. Corporate expenses, excluding acquisition costs and net interest, were down 3.3% with a reduced corporate cost to adjusted profit before tax ratio of 16.5%. We continue to focus on managing the corporate cost-to-income ratio as the business grows, balancing returns to shareholders with investments in infrastructure to support a diverse and multi-jurisdiction business.

On Slide 7, I'll briefly touch on our strong balance sheet. This is the consolidated balance sheet. Investments, which are the aggregate of investments in associates and intangible assets and goodwill, have increased to $529 million, up $96 million due to acquisitions. Cash in trust and liabilities have increased for the same reason. Borrowing by associates at 30 June, 2019, that is, debt that is not on the AUB group balance sheet, has reduced to $44 million from $73.4 million at the end of FY '18 due mainly to the step-up acquisitions in Adroit and BWRS causing their debt to be consolidated.

Slide 8 deals with our group debt. The chart on the upper left is compiled on a look-through basis, including shares of associates' debt. AUB Group corporate debt was paid down by $44 million as a result of the capital raising. The change in balance between subsidiary and associate debt was due to Adroit and BWRS becoming subsidiaries. The group's leverage ratio, compiled on a look-through basis, has ranged historically between 1x and 2x net debt-to-EBITDA and is currently at 1.5x. The group's gearing ratio, which is debt over debt plus equity on a look-through basis is 21.5%, down from 31% at 30th of June, 2018. The group's interest cover ratio was 10.7:1. AUB Group entered into a $150 million multi-currency syndicated loan facility in December 2017 for a term of 3 years with a mechanism for 2 1-year extensions. One of those extensions has been contracted to during the year.

Looking at cash flow on Slide 9. This is the cash flow at the AUB Group corporate entity level. Operating cash generation is strong with $33 million of operating cash generated prior to payment of dividends and prior to the effects of investing and financing activities. At an AUB Group corporate entity level, there was cash of $17.2 million at year-end and undrawn facilities totaled $94.5 million.

The group's approach to supplementing organic growth with growth through M&A continues as outlined on Page 10. Over the past 6 years, we have undertaken 54 transactions with a total value in excess of $250 million. Acquisitions to complement the core insurance operations in Australia and New Zealand will remain the focus for FY '20.

Turning to Page 11 and shareholder returns. As Mike said, the group will pay a final dividend per share of $0.325, taking the total dividend to $0.46 for FY '19. Due to the increase in shares on issue as a result of the equity capital raising, this will increase the payout ratio to 72.9% from 65.2% in FY '18. Return on equity, measured as adjusted NPAT divided by average equity attributable to equity holders of the parent, was 13.1%.

I'll now hand back to Mike. Thank you.

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [4]

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Thanks, Mark. Our execution priorities for FY '20 are summarized on Slide 13. In a nutshell, we plan to provide our partners with more competitive products, with differentiated features tailored for their customers and the ability to access significantly enhanced technology so that they can be quicker and more efficient. All the while, we wish to reduce the cost overhead in the group to improve the group's operating leverage.

FY '20 will be a year of consolidation and simplification of our portfolio to unlock the benefits of scale and focus. The group will make acquisitions to accelerate or enhance this portfolio optimization. We'll continue to work closely with the businesses in Risk Services to remediate performance and also to redefine the Risk Services strategy.

Retaining our clients is paramount and assisting them to do more with us, is key to our success going forward. On Slide 14, you'll see that we are achieving this and it's demonstrated by increases over the past 3 years in both the average premium per client as well as the number of policies our clients, on average, place through us.

Also on this slide, you'll note that our business has a strong and consistent revenue base underpinned by significant level of premium retention. In FY '19, this premium retention level was 90%, excluding premium rate increases, reflecting a very high level of consistency in the business.

