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Edited Transcript of OVH.AX earnings conference call or presentation 29-Aug-19 1:00am GMT

Full Year 2019 OneVue Holdings Ltd Earnings Call

SYDNEY Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Onevue Holdings Ltd earnings conference call or presentation Thursday, August 29, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ashley Fenton

OneVue Holdings Limited - CFO, COO & Company Secretary

* Connie Berenice Mckeage

OneVue Holdings Limited - MD, CEO & Executive Director

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the OneVue Holdings Limited FY '19 Full Year Results Investor Conference Call. (Operator Instructions) I would now like to hand the conference over to Connie Mckeage, Managing Director. Please go ahead.

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Connie Berenice Mckeage, OneVue Holdings Limited - MD, CEO & Executive Director [2]

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Good morning, ladies and gentlemen, and welcome to OneVue's end-of-year results presentation. I'm Connie Mckeage, the Group Managing Director of OneVue; and also with me here today is our CFO, Ash Fenton.

Before we immerse ourselves into the body of the presentation, I'd like to highlight a few points about the year that was. If we quickly turn to Page 4, it clearly demonstrates 2019 was marked by the completion of the simplification of the OneVue business, freeing management to focus on the high growth core sectors of Fund Services and Platform Services with Fund Services now for the first time ever representing 64% of OneVue's total revenues, revenues that are recurring and unaffected by market volatility.

Also, as we move into this next phase, our key focus is on delivering high growth with margin uplift. We intend to achieve this by concentrating on 4 key initiatives: firstly, driving automation and integration; secondly, continuing to innovate; thirdly, increasing scale; and lastly, building OneVue's profile at both the retail and wholesale level. Having said that, we believe there are significant growth opportunities right across the business. However, the greatest potential for margin uplift would be achieved by accelerating the rate at which we transition clients already won in Fund Services managed fund administration, especially as we've now moved to an operating model which is over 90% automated for all new clients.

Let's now start by turning to Page 5. Although 2019 was a year that delivered revenue growth of over 35% and EBITDA growth of nearly 60%, the most significant change will be the net cash position, a 200% increase to $40 million when the $31 million outstanding is paid from the sale of Diversa Trustee, which is due by the end of November 2019. A substantial capital gain of $8.6 million has already been realized.

Remember when we acquired Diversa, it comprised both a super member admin business as well as the third-party trustee business. And the capital gain realized relates solely to the sale of the Trustee business as Diversa superannuation now forms an integral part of our existing superannuation member administration business.

Now turning to Page 6. I won't dwell on this page, but it's important to note that although Fund Services managed fund administration is #1 in the market, its market share continues to grow. Fund Services superannuation member administration has now also firmly entrenched itself into third position in the outsourced superannuation member administration market. Also, this year, Platform Services delivered record growth and net inflows whilst remaining in the top tier platform as ranked by Investment Trends.

On Page 7, the strong growth of the Fund Services vertical has continued, driven by the move to outsource administrative functions to specialist providers. Fund Services delivered revenue growth of 38% and an EBITDA improvement of 27.8%. Both Fund Services operating businesses can be characterized by high-quality long-term contracts with a number of contracted clients still to transition. The acquisition of the KPMG superannuation business added depth to our superannuation capability and has positioned us well to continue to increase our market share.

Before we move off Fund Services, I just want to spend a couple of minutes on managed fund administration. Interestingly, this business is gaining overseas attention due to it being such a high-quality operation. Global players are acutely aware of how fortunate we are to have the who's who of investment management as clients and how challenging it is to win and retain this caliber of client. The business is unequaled in Australia and will, in time, look to compete effectively on the world stage. It does not receive as much recognition as Platform Services as it does not have as many peers drawing market attention to the sector. It is therefore not as well understood.

But if you look at Page 8, you'll see that the combination of proprietary technology, along with high-quality service specializing in retail funds, makes OneVue's offering unique in the Australian market.

