Earnings Call: H2 2021

Sep 16, 2021

Good day, and welcome to our results for the year 30th of June, 2021, in the month of our 30th birthday anniversaries here at Brooks Macdonald. Thank you for finding the time to join us here today in what I know is a very busy period. Hopefully, next time we'll be able to do this in person. I know that Ben and I are very much looking forward to that when the time comes. As I say, Ben is joining me here today, our finance director. He's going to talk us through the financials, but also some of the achievements of the business over the last 12 months or so, after I do an initial high-level summary. After Ben, I'll take us through what we see as the opportunity and indeed how we think we can achieve in this sector going forward. After that, we will undertake a Q&A as usual. Within the pack, as you have seen, there's an extensive appendix which I hope you'll find of value. If you would like to see anything else in there, please do, of course, come and ask us post this meeting. If I could turn us straight to slide 5, I am delighted in my first set of results as CEO at Brooks Macdonald to report excellent financial performance, highlighted by the improvement in the underlying profit margin to north of 25% and continued strategic progress such as the successful integration of 2 acquisitions, which Ben is going to touch on a little bit later. The strength of the firm and the commitment of our people during what has been a very challenging period for us all has been fantastic and allowed us to really deliver for clients and intermediaries. I'd like to put on record my thanks to all of our staff for the fantastic work that they've put in over this financial year. It hasn't just been a case of keeping the wheels turning. We have achieved much in this year, as you will see, and importantly, it includes strong investment performance for client portfolios, consistently outperforming benchmarks over the short and the longer term. This has helped result in record FUM at GBP 16.5 billion, with net flows improving every quarter throughout the year and positive in the second half. This strong financial performance has given the board the confidence in our prospects to declare today a 19% increase in our dividend, our 16th year of rising payments every year since we listed in 2005, and the single biggest absolute increase in our dividend in our history. Overall, therefore, this has been a really strong year for Brooks Macdonald, and it leaves us primed for growth. I'm going to pass over to Ben to talk through the financials and some of our achievements over the last year. Thanks, Andrew. I don't know about you, but I've definitely had enough of presenting to empty rooms, so I'm really hoping this is the last time. Turning to my first slide 7, we're very pleased with the results and our achievements in financial year 2021. We've done what we said we would do. We've delivered strong results and set new records across a whole series of metrics. This has obviously been delivered against a tough backdrop. We've had Brexit and the many negative impacts of COVID. These excellent results are due to lots of hard work, and I've been so impressed with the dedication of the team, and I think it really shows the quality of the people we've got at Brooks Macdonald. To go through each of the financial highlights. Income is up by just under 9%. Underlying profit is up by 33% to GBP 30.6 million. The margin is up by 25.9%. If you remember back in FY 2018, it was 18% and heading backwards. This really is a huge achievement. The statutory profit is up by 151% to just over GBP 25 million. EPS is up by 25.4%. The final dividend is up by 25%, taking the year-on-year increase to 18.9%. Turning to slide 8. If you look on the left graph, you can see that FUM is up by GBP 2.8 billion year-on-year to a record GBP 16.5 billion. This is in part due to the Lloyds acquisition, another year of strong above-market investment performance, and a much improved net flow position. The yo-yoing in out of lockdown last year did impact IFA activity levels. However, as guided, we returned to positive flows at a group level in Q4, and overall, H2 was moderately positive at just under GBP 100 million. We expect this trend to continue in FY 2022, and I'm pleased to say that we've got off to a solid start with both July and August being positive in the year to date. Turning to my next slide 9. Why are we confident on flows? Well, there's a couple of reasons. As you can see from the table on the left, momentum is building, and we are delivering quarter-on-quarter improvements across the board. Also, importantly for the group, we expect international to move back into positive territory from Q2 this financial year. Secondly, further underpinning that confidence, on the right, you can see some of the examples of how our distribution team is delivering and how we are winning in the high-growth segments of the market. For example, in platform MPS and Brooks Macdonald Investment Solutions, or BMIS, not only is the growth rate on an annualized basis close to 40%, but the number of platforms we're on is also up significantly to 20, and I think most impressively, we have over 100 new firms investing in our MPS offering. Even if each of them only adds a little every month, this will really start to add up and make a difference to our monthly net flows. Turning to page 10. On the next couple of slides, I thought it worthwhile to pause and reflect on a couple of our key achievements of the year. Firstly, our recent