On to Slide 15. We're a business that grows and we've delivered compound annual revenue growth of 11% and adjusted NPAT growth of 10% over the past 10 years. Unfortunately, this has been undermined by our low growth in FY '19. We are focused on growth and we'll be taking a range of actions in FY '20 to ensure that in future years, we can revert to our historic growth performance.

As Slide 16 shows, we're a sizable and well-represented player with a footprint that enables us to access all of the key metropolitan and urban markets in Australia and New Zealand. We are, however, not optimized for profitability, nor to deliver market-leading services to our network partners. And we're going to address this and Slide 17 describes how we're going to leverage AIMS to do so.

From 1 October, following IBNA's exit, AIMS will become the group's primary provider to our network, comprising 4 units, delivering best-in-class services for underwriting capacity and placement, technology, claims handling and accounting and compliance support. I'll now describe each of these.

We've commenced a process to review all of our underwriting and placement arrangements and to explore ways in which current and potential new insurance partners can better participate with us to meet the tailored needs of our members and clients. The response from our insurance partners has been very positive and we anticipate having new arrangements in place in Q2 and Q3.

We're consolidating the AUB business center into AIMS in order to provide the scale and capability to deliver enhanced accounting and compliance services to our partners. We've made good progress with a range of IT initiatives and we'll go live with a new high-volume broking system in Austbrokers as well as the new agency system insurer during Q2.

The group has a strong set of claims propositions in large brokers as well as in Procare. We'll be leveraging these to provide better and cheaper services to our clients across the full Austbrokers metric.

Our commitment to partners is that we'll deliver these services better or cheaper than they can source themselves. The benefit of the AIMS initiatives and the restructuring is that it allows us to leverage our scale in ways that both enhance the services to our customers and to do this in a more efficient way for our partners.

We do not take our mixed performance in FY '19 lightly. Our guidance range, shown on Slide 19, for adjusted NPAT growth in FY '20 of 4% to 6%, factored in various activities required to prepare the group, so that it's poised for consistent, profitable growth in the years ahead.

FY '20 will be a year in which the group substantially enhances the value and benefits we deliver to our partners whilst also being a year in which we complete the remediation of Risk Services, Canberra, group overhead costs and other poor-performing elements of our portfolio. This will position us for accelerated, profitable growth for the years ahead.

We'll now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Scott Hudson from MST.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [2]

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Yes. Just a couple of questions for me. Firstly, referring to Slide 4. I guess you put up a number that's $50.8 million adjusted for one-offs. Is adding back the $2.3 million in relation to Canberra a true one-off or is that just accounting for the -- I guess, the new base effect of the Canberra business?

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Mark Shanahan, AUB Group Limited - CFO [3]

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A big chunk of that $2.3 million, Scott is the $1.6 million of one-off costs taken above the line in the first half, $1.6 million after tax. And the rest is just some higher costs during FY '19 that will disappear next year.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [4]

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Okay. So then if the base business is sort of $50.8 million, excluding those one-offs, that's pretty much in line with, I guess, what your midpoint of your guidance is, is that not correct, which implies, I guess, almost no growth. Or am I misinterpreting something?

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Mark Shanahan, AUB Group Limited - CFO [5]

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I think the $50.8 million in that slide is really -- I wouldn't confuse that with the guidance we're giving. The NPAT for the year -- adjusted NPAT was $46.4 million and there are a number of items which were set out in the guidance statement.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [6]

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Okay. In relation to the -- I guess, the Coverforce proposed deal. Can I just understand why that deal was announced, I guess, while there was an ongoing court case and confliction amongst the 2 main shareholders?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [7]

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Scott, it was a material deal. We've entered into a contract. We felt that if the news about that contract emerged in the market, it was price-sensitive and we therefore felt it was appropriate in terms of the continuous disclosure.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [8]

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Okay. And then lastly, can I just maybe get an understanding of what you think the probability of that deal proceeding is?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [9]

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As you know, there are proceedings between the shareholders and the contract that we entered into enables us to judge our options based on the outcomes of those proceedings.

