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Edited Transcript of ED1.AX earnings conference call or presentation 27-Feb-20 12:01am GMT

Half Year 2020 Evans Dixon Ltd Earnings Call

Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Evans Dixon Ltd earnings conference call or presentation Thursday, February 27, 2020 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Paul Ryan

Evans Dixon Limited - CFO & Company Secretary

* Peter McKenzie Anderson

Evans Dixon Limited - CEO

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Evans Dixon Limited FY '20 Half Year Results Webcast. (Operator Instructions) I would now like to hand the conference over to Mr. Peter Anderson, Chief Executive Officer. Please go ahead.

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Peter McKenzie Anderson, Evans Dixon Limited - CEO [2]

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Good morning, everyone, and welcome to the Evans Dixon results briefing for the half year ended 31 December 2019. I'm Peter Anderson, the Chief Executive Officer, and with me is Paul Ryan, our recently appointed Chief Financial Officer. This morning, I will provide an overview of our strategy and financial performance during the period, including the performance of each of our business divisions. Paul will then run through the group financial results before I conclude with an update on the outlook for the group.

I turn to Slide 5. The first half has been a period of substantial transition for Evans Dixon as we build a sustainable platform for future growth. Phase 1 initiatives from the operational review announced alongside the 2019 full year results are now substantially complete, and we are moving to Phase 2 growth initiatives. We are well down the path to operating with a smarter, leaner and more integrated business that can deliver superior outcomes for clients and shareholders. Business integration has been improved, leading to greater levels of interaction across and within divisions, which internally will assist in leveraging industry and client relationships. Communication between divisions has been enhanced, with co-location introduced where practical.

Financial discipline has been a key focus over the first half, and we have delivered significant cost savings through the closure of noncore businesses and rationalization of the cost base. We have deliberately transitioned away from related party revenues. Each division has a specific operating plan for management to implement, and we are tracking progress against defined metrics with a primary focus on return on equity.

Slide 6. Each division has been implementing strategies to optimize our well-established infrastructure to leverage growth and position the business for the Australian financial services landscape of the future. In Wealth Advice, we have a differentiated service offering of highly educated, quality advisers, supported by specialized research and investment staff. We will continue to utilize our strong platform, systems and risk management framework to increase our scale. We have continued to invest in improving our compliance and governance infrastructure to position the business appropriately for ongoing industry change.

In E&P, our rebranded Corporate & Institutional division, our core value proposition is founded on continued investment in quality research and idea generation. There is a coordinated program to leverage firm-wide industry and client relationships, which we believe will assist in achieving growth across both the Corporate Advisory and institutional equities businesses.

In Funds Management, we have a strategy in place to expand and diversify the distribution of our products into new areas, including the IFA and institutional markets. We are utilizing the strong performance of our high conviction equities portfolios and alternative investment strategies to expand the business. Alignment with investors has also increased through co-investment and enhanced governance structures.

Slide 7. In each of the 3 business units, the key underlying business drivers remain stable. Funds under advice was up 4% on the prior period, supported by positive market movements and stable client numbers, as growth in the Evans & Partners high net wealth client base largely offset modest client departures from Dixon Advisory.

E&P revenue was up 21% on the prior period, driven by strong capital markets and M&A advisory activity, with $4 billion in transactions advised on and executed over the half. Funds under management was down 3% on the prior period, primarily driven by the URF sales process, debt reduction and portfolio revaluation. We are methodically implementing the URF strategic plan whilst continuing to focus on our suite of high conviction core equities and alternative asset strategies, which offer unique investment options for retail and wholesale investors.

Slide 8. Our key financial outcomes are summarized on Slide 8 of the presentation. Net revenue for the group was down 7% when compared to the prior corresponding period, impacted by weaker revenues in the E&P and Funds Management segments, largely as a result of our strategy to exit noncore business activities and transition away from related party revenue. Underlying EBITDA was $20.8 million, which was down 22% compared to the prior corresponding period when adjusting for the impact of the change in accounting standard, AASB 16, which was adopted from 1 July 2019. To assist with the comparison to prior periods, where relevant, we have split the impact of the change in accounting standard from the underlying figures. Underlying earnings per share was $0.039, a 30% improvement compared to the second half of 2019, although down 42% compared to the prior corresponding period. The Board has declared an interim dividend of $0.025 per share, which represents a 66% payout ratio against underlying NPATA for first half 2020, recognizing the first half seasonal bias on group profitability. The Board remains committed to achieving its targeted full year payout ratio of 75% to 85% of underlying NPATA.

