Abrdn Emerging Markets Equity Income Fund Inc Price & Performance (AEF)

Thanks, Mel, and good morning, everyone. It's been another really pleasing half year of momentum for us. But before I get into the highlights, I did want to remind you of some of more context for understanding our results today. Particularly for our newer shareholders. And that is that Australian Ethical is not your standard listed financial services company. Addition to the value we create for shareholders, we deliver customer returns through ethical investing focused on positively influencing outcomes for people planet, and animals. This dual purpose has been in our constitution for almost forty years. And is in the fabric of our organization. It's why people choose to invest with us and why people want to work for us. Because of our true authenticity. We believe the drivers more in the demand for responsible investing will continue over time. Even as political regimes change and rhetoric oscillates, because the existential threat to the planet and the urgency of many, if not all humans to address these problems [indiscernible] Most of you also know that we've been intentionally scaling the business up over the last four to five years to capture the growing address [indiscernible] for our shareholders. And broader stakeholders We've been growing with a clear, consistent and disciplined strategy We are now an acknowledged global role model.

Responsible investing. And have positioned the business to remain at that forefront. Poised to take advantage of further opportunity for our stakeholders. Through our advocacy work, we use our collective voice to advocate for a better world. And of course, have been building the capability and investing in an array of growth options to further scale the business. And enhance the impact of our portfolios and response. To the increasing customer demand. We've executed that strategy confident. That as we transform Australian Ethical, into the bigger, more influential business, we are now becoming that the results of that strategy would continue to crystallize for shareholders. I'm pleased to share this morning that disciplined execution has delivered even further growth and improvement in financial metrics on what was clearly a milestone year in FY 2024. In the first half of FY 2025, underlying profit was up a significant 35% on the first half of FY 'twenty four.

And 14% of on even the strong second half of FY 'twenty four.

Delivering on the scale benefits we have realized in recent periods, First half FY 2025 NPAT was up 50% to $9,300,000 Importantly, profit growth has been enabled by a 21% revenue uplift on the prior corresponding period due substantially to organic growth but further bolstered by revenues attached to the successful integration of 14%. As we've shared, net flows were disrupted in the period as we changed providers for our superannuation administration. Post that disruption, flows have reverted to stronger levels for both December and January. Investment performance has been above market and very strong. In the first half as our team continues to deliver high quality portfolio performance in most strategies, This has all contributed to some growth. That sees us at a new record high level of $13,260,000,000 which is up 27% since the June. 2024. Our scale growth, as I have consistently said, has always been with a structural improvement in operating leverage in mind. So it's very pleasing. To see further improvement in our underlying cost to income ratio at 72% for the first half of FY twenty twenty five compared with 75% in the first half of FY 'twenty four. The temporary pullback in marketing spend during the administration change did lower cost this period, which we do expect to normalize in the second half of FY twenty twenty five.

As Mark will elaborate on in a moment, But we also expect net flows and therefore revenue growth to revert to previously higher levels now that that disruption is behind us. Will also manifest from the full run rate of the cost efficiencies achieved through our recent super administration and custody transitions. Our financial momentum and the structural enhancement in our profit realization has enabled the board with confidence to confirm a first half dividend of $0.05 per share which is 67% above the $0.03 dividend declared, for the first half FY '24, When we embarked on our growth strategy, we were clear that while our investments in the business might dampen short term profit growth, that funds under management and revenue capture, if we were successful, would result in stronger medium to longer term profit growth. And a business more capable of capturing further upside beyond that, As I sit here today, the Australian Ethical team continued to deliver on that promise. [indiscernible] Predominantly from strong and consistent organic growth. Have built women's tension of the most trusted superannuation brands in the country. We've now delivered more than 40 consecutive quarters of positive net flows. Through various economic and political cycles, inflationary environments, and global pandemics.

While many other farm managers have a time struggles, We have one of the highest rates of customer retention We continue to have strong customer experience and satisfaction. Have a broader asset class and product offering. With consistent awards for investment excellence and the quality of our people. That organic growth has been augmented by accretive M and A which has delivered further valuable scale, And in the more recent case of LTS asset management, which we completed late September both scale and alliance capability That increases the strength and breadth of our economic engine. Investment Management's margin capture. [indiscernible] Revenue growth. Even after sharpening our pricing over four years, to intentionally create a better moat for customer retention. Has been very, very pleasing. And that is a night with us now to present five year underlying profit growth running at 21% compound. For me, it's even more pleasing than the results we have already delivered is the unquestionably stronger, more diversified capable business we now have. That positions us strongly for further growth. And to give you more insight into that position, we're now receiving multiple awards across almost every facet of our business for investments and superannuation excellence and [indiscernible] responsible investment leadership for growth, for our customer experience and service, our V Corp leadership, across Australia and New Zealand It's a business that has been able to invest for growth, achieve growth achieve accelerated profit realization, and build a true platform to capture more.