acquisitions. Both Cornelian and the Lloyds Channel Islands business are now fully integrated. The job is done, and we are delivering well ahead of expectations. I think this shows that we know what we're doing on M&A, and that we can deliver on what we promise. Our new colleagues have made a tremendous difference to our capabilities and our culture, and we are exceptionally pleased about how they have settled in and how they have contributed to our collective success in the year. I think it would be remiss of me if I didn't say on the Lloyds purchase, that by the end of this calendar year, we'd have got all our money back in cash terms on the investment. Turning to slide 11. Again, another slide reflecting on our achievements. I just wanted to make two quick points. On the top graph, it shows that not only has income gone up and grown strongly, but also the quality of that income has improved. Fee income is now just under 84% of the total income, up from 69% in FY 2017. On the bottom chart, we show our progress in delivering operational gearing and margin progression. When I arrived in mid-2018, the complaint I got, that the margin was going nowhere. Well, we've changed that. We have learned how to grow in a way that delivers for shareholders. Getting to a margin above 25% is a fantastic achievement, and we are very proud of what we have done. We have real operational gearing in the business, and importantly, we believe we can deliver upper quartile margin consistently going forward. Turning to page 12 on yields. It's a very similar story to the half year. Discrete fee yields are pretty stable, but non-fee income has remained suppressed, in particular, interest income. The chart on the bottom right sets out the main components of the year-on-year change for your reference. The group will see some mix impact at the overall level in FY 2022 due to the high growth rates in BMIS and MPS. It is important to remember that although their revenue yield is lower, profit margins are higher. These products will continue to help drive profitability going forward. Turning to slide 13 on costs. We've continued to have good discipline on costs, ex acquisitions, we are down by 2.6%. The acquisitions have clearly brought some costs with them. With now a full year of Cornelian and 7 months of Lloyds being in the numbers. Offsetting this, we have delivered slightly more synergies than we expected. There was also some benefit in the year from us working from home and not being out seeing clients. That will unwind in FY 2022 as we get back in the office and back on the road. We have been keen to get out there early and meet IFAs and clients face-to-face. We believe it is now paying dividends and helping us build a really strong pipeline for the future. We do want to invest. We can now do this from a position of strength. There are two notable areas of investment for FY 2022 that I would like to talk to you about. Firstly, our Inclusive Futures initiative. Hopefully you saw the announcement on that earlier this week. This is us doing the right thing and helping graduates and school leavers to get quality jobs in these extraordinary times. We believe it is right that we play a role in the recovery and that the benefits for the business are many. For example, enhancing our diversity and also making us a richer place culturally, which I eventually believe will also make us richer financially. The second is we're opening a branch in the Isle of Man. This is to ensure we capture the full opportunity available to us from the Lloyds offshore referral partnership we signed earlier in the year. I will cover the incremental cost of these investments on my guidance page later. Turning to slide 14. Here we look at the segmental performance. I'm pleased to say we've seen improvements across all areas. As you know, financial planning is now integrated into U.K. investment management. As expected, this is now delivering enhancements to the client experience. As part of that work, we relaunched our direct private client offering in Q4. Finally on this page, we are really pleased to see the international margin is now 24.7%. The acquisition and lots of hard work by the team have made a huge difference and left the business in a better place. We now have high aspirations for both profitability and growth going forward. Turning to my penultimate slide 15. We have a strong capital base and a healthy surplus. This provides the ability for us to fund smaller deals like the Lloyds one, as and when they come along. It also leaves plenty of room for future growth in the dividend and the associated payout rate. Turning to my final slide on guidance. This page is pretty self-explanatory, but I will pull out a couple of key points. We are positive now on net flows. It won't be a linear progression, but we are confident in the full year outturn. Reinforcing that, as I said earlier, the first two months of the new year were both positive at a group level, and we have a strong pipeline across BPS and MPS going forward. Secondly, on costs. As per consensus, we expect costs to be up by around 10% this year. There are lots of drivers for that, but the main ones are the fact that variable pay will increase in line with profit. We'll have the full year impact of Lloyds, the return to the office, the Inclusive Futures initiative, which will add up to 25 people, and the opening of the new Isle of Man branch. In conclusion, it has been a year of significant achievement. We are back into positive net flows. The two acquisitions are