Slide 9. The financial results for first half 2020 highlight the level of transition underway within the business. Wealth Advice has pleasingly grown its net revenues in a difficult environment. Funds Management has delivered significant growth in FUM-based fees whilst, at the same time, pivoting away from related party revenues. And E&P continues to grow market share against its boutique peers. Operationally, much has been achieved. There is a new experience base, noncore operations have been exited, related party revenues have reduced significantly, material cost savings have been achieved without impacting clients and business integration has improved markedly. Our balance sheet remains strong with significant cash and financial asset balances. And although the Board has declared a lower dividend compared to past periods, it is committed to achieving its full year payout target.

Slide 10. The implementation of outcomes from our operational review is progressing well. The review used the Argenti Strategic Management System to clearly define the strategic objectives for each business and map out a plan to deliver these. Phase 1 was largely completed during the first half. I've touched on a number of these initiatives already. There's a lot of detail in this slide, which I won't go into now. However, it is illustrative of the number of ongoing initiatives within the business and the level of detail considered by the operational review. With Phase 1 work almost completed, we are now turning our attention to Phase 2 initiatives to drive growth over the next 12 to 24 months.

Moving on now to the divisional updates. Wealth Advice. During the period, our Wealth Advice division delivered a resilient result amidst a challenging operating environment, both for the business and the Wealth Advice industry generally. Both earnings and FUA increased, whilst total client numbers remained broadly stable at approximately 9,300, with growth in Evans & Partners client numbers largely offsetting modest losses from Dixon Advisory.

A key focus of our operational review is to leverage firm-wide strengths for the betterment of our clients. A recent example of this was the launch of an integrated Evans Dixon Investment Committee, which replaced the previously distinct Evans & Partners and Dixon Advisory Committees, and strengthens measures of governance in our advice processes. The committee, which brings together a great level of expertise from across the group, is led by Independent Chairman, Patrick Farrell, who was previously Chief Investment Officer at Suncorp and BT Financial Group; Chief Investment Officer, Timothy Rocks; and Head of Research, Cameron McDonald. We also made a number of refinements to our wealth operating model and continue to invest in improving our advice systems. This included reshaping to a leaner workforce and the development of an end-to-end advice continuum for our clients, ranging from mass affluent to ultra-high net wealth. These changes leverage our existing infrastructure and will enable us to scale our service offerings in a risk-managed way.

Slide 12. In terms of financial performance, Wealth Advice delivered underlying EBITDA of $9.9 million, up 3% on prior comparable period as the benefits of an improved operating model and changes to the cost base started to flow through. It was pleasing to see that the revenue mix was stable across the periods.

Moving on now to E&P. During the half, our corporate and institutional businesses were consolidated under a single, unified brand, E&P. This move supports our objective of building an integrated, market-leading business. During the half, E&P advised and executed on many key M&A and capital markets mandates, a number of which are shown on the right-hand side of the slide. Our highly regarded institutional equity sales business again evidenced its strength as a domestic franchise, growing client share of wallet against our boutique peers. During the period, the business has been transitioning its international alliance and is in the process of formalizing an arrangement with a new partner in the coming months. Since the combination of the institutional and research businesses of Evans & Partners and Fort Street Advisers in September 2018, the E&P business has generated significant momentum. We continue to invest in the capability and the quality of our research platform as a core part of our value proposition, which is gaining great traction with the institutional investor community. Our corporate capability has expanded, and we will continue to focus on targeted recruitment to grow our platform, capability and sector expertise.

Moving now to Slide 14. We can see E&P's financial performance for the period. Net revenue was down 13% and underlying EBITDA down 37% against prior comparable period when adjusted for AASB 16. However, net revenue was up 9% and EBITDA up 3% on the last half on the same basis. Our institutional business continues to grow market share in a declining domestic market, with first half revenue also impacted by the transition to a new international alliance. This was coupled with softer corporate revenues compared to a strong prior comparable period. However, corporate revenues were up compared to the second half for FY '19.

