Challenger Limited · ASX:CGF
Challenger — Challenger Financial Services Group — H1 2007 Earnings Presentation
48 slides from Challenger's earnings presentation, Feb 26, 2007
Slide 1: Half-year results to 31 December 2006
Challenger Financial Services Group Limited Half-year results to 31 December 2006 Mike Tilley – Chief Executive Officer 26 February 2007 1 Challenger Group 31 December 2006 Record 1H07 statutory performance1 • Strong but disciplined headline revenue growth across divisions • Group NPAT of $130m up 1
Slide 2: Creating value for shareholders
Challenger Group 31 December 2006 Creating value for shareholders 140 30.00 40.0% 120 35.0% 25.00 100 30.0% 20.00 80 25.0% $ million 15.00 % 60 20.0% 10.00 40 15.0% 5.00 20 10.0% 0 0.00 5.0% 1H 05 2H 05 1H 06 2H 06 1H 07 1H 05* 2H 05 1H 06 2H 06 1H 07 NPAT Basic EPS (RHS) Return on Net Tangible Asse
Slide 3: Contemporary business delivering value
Challenger Group 31 December 2006 Contemporary business delivering value INVESTMENT OBJECTIVES: RONA > 18% DOUBLE DIGIT EPS GROWTH OPERATING IN MARKETS GROWING > 10% A YEAR Leveraging Challenger’s core competencies and capabilities PRODUCTS OPERATIONS DISTRIBUTION Focused on delivering superior Cent
Slide 4: Financial highlights
Financial Results 7 Challenger Group 31 December 2006 Financial highlights Statutory %∆ %∆ Financials 1H 07 2H 06 1H 06 1H 07- Trend 1H 07- Trend 1H 06 2H 06 Assets under $46.4bn $41.5bn $39.5bn 17.5% 11.8% Management Net Income $324m $257m $220m 47.3% 26.1% Expenses $145m $139m $117m 23.6% 4.3% EBI
Slide 5: Financial summary and key performance trends
Challenger Group 31 December 2006 Financial summary Statutory 180 160 (28) 140 7 (13) 120 104 100 $m 80 130 60 40 60 20 0 NPAT 1H06 Net Income Expenses Interest Tax NPAT 1H07 9 Challenger Group 31 December 2006 Key performance trends Statutory 75.0 350 350 60% 300 300 65.0 50% 250 250 55.0 40% 200 $
Slide 6: Financial highlights (historic cost)
Challenger Group 31 December 2006 Financial highlights Historic cost %∆ %∆ Financials 1H 07 2H 06 1H 06 1H 07- Trend 1H 07- Trend 1H 06 2H 06 Net Income $301m $235m $213m 41.3% 28.1% Expenses $145m $135m $117m 23.9% 7.4% EBIT $156m $100m $96m 62.5% 56.0% NPAT1 $113m $58m $58m 94.8% 94.8% 1 - refer a
Slide 7: Key performance trends and divisional EBIT contribution
Challenger Group 31 December 2006 Key performance trends Historic Cost 60.0 350 350 70% 300 300 60% 50.0 250 250 50% 40.0 200 $ million 200 40% $ billion $ million 150 150 30% 30.0 100 100 20% 20.0 50 10% 50 0 0% 10.0 0 1H05 2H05 1H06 2H06 1H07 1H05 2H05 1H06 2H06 1H07 Net Income Expenses Assets und
Slide 8: Funds Management: strong FUM flow underpins result
Divisional performance 15 Funds Management 31 December 2006 Strong FUM flow underpins result %∆ %∆ Financials 1H 07 2H 06 1H 06 1H 07- Trend 1H 07- Trend 1H 06 2H 06 Funds under $15.5bn $12.9bn $11.9bn 30.3% 20.2% Management1 Net Income $55m $50m $42m 31.0% 10.0% Expenses $38m $33m $35m 8.6% 15.2% E
Slide 9: Funds Management key performance trends
Funds Management 31 December 2006 Key performance trends 20.0 60 60 140% 18.0 120% 50 50 16.0 100% 14.0 40 40 12.0 $ million $ billion 80% $ million 10.0 30 30 60% 8.0 20 20 6.0 40% 4.0 10 10 20% 2.0 0 0% 0.0 0 1H05 2H05 1H06 2H06 1H07 1H05 2H05 1H06 2H06 1H07 Net Income Expenses Funds under managem
Slide 10: Significant progress in diversification of growing FUM
Funds Management 31 December 2006 Significant progress in diversification of growing FUM Funds under management 18.0 • FUM building well 16.0 Segregated boutique partnership mandates 14.0 Institutional – 43% CAGR since 2004 12.0 Retail 10.0 – 1H07 growth of $3.6bn $bn 8.0 6.0 (30%) to $15.5bn 4.0 2.