fully integrated and delivering ahead of expectations. The margin is up significantly, as is EPS, and we have a strong increase in both the final and total dividend for the year. I'll now hand you back to Andrew. Thanks very much, Ben. In this next section, I've included a couple of slides that you will have seen versions of before as my predecessor, Caroline, has used them. This is deliberate. Whilst there's been a change of leader, there hasn't been a change of strategy, which was very much an Exco view of the world that I believe in strongly, which is not really going to be surprising to you given my background in financial planning and investment management, and in distribution to intermediaries. This particular slide reiterates why we're confident in our intermediary-focused strategy within the U.K. wealth sector. There's four particular points. The wealth is growing, and the policy framework which has been put in place is driving individual savings and investments, and we do not see any reason why this is likely to change in the short or medium term. The number of advisors continues to grow to deal with the burgeoning demand for their services. Those advisors are outsourcing more, and their criteria plays to our strengths, particularly our range of investments and our consistently strong investment performance. I believe that there's a broad consensus around these points, and as such, I don't intend to spend a significant time on them now. What I would like to focus on are a couple of challenges that I do hear about. Firstly, the competition in our marketplace, which is undeniably far greater than when we first became a listed company, is going to be an issue for us. Secondly, whether we can keep pace with the changing nature of intermediary outsourcing. To answer those two questions, let me spend a little bit of time explaining why we think we can stay ahead of the market. Looking at slide 19, this again is a slide that we've used before detailing our strategy and vision. Our vision being to be the leading investment manager for intermediaries. This has not changed in the last 16 years and remains our primary goal. It is where our experience lies and our understanding of the intermediary marketplace is where we hold much of our competitive advantage. Part of the reason we have that advantage is the fact that we've always owned our own direct-to-client businesses, both in the U.K. and internationally, which help to drive our service innovation for intermediaries. This aligns to our mission, that being to protect and enhance wealth for all of our clients, and our purpose, our reason for being, that being to realize the ambitions and secure the futures of our clients, but also our intermediaries, our staff, and our shareholders. How do we achieve success? That being ambitious, sustainable growth of the business with top quartile profit margin, well, we believe there are three key value drivers here. Organic growth, service and operational excellence, and agile, high-quality M&A, all built on the foundations of our culture. These drivers are supported and underpinned by our digital transformation, which we're delivering in partnership with SS&C. On the next slide, we've put down some points around the delivery with SS&C. The current phase of this partnership, having already successfully transferred our administrative processes and the funds operations to them, is to deliver a digital onboarding journey for clients and intermediaries with the primary objective of simplifying the process both for them and for us. Simply put, our objective is to be easy to use and as easy to use as possible. Digital onboarding is groundbreaking in the world of wealth management, reducing what can be a multi-hour process to, at times, a matter of minutes. We will continue to develop this with SS&C as we build on the foundations which we have put in place. Further phases expected to be concluded towards the end of the year are the release of a new portal, again, to provide functionality to clients and intermediaries to make us easy to use, and the move to new front office technology for us as a business. Whilst technology is a major driver for improving client and intermediary services and making ourselves more efficient, we need to continually innovate to stay ahead of the game. We need to keep innovating. On slide 21, we're looking at our investment proposition and how that's changing to deal with the intermediary marketplace. Innovation is something that we are very proud of. It is indeed arguably why we are where we are today, and we are confident in our ability to innovate for clients and to support the intermediary market in the ways that they find most useful. In full year 2021, we have seen growth in areas of specialist BPS, platform MPS, and Brooks Macdonald Investment Solutions, much of which is new in recent years. Our BPS specialist mandates the AIM Portfolio Service and over full year 2021 and now have over GBP 1 billion in funds under management. We have had a strong Managed Portfolio Service in place for over fin four. Our B2B, business-to-business investment solutions offering allows us to work closely with advisors to deliver a co-branded investment proposition to them that suits them and suits their clients. This makes the benefits of our centralized investment process available to intermediaries in a format that works for them. The main features of this are working closely with the advisor, to design the proposition, bringing our expertise to bear in the design of that