Page 9 demonstrates the strength of this business. It services 53 fund managers, administers 1,393 funds, processes over 500,000 items, executes over 600,000 trades per annum and manages over $516 billion in assets, all on proprietary technology. It is the preferred partner of 4 leading custodians, 3 of them global and a trustee. Importantly, the ongoing investment in the proprietary technology, which helps us retain and grow our market leadership position, is primarily funded by our clients and partners.

On Page 10, you'll notice that in superannuation member administration we've achieved our objective of being in the top 3 outsourced superannuation providers in the market 12 months ahead of schedule. The KPMG acquisition has really helped catapult us into that position, not only bringing additional funds under administration but importantly, bringing an enhanced capability, which has served us well in increasing our market share. We now have over $5 billion in funds under administration, and member numbers now exceed 157,000.

Now let's turn our attention to Page 11 where the Platform Services results are found. Gross inflows in Platform this year totaled $1.8 billion with net inflows topping $1 billion, a record for the Platform business. Again, you can read the detailed numbers at your leisure, but the key point here is that record FUA growth delivered increased scale and EBITDA profitability.

Page 12 depicts that our focus is now on delivering further scale to deliver a material uplift in margin. In Platform, there are significant opportunities for accelerated growth. Platform will also benefit from the additional white labels fully transitioned in June, which added $0.5 billion in FUA.

Finally, on Page 13, Platform Services is a beneficiary from the well-publicized shift to independent platform. And the record inflows are confirmation that the move to specialist providers is, in fact, underway.

Before I hand over to Ash, I want to highlight that all businesses are profitable and have positively contributed to the group result. We're fortunate to have 93% of revenues recurring, supported by a high-quality client base with longer-term contracts.

Ash will now take you through the numbers in more detail. Then I will conclude the formal part of this presentation and open it up to questions. Ash?

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Ashley Fenton, OneVue Holdings Limited - CFO, COO & Company Secretary [3]

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Thanks, Connie, and good morning. Before I run through the numbers, it's worth noting that, in FY '19 and FY '18, we divested a number of businesses as part of the strategic realignment of business. The results of the recently divested Trustee business and the earlier RE, SMSF Admin and investment management businesses are now all shown as discontinued operations, separate from the reported results of the continuing operations which will naturally be the focus of today's presentation. These results are also characterized by the significant profit on the business divestment and some one-off noncash items primarily relating to acquisition accounting and intangibles, which require explanation to properly understand how the underlying business is performing.

Today, I'll run through the makeup of our revenue, costs and EBITDA in detail and outline our cash and balance sheet positions. As usual, I'll start with the financial summary of the results.

Some key points to note. These results show strong revenue and EBITDA growth and EBITDA margin improvement. Looking at the top line, a strong revenue performance with revenues from continuing operations up 35% to $49.6 million. This growth came from a mix of organic growth, up 19% and growth from acquisitions. More on that shortly. EBITDA was up strongly by 59% to $4.5 million. Margin also improved by 135 basis points to 9%. Depreciation and amortization increased from $2.9 million to $4.6 million mainly due to increased amortization associated with the April 2018 KPMG and NMPE acquisitions, $1.1 million, and also from client establishment costs, $0.6 million. Nonrecurring items of $8.7 million require some explanation, and I'll cover that shortly.

Our move into profitability in FY '18 triggered the recognition of tax losses not previously recognized on the balance sheet and an $8.9 million tax benefit in the P&L. In the current period, a further tax benefit of $0.7 million is recognized in the results. The net profit from discontinued operations of $9.4 million includes the net capital gain on sale of $8.6 million as well as the trading results of the discontinued businesses.

Net profit after tax for the period was $1.4 million. And adjusted NPATA was up by 34% to $1.5 million. This represents the underlying cash profit performance from the continuing operations and adjusts the nonrecurring items, the benefit of initial recognition of tax losses and the noncash acquired customer intangibles amortization expense of $2 million.