Slide 11: Mortgage Management key trends and cyclical environment
Mortgage Management 31 December 2006 Key performance trends 80 50% 30.0 80 45% 70 70 25.0 40% 60 60 35% 20.0 50 50 30% $ million $ billion $ million 40 25% 15.0 40 20% 30 30 10.0 15% 20 20 10% 5.0 10 10 5% 0 0% 0.0 0 1H05 2H05 1H06 2H06 1H07 1H05 2H05 1H06 2H06 1H07 Net Income Expenses Cost to incom
Slide 12: Equity stake in Homeloans
Mortgage Management 31 December 2006 Equity stake in Homeloans • Challenger has agreed to invest $44.7m to subscribe for new shares in Homeloans1 – Initial tranche of 8.3m shares at 80 cents per share – Subsequent tranche of 31.7m shares at $1.20 per share subject to Homeloan shareholder approval •
Slide 13: Asset Management EBIT contribution
Asset Management 31 December 2006 EBIT Contribution Statutory 160 140 (14) 23 120 1 5 100 $ million 49 80 131 60 40 67 20 0 EBIT 1H06 Net rentals & Capital gains Annuity Net fee Expenses EBIT 1H07 yields valuations income 25 Asset Management 31 December 2006 Key Performance Trends Statutory 180 35%
Slide 14: Asset Management historic cost
Asset Management 31 December 2006 Asset Management Historic Cost %∆ %∆ Financials 1H 07 2H 06 1H 06 1H 07- Trend 1H 07- Trend 1H 06 2H 06 Net Income $147m $92m $85m 72.9% 59.8% Expenses $39m $29m $25m 56.0% 34.5% EBIT $108m $63m $60m 80.0% 71.4% RONA1 30.5% 22.5% 21.4% 42.5% 35.6% Net assets2 $707m
Slide 15: Spread business and fee business momentum
Asset Management 31 December 2006 Spread business securing opportunities for continued growth Realised gains replenished 300 • Active investment strategy 250 Realised capital gains Unrealised capital gains (cumulative) focused on total return 200 • Continued capital growth $m 150 • Realising opportu
Slide 16: Financial Planning: re-focused on value drivers
Financial Planning 31 December 2006 Re-focused on value drivers %∆ %∆ Financials 1H 07 2H 06 1H 06 1H 07- Trend 1H 07- Trend 1H 06 2H 06 Funds under $7.7bn $6.8bn - - 13.2% administration & advice1 Net Income $24m $20m $23m 4.3% 20.0% Expenses $21m $18m $17m 23.5% 16.7% EBIT $3m $2m $5m -40.0% 50.0%
Slide 17: Investing in platforms; capital management disciplines
Corporate 31 December 2006 Investing today to develop contemporary, scalable platforms for tomorrow • Investment in support services lifting expenses $5m relating to: – management reporting tools – automated reconciliations – new HR system – process re-engineering • As well as: – clearing tax backlo
Slide 18: 1H07 Dividend
Challenger Group 31 December 2006 1H07 Dividend Dividends – cents per share (cps) • 2007 Interim dividend declared – 5 cents per share 35% 12.0 Payout ratio – fully franked 30% – paid out of profits for the period 10.0 ended 31 December 2006 Payout ratio 25% 8.0 20% • Key dates 6.0 15% – record date
Slide 19: Outlook
Challenger Financial Services Group Limited Half-year results to 31 December 2006 Mike Tilley – Chief Executive Officer 26 February 2007 37 Challenger Group 31 December 2006 Outlook • Our contemporary platforms continue to build fee based income streams and our assets and funds under management will
Slide 20: Appendices
Appendices 39
Slide 21: Consolidated profit and loss
Consolidated profit and loss APPENDIX 1 Challenger Group Statutory – Management presentation 31 December 2006 Challenger Group $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Income Net rental income 40.7 46 49 33 30 Investment income 110.0 46 53 69 71 Capital gains/(losses)1 23.8 56 23 29 107 Movement in p
Slide 22: Adjusted result
Adjusted result APPENDIX 2 Challenger Group Statutory – post tax 31 December 2006 Adjusted Statutory % % $m 1H 07 FY 06 2H 06 1H 06 1H 07 - 1H 06 1H 07 - 2H 06 Challenger Group NPAT 130 136 75 60 115% 72% Adjustments Other (non recurring) income - (5) - (5) Hilton - 13 13 - CIF deconsolidation1 (39)
Slide 23: CIF deconsolidation reconciliation
APPENDIX 3 CIF deconsolidation reconciliation Challenger Group Statutory 31 December 2006 CIF Statutory Reconciliation 1H 07 FY 06 2H 06 1H 06 $millions Stat CIF Net Stat CIF Net Stat CIF Net Stat CIF Net Asset Management Net rental income 41 - 41 95 - 95 46 - 46 49 - 49 Investment income1* 110 (12)
Slide 24: Consolidated profit and loss (historic cost)