proposition, but also in the delivery to the end client, delivering the investment process in a way that meets the advisor's objectives, and co-branding and broader marketing support. With Brooks Macdonald Investment Solutions, we play an active role in the advisor's ongoing success, which allows us to build long-standing relationships, which are key to the future success of our business. Appendices in the past, but I really wanted to highlight the strength and consistency of our investment performance. We've already said that overall investment performance of 15.8% was well ahead of the MSCI PIMFA Private Investor Balanced Index at 12.9%. You'll see in the table comparing us across risk profiles to the relevant ARC benchmarks that, bar 1 small exception, we're ahead across all risk profiles over 1, 3, 5 and 10 years, which is real consistency of delivery. Equally, we've had success with our Defensive Capital Fund, which produced 14.4% in full year 2021, putting it ahead of benchmarks over, again, 1, 3, 5 and 10 years, and indeed, it achieved 2x the benchmark in full year 2021. This is ultimately what we're here to provide, consistent, strong performance for our clients, and I take a lot of pride in these figures. Moving to slide 23, before I conclude, I just wanted to say something on the culture of the business, which is a very main, significant priority for me. We're driven by our guiding principles of caring, making a difference, being connected, and doing the right thing, and that gives us a really strong foundation that we need to be able to be ambitious about the growth of our business. To be able to implement our strategy, we need the best people in the market, and that's why we've built a market-leading people agenda to allow us to attract, engage, and retain the best talent in the business, with the aim being that we have a diverse group of people who view BM as a long-term home where they can develop their careers and themselves in a dynamic working environment. On slide 24, I just wanted to make the point that it is important to us all that we, as a business, live up to the responsibilities our guiding principles place upon us and take the opportunity we have corporately to make a difference. We've long had a focus on what is now called corporate social responsibility, and we've been pleasantly surprised when putting together all the initiatives into our recent report, how much work we have already done. I encourage you to have a read. When we ally what we've achieved to what we're now undertaking, it bodes really well for our ability to contribute positively in the future, which is very important to our people. To conclude, we have had an excellent financial year across all fronts and are looking forward with confidence. The fundamental opportunity for us is evident. We have a strong, ambitious team to deliver a clear strategy. Our centralized investment process is delivering consistently strong performance. We have a compelling offering, and the benefits of our partnership with SS&C really start to kick in full year 2022, transforming our client and intermediary experience. For my part, I'm hugely excited to take over as CEO of Brooks Macdonald with the business primed for growth, and I'm hugely enjoying working with our team to drive forward our ambitious growth agenda. Thank you very much for listening, and we'll be happy to take your questions. Question, please press star followed by 1 on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by 2. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm that's star followed by 1 to ask a question. The first telephone question is the line of Paul McGinnis of Shore Capital. Please go ahead. Good morning, Andrew. Morning, Ben Bathurst. 3 questions, if I can. 1 just on guidance then a couple of slightly softer ones. Just talking around pricing trends within each segment, I noticed on model portfolios in particular, you make a good point in terms of it actually being, although it's much lower yielding, much higher profit. I just wondered, on the other side of that, is there any evidence that those assets are potentially less sticky than those which are attached to a personal relationship with an investment manager? I'm just wondering, obviously, your performance is incredibly strong, investment performance. If that were to weaken, whether you think those assets might prove to be less sticky, was question 1. Question 2 was just around the focus on culture. Obviously, some of the wealth management trade press referenced retention levels of investment managers, in particular at Brooks. Are you setting targets for that kind of thing, or indeed the wider Group for retention levels, would be question two. Final one, just on guidance. Group costs, I noticed, were down quite substantially, GBP 3.4 million down to GBP 2.9 million in the year just reported. Are you able to give us any guidance as to what you expect that number to do going forward? Thanks very much. Thanks, Paul. Much appreciated. Thanks again for those 3 questions. In order, with regard to pricing trends in segments and MPS in particular, I think it's fair to say that we've seen quite a move in pricing over the last few years, and I think we're pretty comfortable with where we are at this point in time moving forward. You're right to bring up the point around stickiness. There's a clear argument that the closer relationship you have to the end client, the stickier the business would be in the longer term that that business could be. Equally, I think it's true to say