Slide 15, Funds Management. In our Funds Management business, funds under management reduced 3% to $6.6 billion over the half. However, it was up 12% over 12 months. The half year decline was driven primarily by reductions in the gross asset value of the US Masters Residential Property Fund due to strategic asset sales, repayment of debt and the write-down of the fair market value of URF's real estate portfolio.

In our Funds Management business, we have implemented a number of governance enhancements. These include the appointment of 2 highly qualified independent directors, Stuart Nisbett and Peter Shear, to the board of our responsible entity. The responsible entity is now independently chaired by Stuart and will continue to be supported through the use of majority independent compliance committees. As I mentioned earlier, our strategy, in fact, is to leverage our strong performing equities portfolios and alternative investment strategies to expand the business via improved distribution to the external market. The foundations to achieve this are solid. We have delivered strong performance across our equities offering, highlighted by the standout performance of our international strategy, which was ranked #1 in its class for 2019 by Morningstar.

Slide 16. The strategic exit from noncore operations, including the deliberate wind-down of Dixon projects and the repositioning of the Funds Management business away from related party revenues has impacted the half year results. Net revenues in Funds Management declined by 11% compared to the prior comparable period, driven primarily by reductions in transactional non-FUM-based revenue. However, the revenue composition improved with recurring FUM-based net revenues increasing 23% compared to the prior comparable period.

With that, I'll now hand over to our new CFO, Paul Ryan, who will talk to the group financial results.

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Paul Ryan, Evans Dixon Limited - CFO & Company Secretary [3]

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Thank you, Peter, and good morning, everyone. I will move straight to the group's consolidated financial result on Slide 18.

As Peter has flagged, the first half of fiscal '20 has been a period of significant change for the group, with the half year result to December 2019 impacted by a combination of weaker performance in some of our businesses and a number of changes arising from our operational review. Group net revenue was down 7% on the prior comparable period to $102.9 million, driven by the exit of noncore operations and pivot away from related party revenues in Funds Management and a softer performance in our E&P segment compared to a very strong prior corresponding period. Staff expenses were up on the prior corresponding period, with base salary savings partially realized during 1H '20, offset by higher performance-linked variable remuneration, with the prior comparable period also benefiting from a write-back of bonus provision carried at 30 June 2018 and acquired bonus provisions. Also impacting the result was an increase in amortization of the group's employee equity incentive plan grants, which commenced in October 2018. I will talk to the outlook for staff expenses later in the presentation.

Underlying EBITDA was $20.8 million, although this includes the impact of AASB 16. Adjusting the prior corresponding period for the introduction of AASB 16, which effectively reallocated lease-related expenses costs from operating expenses to amortization of interest, the underlying EBITDA result represents a 22% decrease on the prior corresponding period. Our statutory NPAT was $2.1 million, which was materially lower than the prior corresponding period and impacted by the following: first, a one-off $3.5 million increase in depreciation and amortization charges resulting from the impairment of property, plant and equipment in the U.S., along with the amortization of acquired intangibles arising from prior M&A and the company's IPO; second, approximately $1.7 million in redundancy payments to departing staff arising as a direct result of the operational review; and thirdly, an elevated effective tax rate of 61%, which I will discuss in more detail shortly. Consistent with prior periods, we reported underlying EBITDA and NPATA, which normalized for items that the group does not consider as recurring or in the ordinary course of business. A reconciliation between the statutory and underlying measures can be found in the appendix of this presentation.

Turning our attention to operating expenses on Slide 19. We have set out a bridge between operating expenses incurred in 1H '20 versus 2H '19 in order to show the progress we have made in this area. We saw a $3.1 million decrease in fixed remuneration during the period, which is directly linked to reductions in staff numbers. I'll come back and expand on staff expenses in a moment. Increases in variable remuneration and share-based payments will link to a shift in revenue mix and also reflects the seasonality of parts of our business, particularly E&P. After removing the effects of AASB 16, there was a significant decline in operating costs during 1H '20, which we expect to improve materially in future periods as the full impact of cost-saving measures take effect. As a team, we remain committed to delivering cost efficiencies across the organization, and this will continue to be a high priority focus over the coming period.