APPENDIX 4 Consolidated profit and loss Challenger Group 31 December 2006 Historic Cost1 Challenger Group $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Income Net rental income 46.8 46 49 27 28 Investment income 83.7 50 50 67 71 Net realised gains/(losses) 56.7 36 17 15 36 Interest paid & selling costs (6
Slide 25: Adjusted result (historic cost)
APPENDIX 5 Adjusted result Challenger Group 31 December 2006 Historic Cost – pre tax Adjusted Historic Cost % % $m 1H 07 FY 06 2H 06 1H 06 1H 07 - 1H 06 1H 07 - 2H 06 Challenger Group NPBT 150 161 78 83 81% 91% Adjustments Other (non recurring) income - (5) - (5) Hilton - 13 13 - CIF/Inexus (23) 27
Slide 26: CIF deconsolidation reconciliation (historic cost)
APPENDIX 6 CIF deconsolidation reconciliation Challenger Group 31 December 2006 Historic Cost CIF Historic Cost Reconciliation 1H 07 FY 06 2H 06 1H 06 $millions HC CIF Net HC CIF Net HC CIF Net HC CIF Net Asset Management Net rental income 47 - 47 95 - 95 46 - 46 49 - 49 Investment income1* 84 (8) 7
Slide 27: Reconciliation of Statutory to Historic Cost
APPENDIX 7 Consolidated profit and loss Challenger Group 31 December 2006 Reconciliation of Statutory to Historic Cost Challenger Group $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Statutory net profit after tax 130 75 60 65 55 Recurring items i) Subtract excess of movement in fair value of investment po
Slide 28: Consolidated balance sheet
APPENDIX 8 Consolidated balance sheet Challenger Group 31 December 2006 CIF deconsolidated Challenger Group $millions 31 Dec 2006 30 Jun 2006 31 Dec 2005 Assets Cash & cash equivalents 1,029.2 388.9 465.9 Receivables 296.3 363.6 258.2 Derivative Assets 10.1 6.7 - Financial assets fair valued through
Slide 29: Cashflow
APPENDIX 9 Cashflow Challenger Group 31 December 2006 Excluding SPV cashflows Challenger Group $millions 1H 07 2H 06 1H 06 Opening cash balance 426 533 496 Operating cashflows 60 63 (49) Investing activities (1) 139 (1,365) Financing activities 502 (320) 1,456 Reclassification 23 - (6) Exchange rate
Slide 30: Issued share capital
APPENDIX 10 Issued share capital Challenger Group 31 December 2006 Shares Number of shares 1H 07 2H 06 1H 06 2H 05 1H 05 Ordinary Shares: Quoted (CGF) Opening 544,767,540 537,917,717 534,269,048 528,441,048 2,866,703,735 Additions (+) i) DRP 0 371,823 530,669 0 0 ii) LTIP 5,336,000 6,478,000 3,548,0
Slide 31: Contemporary long term incentive scheme
APPENDIX 11 Contemporary long term incentive scheme Challenger Group 31 December 2006 • Introduction of a contemporary long term incentive scheme introduced with ability to acquire shares on-market to avoid dilution • Class of securities: Options • Initial number of options to issued: 7.6 million •
Slide 32: Earnings and dividends per share
APPENDIX 12 Earnings and dividends per share Challenger Group 31 December 2006 Earnings Per Share Half Year 1H07 2H 06 1H 06 2H 05 1H 05 Basic - reported statutory 23.7 13.7 11.2 12.4 10.6 Basic - historic cost 20.6 10.8 10.8 7.6 8.6 Diluted - reported statutory 22.9 13.1 10.5 12.3 10.6 Diluted - hi
Slide 33: Debt and gearing
APPENDIX 13 Debt and gearing Challenger Group 31 December 2006 % $m 1H 07 2H 06 1H 06 1H 07 - 1H 06 Financial Debt1 Corporate facilities and other 160 120 262 -38.9% Total Financial Debt 160 120 262 -38.9% Operating Leverage2 MM - NIM Facility 230 230 180 27.8% AM - Senior property debt 480 287 358
Slide 34: Funds Management results
APPENDIX 14 Funds Management Funds Management 31 December 2006 Funds Management Results $millions 1H 07 2H 06 1H 06 2H 051 1H 05 Income Net Investment Income 0.0 0 0 0 0 Fees received 70.1 65 52 44 32 Fees & commissions paid (15.0) (15) (12) (10) (11) Acquisition cost amortisation 0.0 0 0 0 0 Net fe
Slide 35: Mortgage Management results
APPENDIX 15 Mortgage Management Mortgage Management 31 December 2006 Mortgage Management Results $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Income Net Investment Income 0.0 0 0 0 0 Fees received 151.3 145 137 122 113 Fees & commissions paid (37.0) (37) (37) (33) (32) Acquisition cost amortisation (41.9
Slide 36: Mortgage Management residential results