I'll now turn to the revenue growth from continuing operations, which was up 35%. As you can see, the $12.9 million growth in revenues from $36.7 million to $49.6 million came from a mix of strong organic growth, $6.5 million, supported by acquisition growth of $6.3 million from KPMG Super and NMPE.

Fund Services revenue performance was strong, revenues up 37.9% to $32.4 million. Managed fund admin revenues were up 22% on the back of new client transitions and increased items processed. Super member admin revenues of $16.2 million were up 58.5% with $7.7 million of revenues from the KPMG Super acquisition.

Platform also grew strongly with revenues up 28.8%. Organic revenue growth of 23.6% was driven by strong net inflows, a positive market and product mix. The NMPE acquisition contributed $0.8 million of incremental revenue.

Moving to operating expenses from continuing operations. At face value, our cost increases look high, but costs from the newly acquired businesses distort this view and need to be separated to show the underlying organic cost increases, which are less than the corresponding revenue increases. You can see the main components of the organic and acquisition expense increases on the slide split between the businesses.

Fund Services organic expenses increased by 15.1%, slightly higher than expected due to the timing of large-scale transitions as reported at the half year. Incremental revenue growth was 15.7%. Expenses related to the KPMG Super acquisition included higher rent costs and additional managerial headcount to support integration and new business activity.

Organic expenses in Platform Services increased by 21.9% whilst related revenue growth was 23.6%. The NMPE acquisition costs were up relative to revenue growth as the Secrets of the Money Masters series, which went to air on Channel 9Gem on 28th June was deferred until after the completion of the findings from the Royal Commission.

Turning now to our strong EBITDA result with growth of 59%. Pleasingly, the margin was up by 135 basis points to 9%. Bridge here shows the breakup of the EBITDA growth, with the organic growth from both businesses separate from the contribution from acquisitions.

Fund Services organic EBITDA margin, excluding acquisitions, of 21.5% was up slightly by 33 basis points as we continue to build scale. However, KPMG acquisition margin of 14.2% was diluted, impacted by the revised pricing on the largest customer contract 3-year renewal as well as higher rent costs and cost of integration and new business. The overall Fund Services margin of 19.8% was a result down slightly from 21.3% to 19.8%.

The organic margin in Platform Services was up by 114 basis points to 16.7%, benefiting from scale. The NMPE acquisition contributed a small loss of $300,000 with timing of revenue the main factor. The overall Platform margin of 14.2% was down 47 basis points.

I won't run through this next slide, but this reconciles the total revenue and EBITDA for the group showing the split by continuing and discontinued operations.

Moving now to the next slide, which I won't dwell on. But note, the discontinued operations are detailed here to show the trading results by the business areas. Also, the net capital profit on the sale transactions rolls up into the overall net profit from discontinued operations that we report in the statutory numbers.

Nonrecurring items relate to 3 main areas: one, acquisition accounting for the contingent consideration on the KPMG Super transaction of $4.3 million; two, some write-downs on capitalized intangibles, $1 million of project development costs which follow divestments and $1.4 million of client establishment costs recognizing custodial client changes; and three, acquisition integration and restructure costs of $2 million, which mainly relate to KPMG Super integration.

Moving now to cash. The graph highlights the key movements in cash over the financial year. A couple of points to make. Our total group operating cash flow before nonrecurring costs of $4.2 million was down mainly due to working capital required in the first half for the KPMG Super acquisition. The second half cash flow of $3.1 million shows the more normal cash conversion rate. The capitalization cash outlay of $5 million was a bit higher than usual, about $1 million more in Fund Services client establishment costs as we transitioned some new large funds and software development requirements for AMIT of about $0.4 million.

We received $12 million of cash from the sale of the Trustee business and $5.4 million of cash was divested with this business along with the related borrowings, which had been reduced by repayments during the year. Following the signing of a new 3-year contract with the KPMG Super business' largest customer, we paid $10.3 million of contingent consideration.