Turning to Slide 20. As a part of the operational review, we have reduced staff numbers to create a leaner, more nimble business. The largest reductions in staff numbers have occurred in the U.S.A. where we are winding down the Dixon projects business and rationalizing operations and in group teams, which reflects corporate overheads. Reductions in Wealth Advice have had minimal impact on client-facing functions. In total, the reduction in staff numbers has resulted in an annualized fixed remuneration saving of approximately $12 million across the group. Notwithstanding the reductions in staff numbers, we have continued our investment in compliance, legal and professional development, with spending in these areas increasing by a total of $1.1 million in 1H '20 compared to the prior corresponding period.

Slide 21. Our divisional contributions to net revenue and EBITDA have also evolved over the past 12 months. The lower underlying EBITDA result for 1H '20 reflects the investment we are making in transitioning the business. It is pleasing that there remains significant diversity across our business segments and the markets they operate in.

Slide 22 sets out the group's cash flow statement, with operating cash flows prepared as a reconciliation to net profit after tax. The group recorded net operating cash flows of $10.2 million after the payment of annual bonuses during the early part of 1H '20. We continued our investment in strategic assets and joint ventures, with further contributions made into both the CVC Emerging Companies Fund and the Cordish Dixon Private Equity joint venture. This is on top of our investment in the US Solar Fund made during 2H '19. This is consistent with our objective to use the group balance sheet to support investments that present strong strategic benefits and increase alignment with investors. The group also repaid $5 million of debt, which was funded from working capital.

Moving to the balance sheet on Slide 23. The group remains in a strong position with net assets of $215.3 million and cash at bank of $34.3 million. Note that there were significant changes to the balance sheet during the half with the introduction of the new accounting standard for leases, AASB 16. This resulted in the recognition of a right-of-use asset and accompanying lease liability as the group's commercial office leases were brought on balance sheet. Importantly, the introduction of this new standard did not impact the net assets of the group.

Slide 24 sets out a reconciliation of tax expense as a component of statutory net profit after tax. During the period, the group realized a pretax operating loss in our U.S. business, which was primarily due to the impairment of furniture, fitting and equipment assets located in our Manhattan office. This office was vacated by the group during the half and is currently in the process of being subleased to a new tenant. Impairment of these assets would ordinarily give rise to a deferred tax asset. However, in our case, we have not recognized this asset as there is not sufficient certainty that the group can recover this asset in the future. This results in an elevated effective tax rate when the post-tax loss from U.S. operations is added to the post-tax profit from Australian operations. Given the nonrecurring nature of the impairment recognized in the U.S.A., we expect the effective tax rate of the group to be lower in future periods.

I'll now pass back to Peter to talk about the outlook for Evans Dixon.

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Peter McKenzie Anderson, Evans Dixon Limited - CEO [4]

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Paul. Our first half result reflects the strategic transitioning of Evans Dixon to be fit for the Australian financial services landscape of the future. The next phase of our business transformation will be implemented over the coming 12 to 24 months and is focused on growth initiatives. In the near term, however, we are expecting a softening in performance due to our deliberate exit from noncore businesses, the wind-down of Dixon projects and redirection of the Funds Management business away from related party revenues. As a result, we are providing refreshed guidance for the full year FY '20. We expect underlying EBITDA to be between $36 million and $39 million. This is compared to the underlying EBITDA of $37.1 million in FY '19, which becomes $44.5 million after adjusting for the impact of AASB 16. Of course, this outlook remains subject to a number of factors, which are outside the control of management and the Board, including market conditions, the completion of corporate advisory transactions and any potential regulatory changes. The Board remains committed to meeting the target dividend payout ratio of 75% to 85% of underlying NPATA for the full year FY '20.

The changes we have made to date position the business for medium-term growth. Phase 2 of our operational review involves implementing growth initiatives required to deliver scale onto our existing market-leading infrastructure within our Board-approved risk parameters. We will need to do this in a very considered way given the current regulatory environment. This will be our key focus over the next 12 to 24 months, and we look forward to sharing our progress with you at future presentations.

And with that, I'd like to open the line to any questions.

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Operator [5]

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(Operator Instructions) There are no questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.