We use that growing scale, credibility and trusted voice to help deliver on our purpose in boardrooms with CEOs and AGMs via the media through sponsoring research and through submission to [indiscernible] Not only with businesses and assets we direct capital to, but also in sectors where we don't. Our customers value this immensely Done for reasons of mission, but also instrumental in building our brand trust. And now we have an incredibly talented and capable team with deep experience from the best investments and superannuation houses domestically and internationally. And when you combine capability and authenticity, I do believe that's why we were seen as an employer of choice. And rated and regarded by Morningstar and others as one of a very small number of true global leaders in our domain. Mark, can I ask you to take us through the financial highlights and results, please? Thank you, John. The first half FY 2025 has indeed produced strong results across all financial metrics as we scale deliver on our strategy. The many financial highlights include achieving another fun milestone record half year underlying profit. [indiscernible] continued up solid revenue growth, and delivering key platform initiatives driving cost efficiencies and improved operating leverage.

Let me begin with a snapshot of the interim financial results. Set of first half results that our team are proud of As John mentioned, our underlying profit was $11,500,000 up 35% compared to the first half last year. The net profit attributable to shareholders of $9,300,000 reflects a 50% uplift. The underlying profit excludes non business as usual costs as shown on the slide. As the business scales, our prime leverage is improving with the underlying cost to income ratio for the period landing at 72%. This 3% improvement is a result of executing on our growth strategy and disciplined cost management. Operating leverage will continue to be a focus over the medium term. The strength of our business performance is attributable to both the growth of our fund and our disciplined approach to managing our business. At $13,000,000,000 today, our fund has grown threefold since 2020. Over the past half year, fund growth has been generated by both organic and inorganic activity. With the successful completion of the acquisition of Altius business, adding $1,930,000,000 of fund, continued positive organic net flows of $211,000,000 and strong investment performance net of fees of $678,000,000 Connect flows were primarily driven by retail super net flows.

As well as some key wins in relatively new values aligned channel. We've been investing time and effort in our values aligned channel has contributed a large proportion of the noninstitutional investment products net inflows of 75,000,000. Our superannuation net inflows of 194,000,000 were lower than prior periods as expected. Due to the impact of the seven week limited service period which was required for the transition from Bursa to Grow. This limited new joints and rollovers received in this period and also resulted in higher outflows for the first few months post transition. However, as our member base grows, SIRO's superannuation guarantee contributions and we received a record $318,000,000 during this period.

SG is a strong stabilizer of our net flows and continues to become an increasing portion of our shipping flows Our fleet strategy is a key component of our overall strategy. Ensuring our products remain competitive for current, and future customers. On an annual basis, we benchmark our fees against aligned and overall competitor cohorts. As we scale, we'll continue to balance profitable growth with delivering a competitive offering to our customers. [indiscernible] Our ethical leadership and ethics integration into portfolio construction has served us well over the longer term and achieving strong net [indiscernible] [indiscernible] does command a premium. As indicated in our FY 2024 results, average revenue margin has naturally reduced. Following the Altius acquisition and the inclusion of lower margin fixed income products within our portfolio. Excluding the impact of Altius funds, the first half revenue margin was stable at 1.02%. [indiscernible] the first half average revenue margin was 0.96%. At this stage, we anticipate our second half average revenue margin will be approximately 0.9% with the full six months of the Altius products in the mix. Our revenue continues to see year on year solid growth with Bink being up 21% on prior comparative period and 13% on FY 'twenty four second half.

The revenue increase has been driven by higher average fund, 29% on PCP, consistent positive net flows positive net investment performance, and the Altius acquisition contributing 1,200,000.0 At 12/31/2024, our current annual revenue run rate is 120,000,000 Now as part of our strategy, we've been building a scalable institutional grade business platform. In the last six months, we've achieved a number of key platform milestones. Including adding specialist fixed income capability completed the super administration transition to grow for our Mercer members October, We completed the transition of custody and investment administration services to state Street in November. And we are well progressed to in upgrading new front and middle office investment During this period, our operating expenses increased 14% to 41,500,000.0 The largest expense growth item is employee expenses. Which increased by 21%. This included the run rate of FY 24 highs, which contributed about half the increase In conclusion, the Altice team and replacement hires, inflationary salary increases plus a small number of new hires during the period. Employee FTE numbers at thirty first December twenty four were 140. It is important to note, this includes 18 FTE working our dedicated internal contact center Focus on customer interactions, engagement and retention.