that the relationships that we're building with advisor firms are particularly sticky as well. They make a commitment to Brooks Macdonald effectively when we get into bed, when they decide that this is the investment process that they're going to take to their clients. To then turn on that piece of advice and say, "Actually, we got it wrong," is quite a big step, actually. When you're talking on MPS, you tend to be talking about a lot of clients as well. It is a big step. Performance would have to be subpar for a significant period of time, in my experience, having spent 15 years working with MPS clients and advisors. Over that time period, we've had a couple of sticky periods, maybe a quarter or two quarters where performance has been behind the curve. Then it's all about the relationships with the advisor firms. Why is performance behind? Why do we think that the centralized investment process is still robust? Lo and behold, that trust has been rewarded and performance has come back. You don't have the client stickiness, but you do have the advisor stickiness. It's not an area of big concern, provided we stick to building good relationships and retain the robustness of the investment process. From a cultural perspective, I think it's another good question. Clearly, we went through a period where we had a number of leavers from the business. I'm really pleased to say that our retention levels are particularly good at the moment. We don't set a particular target for these. You will always have BAU movements of staff. It would be the right time for certain people to move on at certain times, and indeed, there'll be retirements and the like. We're very comfortable with where we sit at this point in time. Ben, do you want to touch on guidance? Yeah. Morning, Paul. Morning, everyone. On the central areas, Paul, I would expect, after a few years of really good work in that area to get the cost down, that we've probably now hit a floor. I think the 2.9, you will probably stop at around 3 going forward. I'd work on that number in your model. Okay. That's great. Thanks for that. It's very comprehensive on all three. Thanks very much. Thank you. The next question is the line of Ben Bathurst of RBC. Please go ahead. Morning, both. Thanks for taking my questions. I've just got 2. Starting with one on the dividend, if I may. I noticed dividend was up strongly year-on-year, but the payout is still a little bit lower than where your peers are. I wondered if you can give me guidance on FY 2022 and that perhaps being the year where you delivered that sort of step change in payout, perhaps moving closer to the sort of 50% figure. As I've noticed that the actual payout has stayed at around 40%. Second question is on M&A. The wider sort of wealth management and advice sectors do seem to be particularly hot at the moment after a bit of a hiatus during the peak of the pandemic. Given that inorganic does remain a kind of a key pillar to your growth strategy, I wondered, are you finding attractive deals a little harder to come by in the current market environment, particularly with reference to EPS accretion criteria, given that sort of those hot conditions? Thank you. Thanks, Ben. I'm going to pass to Ben. Thank you very much. Hi again, Ben. On the dividend, we've guided over the medium term, we aim to get to a 50% payout rate. By medium term, we've never been that specific, but in terms of guidance, the current guidance is we chip up a couple of % every year for the next five years from the just over 40% we are today. That's the plan. Clearly, we look at it every year when we look at all the factors that impact the dividend, but that's the sort of step up I'd be putting in the model. Yeah. From an M&A perspective, Ben Bathurst, I think we'll probably both help to answer this, it is a key pillar. Absolutely. It's one of the 3 value drivers that we've got. I do look at it from the perspective that we get the organic business in great shape, we get net flows really running, we make sure that the product set that we're taking to market is that which our particular market, the intermediary market, is looking for, which I think it is. I think we're in really good shape from that perspective. If we find the right sort of acquisition, then we add that into the mix. That does have to have strategic value to us. It's got clearly to have economic benefit. I'll leave Ben Bathurst to talk about EPS accretion in a moment. It also has to have cultural fit. What we've seen in the two that we've undertaken so far in recent times, Cornelian and Lloyds, all three of those boxes have been ticked and ticked really well. The market has got hotter as we've gone through the last couple of years. The entry of private equity into this market makes it difficult to find deals like Lloyds every other week I must admit. That doesn't mean that if the right deal isn't there isn't a price to be paid for it. Ben, do you want to add? A couple of points to that. The main one is, clearly, we've done 2 great deals. They've gone really well. They're now done. They've delivered more than we expected, both beating their EPS accretion numbers that we set out. Lloyds actually doing the full year numbers we expected in 7 months just shows. As I pointed out in my commentary, we'll get all our money back on Lloyds in terms of cash by the end of this year. They're few and far between those deals. What they have shown is our capability to do M&A, and they've given us, I think, that permission to play in this space. Our history before that