Earnings Call: H2 2019

Apr 22, 2020

Good morning, everybody. Welcome to the presentation of JTC Plc's full year results for 2019. I hope this virtual approach will be an adequate substitute for our usual face to face catch up. I'm Nigel McCain, the group's CEO and presenting with me and with the Scottish accent is Martin Fotheringham, our group CFO. Let me turn to the agenda on Slide 3. The next half now, I'll take a look at the CEO highlights. Martin will run through the financial review and I will follow-up with a business review of 2019 and the outlook for 2020, including a detailed look at the resilience of the business and addressing the impact of COVID-nineteen pandemic upon us. So onto the headlines for the year on Slide 5, On the left hand side of the slide is a quick reminder of JTC's business fundamentals. Which have delivered outstanding results for every one of our 32 years. We'll return to these later and how these fundamentals have supported us to date in the face of COVID-nineteen. Looking at the progress in 2019, we've delivered a strong set of results. In particular, we have seen good revenue and EBITDA growth within the target expectations we have indicated. With net organic growth of 8.4% within our its 10% range and EBITDA margin of 31.9% delivered within our guidance of 13% to 35%. We've seen good contributions from both divisions with strong growth and record new business wins in each and with private client services performing particularly well in every respect. We maintained our disciplined approach to M And A and had a relatively quiet period for completing deals in 2019. We acquired executive partners in the first half of the year and subsequently added small bolt ons in Cayman and the Netherlands. Since the year end, however, we've acquired the Jersey Based Private Client Business of Saum, established a presence in Dublin Ireland, and added registrar services to our capabilities by absorbing the operations of Anderson registrars in the UK. Most importantly, and more recently, we've acquired NES Financial United States, which I will elaborate on later. More generally, we've continued to invest in the business and improve each jurisdiction in which we operate. 72% of our locations reporting improvements year on year, which we measure on our proprietary jurisdictional strength index. Or JSI. On particular notes, our significant premises upgrades in London and Stanley Cayman, New Senior Highs in London, Geneva and New York, and technological and process improvements in both divisions. JDC's unique approach to shared ownership received global recognition by featuring the Harvard Business School MBA Program. This accolade highlights JTC's unique and innovative business, differentiating us from our immediate and wider competitor base and has been well received by all stakeholders and potential new clients. So in essence, in 2019, we've once again enhanced and improved upon our financial performance, strengthened our teams across the board, widened our offering and improved our infrastructure in terms of process, technology and premises. Just as we said we would. So let's turn to Slide 6 and on to the financial highlights where we have achieved Revenue increases of 28.5 percent to 1,000,000, underlying EBITDA growth of 32.4 percent to CHF 31,700,000 and seeing an improvement by 0.9 of a percentage point in our EBITDA margin from 31% to 31.9. Our annualized value of net new business wins were up by 53.6 percent to 1,000,000 from 1,000,000 with both divisions having their best every year for new business. Our pipeline at the year end was slightly lower at 1,000,000, reflecting the efficiency brought by enhancements made to our onboarding processes, and an improved win rate. Since the year end, the pipelines extended out again to 1,000,000 without any immediate evidence of a slowdown from the pandemic at this stage. We see future revenues from these new business in 2019 of 1,000,000. Finally, on to the dividend where you will recall, we aim to distribute 25 percent of our profits in dividends year on year on a 1 third, 2 third basis. And as a result, we'll be proposing a final dividend of 3.6p, taking the full year to 5.3p, which we plan to pay on the 3rd July. Before passing over to Martin for the financial review, I'd like to take this opportunity to extend my thanks to the excellent JTCT for their dedication and support in 2019 and in particular the response to the challenges brought this year by the COVID-nineteen pandemic, Martin. Thank you, Nigel. Every year, we set ourselves a target of improving our business. We achieved that in 2019, as shown by the strong organic growth and the improvement we made in the underlying EBITDA margin. JTC is a very predictable and resilient business. And we're confident in our ability to continue to perform against our targets. If you could turn to Slide 9 in the deck I'd like here just to have a quick run through the income statement. As Nigel has mentioned, revenue grew 28.5 percent in the period and of that 8.4% of that was net organic growth. The underlying EBITDA margin improved by 0.9 of a percentage point to 31.9%. Non underlying costs were significantly down from 2018. You'll recall in that year we had the impact of the IPO and the EBT capital distribution. We adopted IFRS 16 in the year, and that had the impact of increasing the reported EBITDA by £3,700,000, but reducing PBT by £700,000. In 2019, our tax charge was positively impacted by deferred tax credits associated