Full Year 2019 Evans Dixon Ltd Earnings Call
Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Evans Dixon Ltd earnings conference call or presentation Monday, August 26, 2019 at 12:30:00am GMT
TEXT version of Transcript
* David Evans
Evans Dixon Limited - Executive Chairman
* Peter McKenzie Anderson
Evans Dixon Limited - CEO
* Warwick Keneally
Evans Dixon Limited - Acting CFO & Company Secretary
David Evans, Evans Dixon Limited - Executive Chairman 
Good morning, everyone, and welcome to the Evans Dixon results briefing for the financial year ended 30th of June 2019. I'm David Evans, the Executive Chairman; and with me is Peter Anderson, our recently appointed Chief Executive Officer; and Warwick Keneally, our Interim Chief Financial Officer.
This morning, I'll provide an overview of the results and the operating environment and then comment on the performance of each of our business divisions. Warwick will then run through the financial results before Peter concludes with his initial impressions and an indication of the road ahead.
Please turn now to Slide 5. 2019 was the company's first full year as a listed entity. It has been a challenging year, and the share price reflects that sentiment. However, there's also been a number of positive achievements, and two that I would like to draw your attention to are: firstly, the successful acquisition and the integration of the Fort Street Adviser business. Fort Street has significantly expanded and strengthened our corporate advisory and capital markets capabilities and this year, advised on and executed on transactions with a gross value of around $15 billion.
Secondly, the raising of our first internationally listed and institutionally focused fund. In April, US Solar Fund raised USD 200 million for U.S. dollar-denominated fund listed on the London Stock Exchange. Our solar expertise has been endorsed by European institutions, and we expect strong support for the strategy behind both New Energy Solar and US Solar.
Moving through to Slide 7, we can see the key result metrics relevant to the prior corresponding period. Firstly, net revenues for the group fell 5%, impacted by lower transactional revenues in Wealth Advice and Funds Management. Underlying EBITDA was down 26%, although it is important to recall that the prior period was strong, outperforming the prospectus forecast by 18%. The 2018 financial year benefited from strong transactional revenues in the final few months of that period.
Underlying EPS was down 32%, reflecting lower earnings and increased number of shares on issue. And the $0.03 per share final dividend declared by the Board brings the full year distribution to $0.08 per share compared to $0.11 in the prior period.
Let's move on to a summary description of the key business elements and the challenges for the year ahead. In terms of the business drivers for the group, there were positive achievements. Firstly, client numbers grew by over 300 with pleasing growth from Evans & Partners. Secondly, funds under administration and advice were both up strongly. Institutional equities continued to grow its market share, and the corporate advisory business has built a strong transaction pipeline.
Overall, FY '19 was impacted by a reduction in transaction revenues, particularly in the second half of the year. In addition, the business fixed cost base increased over that year. While the business drivers are moving in the right direction, it is important that we acknowledge and address the challenges that the business currently faces, and we believe that we are doing this.
In July, the Board appointed Peter Anderson as our new CEO. Peter immediately instituted an operational review. This process is well progressed and is focused on driving business efficiencies and improving integration across the business to deliver better outcomes to clients and shareholders.
One of the most significant challenges this year has been in relation to the US Masters Residential Property Fund or URF. The poor unit price performance has resulted in Evans Dixon losing some of the trust of some of its most important stakeholders, its clients.
We have taken steps to address the issues. We have changed the management of the fund and the strategy to deleverage and improve returns for investors if being implemented without delay. These measures are underway, and we are confident the fund performance will improve over time. More broadly, to generate growth and to remain competitive, we recognize that it's imperative that we broaden our client base and product distribution.
In Funds Management, there is significant opportunity to diversify the distribution of our Funds Management products both into the institutional market and the independent financial advisory channel. We're also well positioned to continue the expansion of our corporate offering and capital markets capabilities, and we see a significant opportunity here.
We have maintained a strong and prudent balance sheet with a net cash position of over $30 million at year-end. This has allowed the Board to declare a dividend of $0.03 per share. This means that for the full year, we're at the top end of the targeted payout range of 75% to 85% of underlying NPATA.
The next slide shows the contributions of the individual business units. The comparison of the contributions from the businesses last year and this year -- this year's highlights a positive impact of the acquisition and strong performance of the Fort Street business. As you can see, the portion of earnings derived from Corporate & Institutional business has increased from 29% to 41%. Wealth Advice grew its advice, service and brokerage fees but was clearly impacted by the lower capital markets revenue largely related to a reduction of new product offers from the Funds Management business.
In Funds Management, lower activity levels in real asset funds, weaker performance fees and higher cost impacted EBITDA. Encouragingly, fund-based management fees grew 17%, and we are focused on continuing to grow these reoccurring revenues to ensure a more stable revenue base for the business.