wasn't as rosy as the last couple of years. We're very happy with how those have played out. As Andrew said, it's really about sticking to our disciplined criteria and not getting overexcited, knowing what we want, and then when we see things that excite us, going for it. We believe we've got shareholder support to do that. Yeah, we will do something, but when? You just have to watch this space, really. Thank you both. If there are no more questions on the conference call, we have one question that has come through on the web from Stuart Duncan of Peel Hunt. There are in fact two questions. First question, looking forward, what are the implications from the SS&C agreement, both from any further investment required and cost savings going forward? The second question, with regards to margins, is there any reason why international doesn't catch up to U.K. levels? I'll answer those. I'll answer them in reverse order because the second one's more straightforward. In terms of margin for international, really happy to get up to just under 25% in the year. Really great performance by the team. Clearly, the excellent deal has helped, also you shouldn't downplay a whole lot of other good work that's gone on to get us there. No, I think there's no difference in aspirations for the two businesses. We would expect them both to be very similar in due course. In terms of SS&C, there is a few moving parts there, just to keep it as simple as possible. In terms of the run rate costs for that deal, it is in our H2 run rate. You can really just times H2 by 2, add on the things we put out in guidance, and that will get you to the mid to high 90s numbers that we are guiding. That's fairly straightforward. In terms of CapEx, we have guided, again, another GBP 4 million or so next year. Anything to do with SS&C will be in there. We would expect our burn rate on CapEx to be much lower post that, given the fact that actually, a lot of this stuff we get free for SS&C. They'll keep it up to date. We'll obviously share development costs with their wider population. It should be a much cheaper platform to run. As we have set out before, the key thing is the operational gearing in the contract. Once we pass a certain point, which is not far away, the extra bits for adding on assets is de minimis. It just gives us that really good operational gearing and will actually push us ahead, from the mid-20s that we are now. Hopefully, that answers your question, Stuart. As a reminder, please press star followed by one to ask a question. We have a further web question from Paul Bryant of Equity Development. Three questions, in fact. Is the cohort of IFA clients using BPS services a totally different cohort to those using MPS services, or do IFAs typically use a bit of both, depending on their end clients? Question two, with MPS generating far higher inflows than BPS, is this affecting the overall culture of the business as its FUM grows, i.e., less of a focus on bespoke, more on lower cost MPS? Question three, do you see MPS ultimately overtaking BPS in terms of FUM? Okay. Good questions. Let me just write that down. The first one, is the IFA cohort using BPS different to MPS? IFAs have different business models. Typically, what you're seeing now is that MPS will be the default. It'll be the accumulation phase, and you'll have to have a reason to use BPS. That's the reason we put in place the specialist BPS products. Whether there's a particular bent towards ESG, whether clients are moving into decumulation, whether they're vulnerable, whether they're looking for AIM and inheritance tax benefits, these are specific areas where there's a requirement not to be in a model. I think it's fair to say that different IFAs will leave the money in models for different periods of time. As a rule, you've got to have a reason not to be in the model, and that's BPS. I mentioned specialist BPS there. Clearly, you've got what I'll call normal BPS, for want of a better phrase, and that gets used a lot where there's tax implications or indeed where there's real hand-holding required. Do IFAs use one or t'other? That typically, if we've got a good relationship, they believe in our centralized investment process, and they'll use both. Hopefully, that answers the first question. From a flows perspective, yep, flows into MPS type product are higher than BPS. Does it change the culture? No. We have a centralized investment process which drives both BPS and MPS. Clearly, we have different teams dealing with both, but it doesn't change the culture of the business. It's still all about providing the best possible service to clients and intermediaries. It doesn't matter which service you are working in. Will MPS overtake BPS in time? In current direction of travel would suggest so. We'll see over a period of time. My anticipation, when you look over the last 10 years, things have changed. We've had to innovate, we've had to evolve towards the MPS investment solution marketplace, but we've also evolved our BMIS marketplace, which again could end up being more popular. My own personal opinion is that this accumulation phase in a model and then decumulation in bespoke is probably a long-term thing. Hope that helps. There are no more questions at this time. Excellent. Well, just to say, to wrap up, thank you very much for your attendance this morning. Clearly, Ben and myself are available for further questions as and when they come to you. We look forward to seeing you face-to-face in the near future, we hope. Thanks very much. Thank you very much.