We were aware that the shareholders had different perspectives and different views that they like. And so we will now respect the court proceedings and will judge our response appropriately, once that becomes known.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [10]

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And had you engaged with the -- I guess, the other major shareholder within that group or had you only engaged with the private equity player?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [11]

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Scott, so the discussions we had at length were with the private equity player. However, it was in the context of the various rights and their responsibilities.

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Operator [12]

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(Operator Instructions) Your next question comes from Nicolas Burgess from EL&C Baillieu.

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Nicolas Burgess, Baillieu Holst Ltd, Research Division - Equity Research Analyst [13]

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Yes. Actually, just wanted to pick up similar questions. Just on Coverforce. Do you have an anticipated time line for resolution at this point, even a rough one?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [14]

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Nick, so the corporate dealings between Canberra and the other shareholder's at the end of October. And so we're still awaiting clarity in November. And at that point, we'll have a much, much better view in terms of it.

I just want to remind you that we have protected ourselves in terms of the contract, in terms of walkway rights at appropriate point. And so we're really respecting the proceedings between the parties and staying out of the way and we will make a judgment based on the court ruling.

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Nicolas Burgess, Baillieu Holst Ltd, Research Division - Equity Research Analyst [15]

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Okay. So I just wanted to pick up again, just the point of guidance for the full year, for FY '20 versus Slide 4. So if my math is right, actually, guidance implies that you're below that $50.8 million number that you talked about even in FY '20, which I know you've called out specific items for FY '20, but still feedback is that the organic growth environment with rates, et cetera, should be reasonably favorable.

So sort of conceptually, I'm just a little bit confused as to why we've got sort of $50.8 million but we're actually guiding to a number, sort of, 5% or 6% short of that for the full year.

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Mark Shanahan, AUB Group Limited - CFO [16]

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Yes, sure, Nick. So the $46.4 million is clearly the base, the adjusted NPAT for '19. In the guidance on Slide 18, there is a seventh bullet point which talks about legal and financing costs. Those are about $1.5 million to $2 million. If you strip those out, you get 8% to 10% growth on the $46.4 million.

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Nicolas Burgess, Baillieu Holst Ltd, Research Division - Equity Research Analyst [17]

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Yes, okay, so that's a reasonably significant single item. Okay. That clarifies a bit more.

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [18]

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So we've been emphasizing, we did issue a guidance ASX release this morning. So in case anyone missed that, which articulates in writing exactly what Mark just said, which is if you add back the $1.5 million to $2 million we've estimated.

Also worth emphasizing that our guidance range does not include any anticipated acquisitions. So this is guidance based on the current business operation as it stands currently, no upside assumed around acquisitions. And then your decision around adding back the $1.5 million to $2 million, which we've estimated for legal and financing costs.

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Operator [19]

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Your next question comes from Jason Palmer from Taylor Collison.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [20]

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Look, I think everyone's sort of struggling a bit with the '20 outlook. I'm wondering whether you could just sort of unpack those one-off items, whether you'd provide numbers around that -- to the public on that, so that we have some clarity over what potentially the underlying business may be growing at.

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Mark Shanahan, AUB Group Limited - CFO [21]

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Yes, sure. So there are, Jason, as you quite rightly point out, a number of one-off items, which are contained in Page 18. For example, reduced interest rates. As people may know, a lot of cash held in trust accounts earning interest when interest rates go down, that has a direct impact to our bottom line. So that -- the number for that is $1.1 million. Lease accounting changes, change in accounting standard, a one-off negative of $0.7 million. And then, as I said previously, the legal and financing costs, $1.5 million to $2 million. And then there's shareholding sell down, small share downs in -- share sell downs in a number of assets. That's about an impact of about $1.1 million.

So all of those negative items add up to about minus $5 million. And then, of course, there are positive items. For example, there was the write-off of the IT expenses previously. There's also the full year effect of the New Zealand purchase of BWRS, et cetera, et cetera.

