Sequoia Financial Group Limited (ASX:SEQ) Managing Director and CEO Garry Crole and Chairman John Larsen present at the company's 2023 AGM.
Chairman’s Speech
Good morning, ladies, and gentlemen. My name is John Larsen, Chairman of Sequoia Financial Group Ltd and it is my pleasure to welcome you to our 2023 Annual General Meeting.
I welcome and thank my 3 fellow directors alongside me in Melbourne today, for their continued commitment and support. I’d also like to thank our execuve team led by CEO Garry Crole and CFO Lizzie Tan, for everything they’ve done over the past 12 months, and the efforts of all our staff who are working hard to grow Sequoia, improve its service offering and profitability.
For those of you who were able to attend in person today, we all look forward to talking with you after today’s formal meeting concludes. For those shareholders who are joining us online, we thank you for attending the meeting ‘virtually’.
Before we move on to the formal business of today’s meeting, I would first like to make some observations regarding the 2023 financial year and some remarks in relation to the Company’s outlook. I’ll then hand over to Garry Crole who will update you on the progress of our business in the current period.
Throughout the 2023 financial year, the financial services industry faced numerous challenges, including escalating interest rates, continuing global inflation, a reduced number of available advisers, and a heavy fall in market volumes. Despite these hurdles, Sequoia adeptly managed to maintain profitability while absorbing increased operational expenses from an inflationary market in addition to several significant abnormal costs.
Sequoia reported revenue of $131.5m and an EBITDA of $5.5m down from $12.4m in 2022. The results were impacted by weaker equity market condions and several abnormal and non-recurring expenses.
Two acquisitions were completed, we made a small investment in Euree Asset Management (Euree) and acquired the business assets of Castle Corporate and Castle Legal Pty Ltd (Castle) post 30 June 2023. Both investments are expected to be earnings accreve. In the second half of FY2023, we announced the divestment of 80% of Morrison Securities Pty Ltd (‘Morrisons’) to New Quantum Holdings Pty Ltd. Sequoia received total cash of $40.5m and maintain a 20% interest in Morrisons. This additional cash will allow the Company to fund acquisitions with cash rather than via the dilutionary effect of issuing new shares, particularly as we feel the share price undervalues the company and provide us with the confidence and capacity for a high dividend payout ratio of up to 90% of net operating cash flow after tax.
In September 2023, the Board declared a special dividend of 4.0 cents per share post the completion of the Morrison transaction.
The Company currently holds a cash balance of approximately $30 million, which as mentioned be used to finance future acquisitions. Any allocation of funds towards M&A will be approached with prudence. We also continue to fund the share buyback as part of our capital management program in particular whist the share price is around current levels.
In FY24, we are confident the business will deliver strong EBITDA growth and strong top line growth. This was reconfirmed with the FY24 financial guidance we provided last week. Our confidence with such a posive outlook is supported by improved tailwinds for the first me in this sector of our industry for more than 5 years.
Sequoia advisor numbers have grown at a me when total industry adviser numbers fell by up to 40% , this headwind is one we feel confident will reverse and note the overall reduction in advisers has abated in recent months and coming in to 2025 we expect to see an increase in overall adviser numbers as more inductees enter the industry through professional year programs and degree courses intended to replace an aging advice industry.
Looking ahead we will centre our strategies on establishing economies of scale with an emphasis on technological advancements within our core businesses, in particular licensee services and the legal documents business aiming to cultivate additional revenue streams and contribute to improving overall margins.
We find optimism in the Government's efforts to adopt member recommendations in the Quality of Advice Review (the Levy Report) as our advocacy revolves around streamlining the processes associated with financial advice. Furthermore, we aim to lessen some of the financial burdens imposed on financial advisers by cung unnecessary costs and simplifying regulatory procedures.
I’ll now hand over to Garry to provide a more detailed report on the Group’s activities for the past year, and I’ll return for the formal business of the meeting afterwards.
CEO's Speech
Good morning Ladies and Gentlemen. My name is Garry Crole, CEO of Sequoia Financial Group Ltd and I am delighted to welcome you to our 2023 Annual General Meeting.
As mentioned by John Larsen, our Chairman, I would like to discuss FY 2023 but also update you all on the progress of our business in the current period.
FY2023 was a year of transition towards the long-term Sequoia Strategic Plan that this board reset back in the 2019/2020 when I accepted the role as CEO.