Aside from the divisional performances, the financial services sector is changing and presenting challenges for all participants in this market. This next slide describes the evolving nature of the environment and the positioning of each business with respect to these changes. We believe that the business is well positioned to address these challenges and to seize opportunities presented over time.
In Wealth Advice, generally, increased client expectations, education requirements and growing compliance burden are likely to impact productivity and profitability in this sector. We are confident that our market positioning, fee-for-service model, well-educated adviser force and a stringent compliance framework positions us well to adapt to these challenges.
In Corporate & Institutional, we provide a relationship-based offering that is typical of a boutique but with an access to significant bulge bracket advisory, research and sales and trading experience.
In Funds Management, we provide a diverse product offer that is based on differentiated and innovative investment thematics with a focus on real assets. Broadening the client base for Funds Management offers a strong growth opportunity over time. Having come together as a business only quite recently, there is also an opportunity to better leverage these strengths across the business and to improve financial outcomes for clients and shareholders.
I'll now briefly describe the operating performance over the FY '19 year for each of the businesses, starting on Slide 12.
In each of the 3 business units, we saw positive growth in underlying business drivers relative to the prior year. Funds under advice was up 10%, funds under management was up 21% and Corporate & Institutional revenues benefiting from the Fort Street acquisition increased by 22%. We did see some half-to-half variation in Corporate & Institutional revenue. In the second half, capital markets activity was softer, and there were fewer M&A deals completed as this was foreshadowed at our half-year result.
For more details on the individual businesses, please turn to the next slide. In Wealth Advice, both advice brands performed solidly. Net client growth of over 300 clients was attributable to the expansion in the Evans & Partners' high net worth client base, while Dixon Advisory client numbers were marginally higher on a net basis.
Advice and service-related revenues were up marginally, demonstrating steady growth in our core fee-for-service advice businesses. Brokerage benefited from client growth and increased trading activity. However, overall net revenue was down 10% on the prior period due to lower capital markets-related revenues resulting from a reduction in new product offers and capital rating -- raisings. We are committed to improving aspects of our Wealth Advice business with a key focus on better leveraging the strengths of the broader group to enhance client outcomes.
With that in mind, we've recently announced the formation of a group-wide investment committee harnessing the strong investment expertise from across the platform for the benefit of all clients. Secondly, we've also utilized the strengths of the group-wide platform to form distribution partnerships with a number of leading local and global asset managers. These partnerships improve client access to best-in-class products and reaffirm our commitment to open architecture investment advice.
On this next slide, I will go into more detail on why we believe our model is well positioned on the wealth advice market -- in the wealth advice market.
Our Wealth Advice business is underpinned by a professional adviser force supported by strong compliance. We believe we are well placed to manage and benefit from the industry change that is underway, and Slide 14 describes some of our key strengths in this regard.
Firstly, over 90% of our advisers are bachelor degree qualified at a minimum, leaving us relatively well positioned for increased adviser education requirements. Secondly, our advice business has operated a fee-for-service model since inception. And thirdly, we have invested in a strong compliance framework, which includes the development of in-house advice technologies with in-built compliance constraints, which improves adviser productivity and enables effective implementation of regulatory change.
Moving on to the Corporate & Institutional business, please turn to Slide 15. In our Corporate & Institutional division, the integration of Fort Street business is delivering ahead of expectations. And we saw the completion of some significant M&A advisory mandates this period. Largely as a result of a reduction in new raisings for the Funds Management investment strategies, capital markets activity was weaker for the period.
Moving ahead, we see an opportunity to increase our share of capital market transactions by focusing on external clients and better leveraging the businesses' strengths in corporate advisory, sales and distribution. Our Institutional equities business continues its recent momentum. The business increased market share amongst boutique providers as market recognition of the depth and quality of our research and sales teams grows.
On this next slide, we've detailed some of the specific transactions undertaken by the business. The combination of institutional sales, research and advisory business with Fort Street and their subsequent rebranding was a significant milestone for us in 2019. The group now occupies a clear niche in the marketplace, providing bulge bracket expertise and in a relationship-based boutique structure. The business advice clients in relation to several complex mandates during the period and continues to build an encouraging pipeline of advisory and capital market transactions.
In our Funds Management business, funds under management grew 21% over the year, delivering good growth in the reoccurring revenue base of the business. However, the nonfund-related revenues were impacted by lower transaction fees as New Solar -- New Energy Solar moved from investment to operational phase and URF waived acquisition and leasing fees at the beginning of the year.
Just over a year ago, we invested to reposition our funds management business as a key player in the market, specifically transitioning our fund of funds products to a direct investment model. This is starting to bear fruit with strong performance from a number of the funds. This transition, along with costs associated with new fund launches, resulted in higher expenses in FY '19. However, we believe we have created a scalable model from which to achieve future growth.