Turning now to our balance sheet. The position has strengthened following the sale of the Trustee business and net tangible assets are now positive, $0.1178 per share compared to the negative position previously. And post receipt of the deferred consideration of $31 million due on 30th November from the sale, total pro forma net cash will be circa $40 million. As noted previously, following the final settlement, the Board intends to declare a fully franked special dividend of $0.0219 per share, about $5.9 million, to utilize all the available franking credits. We will be well positioned for ongoing disciplined capital management, ensuring we support further growth opportunities whilst also considering share buyback capability of up to 10% of share capital to provide flexibility.

Finally, with the simplification complete, I look forward to a much cleaner set of numbers going forward with 2 clear business growth verticals to focus on.

Now I'll hand back to Connie.

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Connie Berenice Mckeage, OneVue Holdings Limited - MD, CEO & Executive Director [4]

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Thanks, Ash. We're looking forward to 2020 as the business is well positioned to capitalize on the structural and regulatory shifts taking place in the market. Simplifying the business has freed us to focus our attention on growing the core businesses and to continue to deliver further scale and operating leverage. Delivering high growth and a margin uplift will require us to execute on the following 4 initiatives. First, automation and integration. In 2019, we fully automated and integrated the buying and selling of custodially held managed funds. The next phase is leveraging the new payments platform and the ASX blockchain to further automate transactions on Platform, reducing both execution risk and cost. Further integration and straight-through processing between Platform Services and Fund Services managed funds and super member administration will also be completed.

Secondly, innovation. As well as making execution more efficient, we're driving forward on what is becoming increasingly important, the customer interface and experience. We will roll out our digital capabilities such as the new online application process across the group and leverage the good work we've done in developing educational and client engagement initiatives via No More Practice.

Third, increasing scale. Our client base includes custodians, trustees and global and local investment managers with high infrastructure requirements and robust security protocols. As a result, we have already made significant investments in infrastructure and security. In 2020, we'll concentrate our efforts on delivering greater scale and margin expansion across the group, either organically or via material transactions funded by the increased cash balance.

Now moving to the next page, building an awareness of the OneVue brand. Although there are strong tailwinds for specialist platforms and OneVue has a significant pipeline of new business opportunities, the advice market is quickly fragmenting as advisers move away from institutional ownership. In the shorter term, there is also a record number of advisers exiting the market. Countering this, however, is the market share gain by the specialist providers such as OneVue, whilst the banks and institutions are finally opening up their approved product lists to consider other platforms.

In this new environment, we think it's important to have brand awareness at both the retail and wholesale levels. It is the reason we acquired NMPE, or No More Practice, and its marketing capability. A higher profile will give greater confidence to retail investors when OneVue is being recommended by advisers or our corporate partners. Phase 1, the Secrets of the Money Masters, a client-funded campaign launched in May and resulted in strong mainstream and social media performance. Due to its success, Channel Nine has also recently confirmed a full series rerun on 9Gem from September 14 with a second series due in 2020. Remarkably, complementing mainstream channels, mobile now represents over 60% of the digital viewership.

As we move to the final page, in summary, this year, we completed the simplification of the business and freed management to focus on growing Fund Services and Platform Services. In a rapidly changing and highly challenging environment, we delivered a strong financial result with group revenue up 35.3% and EBITDA up 59.1%. Importantly, upon receipt of the $31 million final proceeds from the sale of Diversa, our net cash position will exceed $40 million, and we will look at smart capital management including paying a $0.021 per share special fully franked dividend; actively pursuing other opportunities, both organic and acquisitive; and considering a buyback.

There are clear growth runways and momentum is accelerating. Both business lines have strong tailwinds, and we've identified the greatest margin improvement opportunity is to transition clients already won, especially in Fund Services. There's a strong pipeline of potential new clients, and we need to ensure we win our market share. Finally, we must execute on the 4 pillars of our strategy: automation and integration, innovation, scale and building brand awareness.

Ash and I would like to thank you for taking the time to attend this briefing. We understand it's very hectic time of year for you, and we'll now open it up to 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.