An investment that is designed to deliver on a compelling client experience pillar It's something that some other super funds and fund managers outsource And FTE excludes fixed term contractors working on specific strategic projects. Which is pleasingly less than our revenue growth. This was a result of the transitions of the super admin and custody services the new scalable rate cuts. A portion of the unit cost savings has been reinvested into strengthening our investment platform. Marketing costs decreased 15% compared to the prior primarily due to the scale back of marketing campaigns during the seven week limited service period. Full year FY 2025 marketing expenses are expected to be slightly higher FY 2024. We continue to invest in IT to build a strengthened and resilient operating platform with robust technology infrastructure. As our business grows, our technology platform license costs have increased. Including technology needs of the Alteryx business. [indiscernible] Now we continue to retain a strong balance sheet an excellent cash conversion no debt and surplus rate capital. It is worth noting that the first half of twenty twenty five, net cash from operating activities reflects the seasonality of payments of annual employee bonuses. Our minimum rate capital requirements at thirty one December twenty four is 8,500,000.0.

And AEI currently holds surplus rate capital of 8,900,000,000.0. Now this slide is showing very strong growth across our key shareholder metrics over the last five years. The interim dividend of $0.05 per share is an increase of 67% and equates to a 61% payout ratio in line with previous interim dividends. The annual payout ratio remains in the range of 80% to 100% per our board dividend policy. [indiscernible] is subject to the future business capital requirements. I'll now hand over to John to provide a business update. Thanks, Mark.

In terms of business update, we are making very meaningful progress in every of our strategic execution. We have an expanded investment in ethics capability and team positioning the business more strongly in private markets and of course in fixed income, on the completion of the LTS acquisition.

September. They had a stronger product offering a more diversified channel offering. Our advocacy is most importantly making a positive difference in the world But as I said earlier, also building our brand and reputation. The experience we're delivering for customers continues to strengthen from an already strong base. As we selectively invest where we see customer acquisition and retention benefits and as evidenced by the growing numbers of awards we receive. Our successful transition to the new super administration provider and new Australian will enhance this customer delivery and operational efficiency while delivering valuable unit cost reductions. Going forward. And clearly, having grown our funds under management from Circus $3,900,000,000 only five years ago, to $13,300,000,000 today. We are a larger stronger, higher EPS realizing and more impactful business than ever before. Our medium term opportunity is exciting to us. It will be obvious now to most that we have worked hard and as a priority over the last few years to build deep and perpetual capability in the high margin, sticky, high systems growth part of the market being retail superannuation. And believe we're now very strongly positioned with brand trust investment capability and performance, direct to consumer channel breadth and momentum It has been our priority and I'm pleased with the traction.

And it will underpin our sort of growth. But while I've spoken about it less, we've also been quietly but systematically building the capability and to compete and succeed in the investment or non superannuation space. We see potential for new revenue capture through the asset class expansion that we've already embarked on. In private markets and fixed income. And future potential in international equities. The investment talents, product expansion, systems and process, we continue to build and believe we can package in the years ahead. Combined with our natural reach into the advisor markets and now further augmented with resource pointed at the mezzanine or middle market or as we refer to it our values aligned organizations is we believe deeply perspective for us as well. We expect the early green shoots of that work to begin to emerge even over the next year or so. As we present recent and new product developments and markets, and build what is already a growing pipeline of opportunities with a values aligned organization channel. Revenue growth, as you see, continues to be a large focus for us. I expect that to continue in FY 2025 and beyond. Noting that at the January, our sum is already at $13,540,000,000 But we also remain intent on driving unit cost down over time.

And as we further scale from here, you will see some benefits of that even in FY 2025, having now successfully delivered on operating platform enhancements, including our administration plan consolidation and custody transfer. They do deliver immediate runway cost reductions. Of course, we will continue to invest prudently in the business also. We are always prepared. To invest a dollar to make four as you've seen. In recent years. I'm describing a strategy that sees us start to leverage the optionality and growth platform we've built. For revenue growth. And we'll deliberately focus efforts to build and partner for more efficient systems and process. And leveraging our buying power to reduce unit costs. As we continue to scale over the medium term. We are adamant we can continue to grow the top line both organically and periodically and organically also. But also move the needle on unit costs and in combination further widen the cost of income tools. What does all that mean? It means market corrections aside, we are very confident of continuing both our upward profit growth and having that underpinned. Improving operating leverage. Thanks very much for joining us this morning. We appreciate as always your interest and support on Australian Ethical and look forward to answering any questions you might have.