As mentioned earlier, we are focused on expanding our client base and diversifying distribution, and the launch of the US Solar Fund demonstrates progress in this regard. We're also building strong relationships across the IFA channel to raise funds for our business as a part of our distribution partnerships with leading local and global asset managers.
The next two slides give you a sense of the breadth of our Funds Management product offering. As you can see on these two slides, the Funds Management business has proven capabilities across a range of asset classes. We are building out our equity product offering, have launched differentiated investment strategies such as global disruption and solar energy infrastructure and private market products.
Moving now on to Slide 20, we will provide some comments on our key fund thematics. Our approach to fund development is based on thematics. We identify opportunities in the market, often as a consequence of sector disruption or evolution or because the products available to our clients in particular asset classes are not suitable or performing. This slide details some of the key FY '19 milestones as well as the outlook for those asset classes. It's a busy slide, but there has been a lot happening.
I'll now hand over to our Interim CFO, Warwick Keneally, to go through the financial results for the year.
Warwick Keneally, Evans Dixon Limited - Acting CFO & Company Secretary 
Thank you, David, and good morning, everyone. I'll move straight to the group's consolidated financials on Slide 22. Group net revenue fell 5% to $212.1 million relative to financial year '18 due to lower transactional items. Taking into account an increase in total expenses, this resulted in a 26% decline in underlying EBITDA to $37.1 million. This result is consistent with the $35 million to $38 million guidance range provided in May.
At the statutory level, EBITDA of $35 million was down by a lesser degree of 9% on the prior period. This is due to the inclusion in the 2018 result of one-off integration payments made prior to the group's IPO and costs associated with listing the business.
Statutory NPAT of $16.8 million was down 13% on FY '18 impacted by: firstly, increased amortization costs of acquired intangibles following the group's IPO in May 2018 and the acquisition of Fort Street Advisers in September; secondly, positive net interest income as a result of debt extinguishment and higher cash balances post the IPO; and thirdly, an increase in the effective tax rate from 30% to 34% due to movements in deferred tax assets in our U.S. business and the introduction of an employee share plan during the year.
Amortization of share-based payments associated with the plan are not tax deductible. Adjusting for amortization of acquired intangibles and other extraordinary items, underlying NPATA was $21.8 million, which was 30% below the prior year. Details of these adjustments can be found in the appendix of our presentation.
Moving to the next slide, we can see the divisional components of EBITDA. The key point to note on this slide is the relative contributions of each of the businesses. In addition, while corporate costs of $14.9 million are down from $18.5 million in FY '18 largely due to lower variable remuneration in the current year, both allocated and unallocated costs will be areas of focus in the coming year.
These next slides provide further detail on the divisional results, beginning with Wealth Advice on Slide 24. Wealth Advice net revenue was down 10% relative to FY '18 to $86.8 million, has reduced capital raisings to Fund Management products, impacted capital markets revenues. Conversely, net revenue derived from advice and services was up 1%, supported by a 6% increase in average funds under advice relative to the prior year.
The margin of advice and service revenue to funds under advice fell 5% to 36 basis points as asset-based fee caps constrained fee growth relative to funds under advice. The reduction in direct expenses was largely related to lower variable remuneration associated with the weaker financial performance during the period.
Moving now to Corporate & Institutional on the next slide. Corporate & Institutional delivered a good result based on completing transactions from a strong M&A pipeline and continued growth in institutional equities. Net revenue was up 17% and underlying EBITDA was up 8%. Revenues and expenses were impacted by the Fort Street acquisition completed during the first half. The weakness in capital markets revenue was largely related to a reduction in Funds Management new product issuance.
Please now turn to Slide 26 for the results of our Funds Management business. Funds Management net revenue for the period was $69.4 million, down 12% on FY '18. The prior period benefited from strong levels of new product issuance and higher performance fees. Acquisition and leasing fees related to URF were also waived at the beginning of the period.
Direct expenses increased 6% to $40.9 million due to increased costs associated with repositioning our equities platform to a direct investment model and one-off costs associated with new fund-raisings, particularly the IPO of US Solar Fund. Expenses across the business will be a focus in FY '20, and this next slide provides some detail on expenses.
During FY '19, total expenses were up 1% with the growth in fixed costs largely offset by a reduction in variable expenses due to the softer financial performance during the year. The increase in fixed and operating expenses is attributable to four key drivers: firstly, investment growth around the IPO that is yet to deliver a revenue benefit; secondly, the acquisition of Fort Street Advisers in the first half of the year; thirdly, higher costs associated with being a listed company; and lastly, our ongoing investment in a strong risk and compliance framework.
Looking ahead, there will be a strong focus on delivering cost efficiencies across the business. We believe there is scope for material improvements in fixed costs through improved integration across our businesses. Peter will speak to this a little further in the next session -- section of the presentation.