After several years of strong growth, FY 2023 presented us with an environment that provided many challenges within our businesses, namely:
- Consumers were faced with a significantly increased cost of living due predominantly to higher interest rates
- General global inflation was driving increased costs to the SME market.
- Sequoia is operating in a market where there has been a shrinking pool of advisers and a substantial decline in equity market volumes.
- The increased cost of providing advice due to strict regulatory requirements and other compliance related impositions on advisers.
All of these issues significantly impacted the overall profitability for those that operate a business in this space.
Despite these hurdles, and some heavy unexpected claims costs attributable to past businesses which we couldn’t control, the Group was able to maintain reasonable profitability due to our diversified financial services business model.
The Company’s revenue of $131.5m and operating profit of $5.5m (which includes discontinued operations from the for-sale business) on the surface was a disappointment. As mentioned, there were abnormal expense items – namely claims and remediation costs in excess of $2.0m, an unrealized loss on a Group share portfolio of $0.7m and lower revenue earned on our structured investments portfolio of $1.3m due to uncertain economic conditions and hence our decision to reduce the issuance of new products. If you add back these items, the operating profit before tax was just above $9m.
In the second half of FY2023, Sequoia announced the divestment of 80% of Morrison Securities Pty Ltd (‘Morrisons’) to the digital wealth management platform New Quantum Holdings Pty Ltd and received total cash consideration of $40.5m. Because the full payment for this transaction wasn’t received until August 23 we slightly delayed our special dividend payment of 4.0 cents per share, which cost the Group $5.5m. This payment was the commencement of our Group moving towards our long-term goal of providing annual dividend payments towards 90% of normalized operational cash flow after tax. This is well ahead of the long term plan we set back in 2019/20 to increase dividend distribution as a percentage of normalized operating cash flow after tax over time.
The divestment of Morrisons has placed the Group in a very strong capital management position where we can now consider funding options for acquisitions using balance sheet cash as opposed to building a pool of cash from operations or needing to use debt or resort to the dilutionary impact of issuing new shares.
On the acquisition front, in June 2023, we made a small investment in Euree Asset Management (Euree) and acquired the business assets of Castle Corporate and Castle Legal Pty Ltd (Castle) in August 2023.
These strategic investments contribute to the enhancement of Sequoia's customer offerings. The Euree investment expands the range of multi-asset fund options available to our advisers, while the Castle acquisition increases Sequoia's market share and immediately increase the operating profit contribution from our Documents business in our Professional Services Division.
In May 2023, Sequoia's Directors extended the existing on-market buy-back program for a further twelve months. Initiated in May 2022, the buy-back program aimed to prioritize shareholder benefits and enhance capital management. Since such me we have acquired and cancelled just under 5m shares totalling $2.5m or approximately 3.7% of the issued shares in the company under this buy back at an average price just above 50 cents per share.
In terms of our forward-looking outlook, we are confident the Group will deliver strong EBITDA growth and strong top line growth in FY24. We recently published guidance that stated we expected to make a minimum of $10M normalized EBITDA in FY24 and this was likely to be split 40%/60% over the two halves of the financial year.
This represents normalized EBITDA growth of 117% over FY23, after adjusting for the impact of the now divested Morrison’s business. On the revenue front we provided a $130 million FY24 guidance. This implies excellent revenue growth of 33% for FY24, after adjusting for the impact of the now-divested Morrison’s business.
On the People front, this expected future growth of the Group’s businesses allows us to further to invest in the quality and capability of our leadership team. During the year, we announced three senior appointments. Martin Morris as COO, Justin Harding as Head of Legal & Risk and Mark Hutchison as an additional Senior Compliance Manager in August. These outstanding leaders are poised to play a crucial role in steering the Group towards even higher levels of profitable growth in the years ahead.
The Group expects earnings growth in all Divisions next year. This confidence is supported by a better external environmental outlook, where favourable commercial tailwinds from improved industry dynamics are expected. The recent decline in advisor departures from the industry is a positive development for the sector. For Sequoia, the above market growth in our adviser numbers is very encouraging. From a Divisional perspective, we were very pleased with the improved performance of the Equity Markets Division across the final 5 months of FY23 and have high expectations for our Professional Services Division where we intend to deploy more acquisition capital to grow earnings by more than 25% following the recent Castle acquisition.
Management is confident about further accretive acquisitions in FY24, focusing on general insurance broking, financial planner customer books, additional documents and associated legal services, whilst expanding our market share in SMSF administration roll-ups is a major acquisition focus.
Thank you for attention and I will now hand back to John Larsen.
Ends