So overall, the net of all these items, takes about $2 million off the adjusted NPAT for '19. So if you factor in what we'd said earlier, looking at about 8% to 10% guidance on the $46.4 million, if you exclude the legal costs.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [22]

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Okay, that's very helpful. And the second question...

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [23]

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Just a quick summary, sorry. So the $46.4 million is the base. There are obviously a bunch of moving parts. We need to make sure that as management, we manage those. Adding back the $1.5 million to $2 million gives you the 8% to 10% range. And we have adopted what we believe to be a prudent approach in terms of not assuming for factoring any possible future acquisitions.

And so we think in a year of transition, where we're completing remediation, we're running a cost-out program, et cetera, we think that that is a good prudent and quite strong performance actually.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [24]

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And just my second question. I think Slide 17, your title, "Taking control of our core capabilities," I'm wondering if you can just sort of run through that in a bit more detail what the new-look AIMS service would look like for the AUB brokers, in respect of more specified policies, potential leakage to the network or any less leakage to the network shall I say. And it sounds like you're offering some level of service functionally that wasn't there in the past.

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [25]

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Yes. So AIMS was providing underwriting capacity and training services and a PI program for the brokers themselves. So the accounting and compliance, the claims and the technology pieces are all new.

I'll start at -- we refer to as the accounting and compliance, it's really the back-office support for brokers so that they can benefit from the efficiencies of scale. The claims piece, similarly, we have some very strong capabilities around claims and so this is about making that available to all the network partners.

Now the technology piece, there really are 2 elements to that. The one is around the underwriting system that we've spoken about previously. But what we are delivering is a new technology platform for the brokers, for high-volume, lower-premium policies. This is to free the previous brokers up so they can focus on what they do best, which is broking sophisticated, specialized products and to our major clients.

And then on the underwriting capacity and placement, I've mentioned these statistics before. We used to place about $1.9 billion of our full $3.2 billion through AIMS. This is about how do we improve and enhance how we leverage that full $3.2 billion of scale.

In a nutshell, it's about how do we give our brokers access to better products so that, that have features that are disruptive and genuinely market-leading for our customers, leveraging upgraded technology and back-office services so that they can continue to be the best in market.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [26]

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Okay. So just a follow-up question on that. Have you had some level of feedback from the broking network -- or sorry, the equity brokers on the likely take-up of that service, that accounting and compliance, claims handling service that you're offering?

And secondly, I mean, there's been a bit of content out there in respect of a potential CapEx project, or a large CapEx project on the broking side of it. I couldn't find it anywhere in the slide deck. I apologize if it's in there. But can you maybe settle that issue as well around the level of CapEx investment you'd be putting into a new platform?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [27]

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So the feedback from -- so all the feedback I've had -- we haven't actively -- haven't gone out and solicited every one of our broker principals. But the feedback I've had from a number of brokers has all been positive.

I think everyone is united and aligned with the fact that they see significant benefit from what we're doing and probably worth emphasizing, each of these areas, and I hate the word "committees", but what we've set up is a claims subcommittee, an underwriting subcommittee, a technology committee, et cetera. They are chaired by one of our key brokers.

And we have our APAB, the advisory board of our major -- yes, our selected group of chosen brokers representing each of the regions. And they are the governing body for everything we're doing around AIMS. So the brokers and the underwriting agents are a fundamental part of this direction.

In terms of the question around the CapEx, the comment I made previously was that what we're trying to do is ensure that our IT costs are net neutral, which means that we are leveraging. There is no major CapEx spend that causes -- there's a big uptick and that will run on. This is about us redirecting what we were spending before and being more effective with it. So we see a net neutral impact of the technology.

