Earnings Call: H2 2021

Sep 16, 2021

Good day, and welcome to our results for the year 30th 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, and 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, and 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 then 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 and A as usual. And 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. So 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. And 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 £16,500,000,000 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 2,005, and the single biggest absolute increase in our dividend in our history. Overall, therefore, this has been a really strong year for Brooks and McDonald, and it leaves us primed for growth. Now 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, 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 Brookes McDonald. So to go through each of the financial highlights. Income is up by just under 9%. Underlying profit is up by 33% £30,600,000 The margin is up by 25.9%. And if you remember, back in FY 'eighteen, it was 18% and heading backwards. So this really is a huge achievement. The statutory profit is up by 151% to just under over 25,000,000 And EPS is up by 25.4 percent and 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 Fermi is up by €2,800,000,000 on year to record £16,500,000,000 This is in part due to the Lloyd's acquisition, another year of strong above market investment performance and a much improved net flow position. The yoyoing in and 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 100,000,000 We expect this trend to continue in FY 'twenty two, and I'm pleased to say that we've got off to a solid start with both July August being positive in the year to date. Turning to my next slide, Slide 9. So 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. And 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 NPS and Brooks Macdonald Investment Solutions or Bemis, 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 2020, and I think most impressively, we have over 100 new firms investing in our NPS offering. And 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. So both Cornelia and the Lloyd's Channel Iron 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 and 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 Lloyd's purchase that by the end of this calendar year, we would 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 2 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 and fee income is now just under 84% of the total income, from 69% in FY 'seventeen. On the bottom chart, we show our progress in delivering operational gearing and margin progression And when I arrived in mid-twenty 18, 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. Going forward, the group will see some mix impact at the overall level in FY 'twenty two due to the high growth rates in Bemis and NPS. However, it's important to remember that although their revenue yield is lower, profit margins are higher. So these products will continue to help drive profitability going forward. Turning to Slide 13 and costs. We continue to have good discipline on costs and ex acquisitions, we are down by 2.6%. The acquisitions have clearly brought some costs with them with now a full year of Cornelia and 7 months of Lloyds being in the numbers, But 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 outseam clients and that will unwind in FY 'twenty two 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. And we believe it is now paying dividends and helping us build a really strong pipeline for the future. But we do want to invest and we can now do this from a position of strength. And there are 2 notable areas of investment for FY 'twenty two that I would like to talk to you about. Firstly, our Inclusive Futures initiative and 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 of 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 running a branch in the Isle of Man and this is to ensure we capture the full opportunity available to us from the Lloyd's 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 and as expected, this is now delivering enhancements to the client experience. And as part of that work, we relaunched our direct private client offering in Q4. And 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 and we now have high aspirations for both profitability and growth going forward. Turning to my penultimate slide, Slide 15. We have a strong capital base and a healthy surplus. This provides the ability for us to fund smaller deals like the Lloyd's 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 and reinforcing that, as I said earlier, the 1st 2 months of the new year were both positive at a group level and we have a strong pipeline across BPS and NPS 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, will have the full year impact of Lloyd's, the return to the office, Inclusive Futures initiative, which will add up to 25 people and the opening of the new Isle of Man branch. So in conclusion, it has been a year of significant achievement. We are back into positive net flows. The 2 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 has been a change of leader, there hasn't been change of strategy, which is very much an ex co 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 4 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 advisers continues to grow to deal with burgeoning demand for their services, those advisers 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 significant time on them now. But 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 listed company is going to be an issue for us and secondly, whether we can keep pace with the changing nature of intermediary outsourcing. So to answer those two questions, let me spend a little bit of time explaining why we think we can stay ahead of the market. So looking at Slide 19, this again is a slide that we've used before detailing 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 helped 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. So how do we achieve success, that being ambitious, sustainable growth of the business with top quartile profit margin? Well, we believe there are 3 key value drivers here: organic growth, service and operational excellence and agile high quality M and A, all built on the foundations of our culture. And these drivers are supported and underpinned by our digital transformation, which we're delivering in partnership with SS and C. So on the next slide, we've put down some points around the delivery with SS and C. And 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. And we will continue to develop this with SS and 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 of 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, and we need to keep innovating. And on Slide 21, we're looking at our investment proposition and how that's changing to deal with the intermediary marketplace. This is innovation is something that we're very proud of. It's indeed arguably why we are where we are today, and we're 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 'twenty one, we've 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 'twenty one and now have over €1,000,000,000 in funds under management. We've had a strong managed portfolio service in phase for over Finform. Our B2B, business to business, investment solutions offering allows us to work closely with advisers 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 working closely with the adviser to design the proposition, bringing our expertise to bear in the design of that proposition but also delivery to the end client, delivering the investment process in a way that meets the advisers' objectives and co branding and broader marketing support. With Investment Solutions, we play an active role in the advisers' ongoing success, 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 PIM for balanced indexed at 12.9%. But you'll see in the table comparing us across risk profiles to the relevant ARC benchmarks that by one small exception, we're ahead across all risk profiles over 1, 3, 5 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 'twenty one, putting it ahead of benchmarks over again 1, 3, 5 10 years, and indeed has achieved double the benchmark in full year 'twenty one. 