Mel? Thanks, John.

As a reminder, if you wish to ask a question by the webcast, please type your question into the Ask a Question So we've had a few financial questions in, Borek. I'm going to hand to you, Mark, to talk through the timing of the $4,000,000 annualized cost benefit from the growth transition that you've outlined Has this been already full run rate in the first half of twenty twenty five? Or what can we expect the quantum of this to be for the full year? And if you could also elaborate on the reinvestment of these savings and into what growth areas?

Okay. Thank you, Mel, and thanks for the question. We it's a great question and to just preface it, we are very happy with where our operating leverage has landed in the first half. We we've landed 3% improvement from the 75% of the prior comparative period. Now as the question asked about the run rate, in specifics, as I noted, we landed the opt in October, the growth transition for the Mercer cohort. That was about 80% of the total cohort of super members moving to growth platform. And that coupled with the State Street transition in November has meant that at the back end of the half, we have started to see the run rate unit cost savings coming through into the results That has enabled us to to move to 7372%, down 3% We there are a number of other factors which are coming to our looking at our operating leverage over the next six months That is, you know, as as mentioned, margin expenses are set to increase [indiscernible] sort of moderately from last year. And we We are also focused in on our fixed costs in the business. Where we are reinvesting some of that money is in the investment front office systems and that is the order management systems, the portfolio management systems, the data management systems within the front office, and that's to institutional grade our business.

We are a long way into that implementation project, and that is a substantial portion of that unit cost saving for this year. In the future years, that will actually come through with improved operating leverage. Thank you. Thank you, Mark.

Another question relating to the super administration transition, which I'll hand to you Mark. What do you expect the savings to be with the consolidation of the second tranche, the Christian Super members, those that are on MUFG want to grow, do you expect further savings there? [indiscernible] as mentioned, 80% has already come through. With the member cohort, the Mercer cohort coming into the grow. The link or the MUFG cohort, which is another 20%, will be done at the end of the calendar year. And that is an additional portion of unit cost savings. As mentioned last year in FY '24, we said that circa $3,000,000 cost savings through the rate card. And we're expecting that to fully have landed the end of the calendar year. Thank you, Mark. A question for you, John.

Are there any comments you can share relating to this week's AFR article regarding the major acquisition with Future Super Look, our existing shareholders, as many of us will know, our board doesn't comment on any M and A activity or or media speculation for that. For that matter. But are very focused and aware of their continuous disclosure obligation and committed to fulfilling those.

Thank you, John. Another financial question for you, Mark. Can you talk about the approach to marketing spend over the limited service period in the first half And how might this look for the second half and the full year Yes. With the limited service period for the transition was a seven week blackout period.

Within that period, there was we pulled back on our marketing spend as stated. And you can see that in the financial results half on half. That our current first half of marketing spend has been pulled back But we have been judicious in thinking about our marketing spend in the second six months We will be increasing that and we see it being circa in line with the full year last year. And we expect to have an increase in net flows as we come through it. Which will be compensated for the margin spend. So we've got an advertising campaign just hitting the market at the moment, and we believe that we are well received. Thank you, Mark.

Back to you, John. Some interest in what the outlook is for managed inflows. And is there anything to consider with Altus key relationships later in year?

Yes. It's a good question. As I alluded to in the presentation, we've been first and foremost focused on making sure we have a really robust platform and engine for retail superannab. Superannuation under life as a business where we're at. I think that does underpin our growth. But we're also focused on the non superannuation opportunity as I alluded to. And we have been creating, I think, the right capability in terms of talent, in terms of product sets, system and process, to be out of Prosper in that part of the market also. So it's very much in our thinking. I add to that the channel breadth that we've been intentionally creating Many will be aware as well as sort of a really strong direct to consume the marketing capability. In recent years, we have added a meaningful adviser channel, which now contributes more than $2,000,000,000 of funds under management for us. We are active in the employment platform channel. We have increasing demand and requests from employers for product as well. And even more recently, I refer to what we call the values aligned organization channel. Think about as middle market or mezzanine in another description. We have a meaningful pipeline.

Now growing of opportunity there. So look, I'm not suggesting in the next six months, you're going to see a significant uplift in fund, but we're very confident we've got in place the right infrastructure team and capability on a twelve month view and beyond to be successful in that non superannuation [indiscernible] Thank you, John.