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Operator [28]

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(Operator Instructions) Your next question comes from Scott Hudson from MST.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [29]

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Yes. Just I guess a follow-up on nonorganic growth. Excluding Coverforce, I assume that there's sufficient funding capability to pursue -- or to continue to pursue other nonorganic growth opportunities?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [30]

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Yes.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [31]

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So your M&A activity is not going to be contingent on Coverforce going through or not?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [32]

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No.

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Operator [33]

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Your next question comes from Andrew Buncombe from Macquarie.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [34]

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Just 3 questions from me, please. Just on the first one, I assume with the new underwriting technology system, that that's essentially already been built and that was built by an external provider. Or is that something that one of the network equity owner brokers has built and you're rolling it out to everybody else? Just some more color there would be useful, please.

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [35]

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So the higher-volume, low-premium system that I referenced has been built by an external party. The -- Andrew, you may recall, I've spoken previously about the fact that we're really bifurcating the way in which we're adopting technology -- deploying technology across the broker network. We have roughly half of our policies -- our policy count generate 85% of our GWP. And we believe that our current technologies in place, particularly in some of our network members, are very strong, right?

So the CBS combination with Sunrise Exchange with workflow and CRM tools on top of it are very strong. What we haven't done though is deployed the workflow and CRM components across the network. So we have a project underway to deploy that. So that piece fits in to the description you applied, which is it's leveraging technologies already in place with some of our brokers and deploying them to the brokers where they don't have those technologies. So it's still the same core platform but it's the pieces operating on top and in conjunction with that. The other half, by a policy count of our premiums, generate 15% of our GWP. They relate to policies under $5,000.

We currently are very good at dealing with bespoke, complex, highly-brokered products. We aren't efficient, currently, at processing high-volume, low-premium products and that's the technology that we've worked on with a partner, an external party and we'll be deploying in the second quarter.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [36]

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Excellent. And maybe a follow-up on that, please. I'm assuming that that's -- or those discussions that have been held with the underwriters about this new platform have included discussions around changing commission rates. Are you able to give us a bit of color on that? Or the business that's placed down the platform, will that go at the same commission as the market placements?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [37]

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So the discussions with the insurers, obviously, one of them is about how do we -- this all works back from our clients in the market, right? What we're trying to do is ensure that we have unique specific products that support our specialist focus and capabilities that support our clients' needs. And so working with insurers so that we have good interfacing into their systems, good access to be able to work with them on designing products and delivering those to our customers through our specialty broker partners, that's the focus.

We see, as a consequence, opportunities for us to grow market share. We see, as a consequence, the opportunities for us to reduce our back-office costs. We see the opportunity for us to reduce frictional costs in the duplication of costs between insurers and ourselves. And so we see the financial opportunity for us to be around those pieces rather than about twisting their arms in terms of a net -- additional commission rates.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [38]

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That makes sense. And then the final one from me, maybe about the broader price rises. I have in my notes here that you mentioned at the top of the call that you were seeing low to mid-single-digit price rises. We've obviously seen IAG, Suncorp, QBE's results over the last couple of weeks. They're disclosing much higher rates in commercial lines. Are you able to maybe reconcile what we may be missing there between your numbers and theirs?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [39]

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Yes, sure, Andrew, and, I mean, you'll probably recall me saying this before. People get tired of my answer. I think it's the -- what is the effective rate, right? So if you take premium retention, customer retention and the effective rate on a like-for-like coverage basis. So certainly what we've seen is while premium rates on a like-for-like insurer basis, across our portfolio, if you factor in the fact that in many cases, we're operating with SME clients who're operating in a market which has some headwinds and so they're seeing cost increases outside of insurance premiums of 1% to 2% or 3% at most, certainly not 10%.

And as a consequence, they are looking at ways in which we can help them reduce, where appropriate, coverage, et cetera, so that it meets their economic requirements. So the effective rate increase that we're seeing across our portfolio is in the 3% to 5% range, even if insurers are anticipating -- because if you look at the insurer's numbers, the customer retention piece is the piece they don't talk about when you talk about the premium rate increases. If you combine premium rate increase and customer retention and like-for-like coverage pieces, then the rates are more like the ones that we're anticipating.