But now let's move on to the balance sheet on Slide 28. The balance sheet is in good shape. At 31 December 2018, Evans Dixon had a total cash balance of $45 million and net cash of $30 million. The reduction in net cash from 31 December 2018 was largely due to our $21.6 million seed investment equivalent to USD 15 million in the LSE-listed US Solar Fund. This was financed with cash and a $15 million Australian bank facility.
Finally, I will comment on the group's cash flow. Please turn to Slide 29. Slide 29 details how we deploy the group's post-IPO cash balance during the year. Excluding dividend payments, the two most significant outlays were: firstly, $23 million for the acquisitions of Fort Street Advisers and an additional 25% of Fort Street capital; and secondly, the aforementioned USD 15 million investment in USF, of which USD 5 million is escrowed for 3 years. The remainder is not subject to any sale or constraints.
I will now hand over to our CEO, Peter Anderson.
Peter McKenzie Anderson, Evans Dixon Limited - CEO 
Thank you, Warwick, and good morning, ladies and gentlemen. Having very recently become the Evans Dixon's CEO, I'm going to talk to you briefly about my transition from the Board of Evans Dixon to the CEO role, the work that we are doing and how I see the business.
Please turn to Slide 31. I joined the Board of Evans Dixon in April this year, having spent my career working as a restructuring specialist both in Australia and overseas. Part of my expertise is, very broadly, in understanding business structures, determining where value resides and working to bring that value to the fore.
Despite my limited time on the Evans Dixon Board, I quickly came to believe that the business had the sort of foundations that a successful financial services business would need in order to succeed in this sector. This is one of the reasons that I accepted the role of CEO when Alan Dixon decided to step down in June.
Since June, the management team and I have moved quickly to undertake an operational review. The review is designed to ensure that senior management collaborate to comprehensively examine the business and identify strategies to improve profitability. Having seen the outcomes of similar processes, I'm confident that we can position Evans Dixon to continue to successfully serve our clients given the fast-changing world of financial advice and funds management and also to reward our investors.
What is fundamental for this process is a strong base, and on this next slide, Slide 32, I will detail some of my initial observations as to the strengths of the Evans Dixon business.
What is quickly apparent about Evans Dixon is the quality of its people and the high regard in which they're held by their clients. For any services business, this is essential. From our corporate advisory professionals to the many retail and financial advisers across the group, the relationships with clients are long-standing and respectful.
The other feature of the business that I've been pleased to see is good infrastructure. What I mean by infrastructure is the framework around the business -- around which the business is built. For example, the risk and compliance regime and structure are excellent, and staff are accustomed to refer to and work with compliance personnel day in and day out. Similarly, investment in IT has been consistent and strategic, and the business has developed end user systems that manage the group's activity and client interaction well.
Finally, the balance sheet is robust, and our long-standing fee-for-service advice model in Wealth Advice is ahead of the market in terms of the changes required to improve transparency in financial advice offerings. Although it's early days, one of the key areas of opportunity is in better integrating the businesses and leveraging skills across the group.
Having been brought together, listed and then acquiring Fort Street Advisers in quick succession, insufficient time and effort has gone into considering how the businesses can best work together. This work needs to be done immediately and is fundamental to also understanding the most appropriate cost base for the business.
In summary, I'm very encouraged about what Evans Dixon can offer and the positioning of the business for the future of financial services in Australia. We're well progressed in identifying opportunities to increase profitability. However, I'm not in a position at this stage to advise precisely how the outcomes will shape the next set of results.
If we turn now to the final slide, Slide 33, I will outline the key areas of the operational review and provide a broad indication as to progress. In the first months of FY '20, the group has been focused on conducting an operational review to deliver cost efficiencies and further improve cross-business integration. This process is ongoing, and the near-term focus for management will be finalizing and further implementing the outcomes of the review.
The year has started well with good momentum across the business, and our pipeline of corporate advisory transactions remains encouraging. Based on cost reduction initiatives actioned to date and general business activity levels, we expect the group's performance to improve relative to that achieved in the second half of 2019. This is expected to deliver an FY '20 result for the group, broadly in line with the full year 2019 result we have just delivered.
On a longer-term basis, financial services is likely to be subject to further change and possible additional regulation. I'm confident each of the businesses has the tools to grow in this environment. Wealth Advice has a well-educated adviser base, and its fee-for-service model is appropriate for the future.
Corporate & Institutional has well-respected advisory, capital markets and institutional broking expertise, underpinned by strong client relationships. And Funds Management has a strongly performing suite of investment products and a scalable investment management platform. Evans Dixon has excellent foundations on which to improve profitability.
Thank you for your time, and I look forward to reporting on our progress at our AGM in November. We will now be happy to take any questions you may have.
(Operator Instructions) As we are showing no questions, that concludes our conference for today. Thank you, everyone, for participating. You may now disconnect.