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 are 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 point that it is important to us all that we as a business live up to the responsibilities our guiding principles 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. So 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 and C, really start to kick in, in full year 'twenty two, transforming our client and intermediary experience. For my part, I'm hugely excited to take over as CEO of Brooks Macdonald with the business prime for growth. And I'm hugely enjoying working with our team to drive forward our ambitious growth agenda. So thank you very much we'll be happy to take your questions. And the first telephone question is from the line of Paul McGinnis of Shawcap. Please go ahead. Good morning, Andrew. Good morning, Dan. Three questions, if I can. One just on guidance and 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, is there on the other side of that, is there any evidence that those assets are potentially less sticky than those which are attached to like a personal relationship with 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 2? And then final one, just on guidance. Group costs, I noticed, were down quite substantially, £3,400,000 down to £2,900,000 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, Paul. Much appreciated. Thanks again for those three questions. So in order, with regard to pricing trends in segments and NPS 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. But equally, I think it's true to say that the relationships that we're building with adviser firms are particularly sticky as well. They make a commitment to Brooks Macdonald when we get into bed, when they decide that this is the investment process that they're going to take to their clients and to then turn on that piece of advice and say, actually, we got it wrong. It's quite a big step actually. And when you're talking on NPS, you tend to be talking about a lot clients as well. So 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 advisers. And over that time period, we've had a couple of sticky periods, maybe a quarter or 2 quarters where performance has been behind the curve. And then it's all about the relationships with the adviser firms. Why is performance behind? Why do we think that the centralized investment process is still robust. And lo and behold, that trust has been rewarded and performance has come back. So you don't have the client stickiness, but you do have the adviser stickiness. So 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 of where we had a number of levers from the business, I'm really pleased to say that our retention levels we're 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. But we're very comfortable with where we sit at this point in time. Ben, do you want to touch on guidance? Yes. Paul. Good morning, everyone. So on the central areas, Paul, I would expect after a few years of really good work in that area to the cost down, that would probably now hit a floor. So I think the 2,900,000,000, you will probably stop at around 3,000,000 going forward. So I'd work on that number in your model. The next question is from the line of Ben Bufferts of RBC. I've just got 2. Starting with 1 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 any guidance on FY 'twenty two and that perhaps being the year where you delivered that sort of step change in payout, perhaps moving closer to sort of 50% figure. And as I've noticed, the actual payout has stayed at around 40%. The second question is on M and 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. So on the dividend, we've guided over the medium term. We'll get to we'll 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 percent every year for the next 5 years From the just over 40% we are today. So 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 Ben, and 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. But 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 intermediate market is looking for, which I think it is. I think we're in really good shape from that perspective. And then if we find the right sort of acquisition, then we add that into the mix, but that does have to have strategic value to us. It's got clearly to have economic benefit, and I'll leave Ben to talk about EPS accretion in a moment. And but and it also has to have cultural fit. So what we've seen in the 2 that we've undertaken so far in recent times, Cornelia and Lloyd, all three of those boxes have been ticked and ticked really well. Undoubtedly, the market has got hotter as we've gone through The last couple of years and the entry of private equity into this market makes it difficult to find deals like Lloyd's every other week, I must admit. But that doesn't mean that if the right deal isn't there, there isn't a price to be paid for it. Ben, do you want to add? Yes. I mean, anything Killer points to that. I mean, 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. Lloyd's 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 Lloyd's in terms of cash by the end of this year. They're few and far between those deals. But what they have shown is our capability to do M and A. And they've given us, I think, that permission to play in this space. Our history before that wasn't as Rosie is the last couple of years. And so that is so we're very happy with how those have played out. And as I said 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. And we believe we've got shareholders' support to do that. So Yes. We will do something. But when you just have to watch this space, really. If there are no more questions on the conference call, we have one question that's 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 and C agreement, Both from any further investment required and cost savings going forward. And the second question, with regards to margins, Is there any reason why international doesn't catch up to U. K. Levels? I'm sorry to answer those. I'll answer them in reverse order because the second one is more straightforward. In terms of margin for international, really happy Together to just under 25% in the year, really great performance by the team. Clearly, the excellent deal has helped, But also, you shouldn't downplay a whole lot of other good work that's gone on to get us there. So no, I think there's no difference in aspirations For the 2 businesses, we would expect them both to be very similar in due course. In terms of SS and C, there is a few moving parts there. But just to keep it as simple as possible, in terms of the run rate cost for that deal, it is in our H2 run rate. So 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're guiding. So that's fairly straightforward. In terms of CapEx, we've guided again another €4,000,000 or so next year. So anything to do with SS and C will be in there. And we would expect our burn rate on CapEx should be much lower post that given the fact that actually a lot of this stuff we get free for SS and C. They'll keep it up to date. We'll obviously share development costs with their wider population. So it should be a much cheaper platform to run. And as we've 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 bps for adding on assets is de minimis. It just gives us a really good operational gearing and will actually push us ahead from the 20s that we mid-20s that we are now. Hopefully, that answers your questions, Stuart. 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 2, with MBS generating far higher inflows than BPS, is this affecting the overall culture of the business as if FUM grows, I. E, less of a focus on bespoke more than lower cost NPS? And question 3, Do you see MPS ultimately overtaking BPS in terms of FUM? Okay. Good questions. Let me just write that down. So the first one is, is the IFA cohort using BPS different to MPS? IFAs have different business models. But typically, what you're seeing now is that NPS will be the default. It will be the accumulation phase, and you'll have to have a reason to use BPS. And that's the reason we put in place the specialist BPS products. So 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. So I think it's fair to say that different I phase will leave the money in models for different periods of time. But 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 handholding required. So do IFAs use one or the 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, the upflows into NPS type product are higher than BPS. Doesn't change culture, no. So we have a centralized investment process, which drives both BPS and NPS. 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. And will MPS overtake BPS in time? Well, in current direction of travel would suggests 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. We've also evolved our BPS marketplace, which again could end up being more popular. My own personal opinion is this accumulation phase in a model and then decumulation in Bespoke is probably a long term thing. Hope that helps. And 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