APPENDIX 16 Mortgage Management Mortgage Management 31 December 2006 Mortgage Management Residential Business Results $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Income Net Investment Income 0.0 0 0 0 0 Fees received 140.4 133 126 112 102 Fees & commissions paid (37.0) (37) (37) (33) (32) Acquisition co
Slide 37: Mortgage Management commercial results
APPENDIX 17 Mortgage Management Mortgage Management 31 December 2006 Mortgage Management Commercial Business Results $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Income Net Investment Income 0.0 0 0 0 0 Fees received 10.9 12 11 10 11 Fees & commissions paid 0.0 0 0 0 0 Acquisition cost amortisation 0.0 0
Slide 38: Asset Management statutory results
APPENDIX 18 Asset Management Asset Management 31 December 2006 Asset Management Statutory Results $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Income Net rental income 40.7 46 49 33 30 Investment income 110.0 46 53 69 71 Capital gains/(losses)1 23.8 56 23 29 107 Movement in policy liabilities (43.6) (53)
Slide 39: Asset Management historic cost results
APPENDIX 19 Asset Management Asset Management 31 December 2006 Asset Management Historic Cost Results $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Income Net rental income 46.8 46 49 27 28 Investment income 83.7 50 50 67 71 Net realised gains/(losses) 56.7 36 17 15 36 Interest paid & selling costs (62.5)
Slide 40: Asset Management balance sheet
APPENDIX 20 Asset Management Asset Management 31 December 2006 Asset Management Balance Sheet 31 Dec 2006 30 Jun 2006 31 Dec 2005 $millions Stat HC Stat HC Stat HC Cash 862 862 - 349 349 - 396 396 - Debt investments 955 959 (4) 728 726 2 900 892 8 Equity and other investments 73 68 5 50 53 (3) 104 8
Slide 41: Financial Planning results
APPENDIX 21 Financial Planning Financial Planning 31 December 2006 Financial Planning Results $millions 1H 07 2H 06 1H 06 2H 05 1H 051 Income Net Total Investment Income 0.0 0 0 0 0 Fees received 87.1 80 75 69 63 Fees & commissions paid (63.3) (59) (55) (49) (44) Acquisition cost amortisation 0.0 0
Slide 42: Corporate statutory results
APPENDIX 22 Corporate Corporate 31 December 2006 Corporate Statutory Results $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Income Net income 2.0 0 0 0 0 Expenses Employee expenses (13.3) (11) (9) (8) (8) Other expenses1 (4.0) (19) (3) (1) (13) Total expenses (17.3) (30) (12) (9) (21) EBIT (15.3) (30) (12)
Slide 43: Group assets, loans and funds under management
APPENDIX 23 Group assets, Loans & Funds under Management Challenger Group 31 December 2006 Group Assets, Loans and Funds Under Management $millions 1H 07 2H 06 1H 06 2H 05 1H 05 Asset Management Assets managed for the Life company 1 Property 916 1,515 1,422 1,329 969 Debt investments (including hybr
Slide 44: Operating efficiency
APPENDIX 24 Operating efficiency Challenger Group 31 December 2006 120.0 70% 60% 100.0 50% 80.0 $ millions 40% 60.0 30% 40.0 20% 20.0 10% 0.0 0% 1H 05 2H 05 1H 06 2H 06 1H 07 Base employee expenses Increase in salary & wages Increase in variable compensation Expense to income ratio 63
Slide 45: Glossary
Glossary MM Mortgage Management division FM Funds Management division AM Asset Management division FP Financial Planning division Corporate All other non cash generating unit activity Net rental income (AM only) Gross rental income less trust expenses, financing costs directly associated with proper
Slide 46: Glossary
Glossary Fees & commissions paid MM – trailing expenses paid to mortgage originators. Accounted for on an accruals basis with cash flow closely aligned to accounting treatment. FM – upfront and trailing expenses paid to financial planners and advisers FP – commission represents Financial planners sh
Slide 47: Glossary
Glossary Other expense Unless disclosed otherwise, all non employee expenses. Significant items Non recurring or abnormal income or expense items within each reporting period. Purpose being to assist analysis of the normalised or underlying profit performance of Challenger. Net Assets An approximati
Slide 48: Disclaimer
Disclaimer: The material in this presentation is general background information about Challenger Financial Services Group activities and is current at the date of the presentation. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as ad
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