Back to you Mark on the financials. Are you able to comment on how the strategic project costs and contractors have been treated in the financials? Are they do they appear in underlying profits they taking below the line?

There has been a couple of strategic well, quite a few strategic projects in the first half. The only below the line or you've had adjusted projects that we have are transformational projects. Which is the Grow Transition Any allocated fixed end contractors that the specific to that particular project and there has been a large project, have been combined in that transformational project. Other projects that we have referenced such as the custody transition or the investment management, uplift of our system front office systems are actually part of their operating expenses. As we see that as normal recurring business. [indiscernible] Another question for you, John, to do with our inorganic strategy. Can you talk through some of the key criteria for majors and acquisitions from both the financial and strategic perspective? What do we consider important for us?

You're now good. I've been clear over time and that continues to be the case. We are interested in the right inorganic opportunities just to further accelerate and punctuate what we're most of focused on, which is a great organic engine. So certainly still in our consideration sets. We're primarily interested in scale. We think we've built a fabulous business, which has the ability to scale down a good platform to sort of ingest further funds. So in particular, scale, we have been interested, of course, in the right augmentation of capability is a great example of both of those bringing scale plus new customer sets, capability So that's both scale and capability.

You know, we're pretty comfortable now at a capability level. So probably our our key interest is is the right sort of ethically aligned values, aligned scale through an M and A But when we look for as you know and I've said and I'll continue to repeat, will be very disciplined. About the M and A we do. The beauty of having built a great organic engine is we don't need to be doing that. And opportunities we'll assess will continue to be with very strong uplift in sort of key economic and shareholder measures in mind in a very disciplined way.

Thank you, John. Another one for you, John. Are you concerned about the rise of the right wing politics and the anti work agenda that may impact your business growth.

Yeah. Well, it's a different world, isn't it, that we exist in now. Probably have a personal view, but through a business lens, I'm untroubled by this candidly. We've got a business that's now nearly 40 years old.

That has done well and succeeded through all sorts of economic side the previous Trump administration, where in fact, the business flourished. Interestingly, the the enemy for our business is actually apathy. Not polarization. In In periods of polarization and crisis, we see this play out Yes, there's no question. There'll be plenty of naysayers There'll be noise. We accept that. By the same token, that sort of crisis or polarization drives behavior, drives momentum of those who see they need to do something [indiscernible] So that's actually quite a constructive dynamic for us. You combine that with investment performance, People are always going to want strong investment performance. We've delivered outstanding performance for decades now. For example, our Australian equities portfolio on a thirty year view now, something like 2% up against benchmarks per annum. So there will continue to be motivated investors and individuals in the market for different reasons. Combined with strong investment performance, we feel very comfortable about the sort of addressable market for us going forward, even in a changed sort of world landscape.

Thank you, John. And you did comment on the traction that we're getting the outstanding long term performance of our funds. Mark, one for you.

Given the strength of having the guaranteed super contributions that the business has. Are you able to comment on the outlook for where we see our ordinary net flows landing over the next few years.

Good question. As mentioned, the SGE contributions are fantastic and they have been at record levels In the first six months, we did receive $318,000,000 of net flows from the SG. As as we know, the government has structural changes for the SG. And it moves to 12% as at January. There's a natural tailwind for SGE contributions. We'll also be as we've, you know, the 120,000 membership base and we are focused on acquisitions, that will naturally mean that we've got a greater SG contribution within our net flows. So the three eighteen gives an indication of where we expect it to be next year. And of course, complementary to the SG contributions is that we will be returning to business as usual when it comes to our marketing efforts, our acquisition trail, and we expect rollovers to resume. And pleasingly, we've already seen a change and an upshift within December and January. Thank you. Thank you, Mark. Another one for Mark.

Just in relation to the UPAT adjustments that we've seen in the results. Do you expect to keep incurring integration and transformation costs? Or how long do you expect to keep incurring these costs which would be adjusted from your underlying results? Yes.

The majority of that you've had adjusted transformational costs is to do with that large scale project that we've been incurring over the last year or two. As mentioned, the MUFG or the final cohort of our Membership to transition to grow will be completed by the end of the calendar year. [indiscernible] referencing that transformational cost, that is not are expecting by the end of the year. We will be through the transformation, the implementation, and on an ongoing basis that particular cost won't be part of our below the line costs. Of course, there there are always other major transformational projects if they occur we will be appropriate and judicious in explaining what they are to the market. Thank you, Mark.

Well, that brings us to the end of our questions. Thank you everyone for your interest. Thank you for attending and have a great day.