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Andrew Buncombe, Macquarie Research - Insurance and Diversified Financials Analyst [40]

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Have you seen any change in customer retention or churn over the last 12 months?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [41]

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No, it's flat, so neither positive nor negative.

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Operator [42]

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Your next question comes from John Campbell from Avoca Investment Management.

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John Campbell, Avoca Investment Management Pty Ltd. - MD and Portfolio Manager [43]

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Just looking at Risk Services. It sort of seems to be -- if you look at over the last couple of years, it seems to be a story of basically flat revenues which we know have been impacted by iCare. But costs growing at around 10% per annum. And it's a little bit hard to understand why costs have been growing like that, without reference to what we all know to be a fall in (inaudible) term revenue outlook. So could you just give us sort of some color on that sort of cost fee revenue growth mismatch. And I guess, some color on where it's going from here?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [44]

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John, sorry, the line for your question was pretty bad. So I think what you're asking about is why have costs grown faster than revenue over a period of time. Is that correct?

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John Campbell, Avoca Investment Management Pty Ltd. - MD and Portfolio Manager [45]

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Yes. I mean -- so really, over the last couple of years, revenues have been basically flat and costs have been growing at 10% per annum. And that obvious margin impact from 15% plus margins to 5% just seems to be a story of unconstrained cost growth.

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Mark Shanahan, AUB Group Limited - CFO [46]

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John, was your question with respect to Risk Services or the entire business?

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John Campbell, Avoca Investment Management Pty Ltd. - MD and Portfolio Manager [47]

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No, no. Risk Services, specifically on Risk Services.

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Mark Shanahan, AUB Group Limited - CFO [48]

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There was most certainly a building of capacity within the 2 health and rehabilitation businesses, Altius and Allied, a building of capacity in anticipation of a return of volumes from iCare in New South Wales. And that's certainly what we believed. We have not seen that volume return. So part of the work is to reduce that cost base.

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [49]

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John, short summary is the strategy, up to early FY '19 or mid-FY '19, was, despite the downturn in the revenue line, to maintain capacity, anticipating a sooner than -- in fact, there's no evidence of it, but there was an anticipation of an uptick in revenue and therefore, capacity was retained. That hasn't happened. And so we've been working with the businesses to remediate and that's the remediation I spoke about for the first half.

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John Campbell, Avoca Investment Management Pty Ltd. - MD and Portfolio Manager [50]

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And does iCare give any color at all about case volumes going forward? Or are they basically just silent?

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [51]

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They provide color, I guess, I'm always averse to talking about someone else. I think we have an assumption that case volumes will stay flat and therefore, our revenue will stay flat and that's our planning assumption, linked to our plans for the next 12 months.

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Operator [52]

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(Operator Instructions) There are no further questions at this time. I'll now hand back to Mr. Emmett for closing remarks.

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Michael Patrick Cheere Emmett, AUB Group Limited - CEO, MD & Director [53]

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So thanks again for joining us on the call and I look forward to seeing you over the next few days.

Australian Broking, Underwriting Agencies and New Zealand Broking all performed well. The new strategy is to build scale and specialization to improve our broker offering and efficiencies and it's underway and it's expected to deliver improved results.

We've made good progress to remediate the issues that impact the FY '19 results, namely Canberra and Risk Services. And we're enhancing the services to our network partners to assist them to grow and operate more efficiently.

Our guidance of 4% to 6%, incorporates a number of factors we've highlighted but particularly includes one-off costs of $1.5 million to $2 million for a major acquisition, such as Coverforce, but it doesn't include any income from acquisitions. Excluding for these costs-adjusted NPAT guidance, would be in line with the ASX update we provided, which is 8% to 10% growth from the $46.4 million comparative figure for FY '19.

Thank you very much.