with the amortization customer relationships. We also updated our transfer pricing policy in the year. It remains OECD compliant and the work was again done by KPMG. The output was that there was no significant change to the previous policy In 2019, our adjusted underlying EPS was 22.33p, a 16.1% improvement from 2018. As Nigel has said, the final dividend will be Moving to Slide 10, where we have the revenue bridge, which we've seen previously. When we presented to you. The net growth of 28.5 percent in the year was built up 8.4 percent organic and 20.1 percent from acquisitions. Attrition in the year was lower at 7%, 97.4% of the non end of life revenue was retained in the year. We had net new organic revenue of 1,000,000, which was split 4,500,000 from existing clients in 6 point 6,000,000 from new clients. The new business pipeline at the end of 2019 was 34 point 1,000,000. That was a drop from the same time in 2018. However, I would point out that that measure is taken at moment in time. The pipeline at the end of March 2020 is in fact now 1,000,000. Moving to Slide 11, which is looking at the ICS division, you'll see in this slide that for the first time, we shared a revenue bridge, which shows the organic growth and buildup of the component parts of the, of revenue. Before I look at that, I'd just like to point out you can see an increase in revenue of 26.4 percent in the period. And an improvement of 25.2 percent in EBITDA. Disappointingly, the underlying EBITDA did fall back year on year by 0.3% but it did improve in the second half of the year. It had in half 1, we were at 27.8%. For the full year, we moved up to 28.5%. Looking at the revenue bridge, the organic growth for the ICS division was 9.4% and attrition to 6.8%. We won net new organic revenues of 1,000,000. Even we split between existing clients and new clients. Turning to Slide 12, which looks at the TCS division. Again, we can see that the there was significant improvement in revenue in the year as well as EBITDA. The underlying EBITDA achieved for this division was 36.1%. That is an outstanding performance. In terms of the organic growth in the revenue bridge, organic growth itself was 7.2% and attrition 7.4%. New York 1 in the, over the year was GBP 4,500,000, which was 1,100,000 from existing clients and 3.4 from new clients. At the beginning of 2019, we had 36 mandates that were worth more than GBP 100,000 per year. By the end of the year, that Turning to Slide 13, the group balance sheet. Notable in the changes in the balance sheet and the year were increases in goodwill and other intangible assets. As a result of the acquisitions of executive partners and of fiscal. We impaired the goodwill associated with NACT by 1,000,000 in the year. Property, plant and equipment and lease liability increases reflect the adoption of IFRS 16 in the period. Our net investment base by one day in the period from 117 days in 2018 to 116 days this year. Our loans and borrowings increased due to the funding drawn for acquisitions in the period. We have a borrowing facility of 1,000,000 This was increased on 9th January 2020. The banking facilities are in place until the 8th March 2020 3 and no new payment is required until that point. At yearend, our underlying net debt £59,300,000, representing 1.9 times the underlying EBITDA. Moving to the cash flow statement on Slide 14. In 2019, we generated cash of 1,000,000. The cash balance we showed at the end of the year did include 1,000,000 of cash that belonged to the EBT 12 that has subsequently been distributed. We drew 1,000,000 of acquisition facilities during the year. We also advanced 1,000,000 just prior to the year end, which secured us exclusivity on the NESF transaction. That will be settled as part of the purchase consideration. 2019 we paid dividends amounting to 1,000,000. The final dividend of per share, which we are proposing for this year, will amount to a payment 1,000,000 in July of this year. Moving to Slide 15. I wanted to give a little bit more color around the cash conversion and the reconciliation from the reported cash conversion to the underlying cash conversion. Principally in 2019, this has to do with the 2 acquisitions we've made in the year. Firstly, Executive Partners is a business whereby Much flight JTC, they have a significant amount of annual invoices that are raised in the first month or 2 of the year and are collected in the first quarter. This was done by executives last year, and this was done before GTC's ownership. Effectively, we had 9 months worth of revenue, but the cash had already been clipped to buy executive and taken into account in that acquisition. The impact of that will not be continuing in future year because JTC will obviously collect and keep the cash, which we have done this year. With regard to our fiscal, we acquired that business in 2019 and we recorded revenue in 2019. However, the cash associated with that revenue was collected in early 2020, and that was in line with the acquisition agreement and the customer billing arrangements. Again, like executive, that will not be repeated going forward. So there will be no bridge from the reported to the underlying for the cash conversion going forward. The final slide in this section is Slide 16, where we look at net debt. As can be seen from the chart, the net debt level for GTC fell slightly from 2018 to 2019. The leverage target we set ourselves is 2 times underlying EBITDA. And we maintain that target going forward. Our bank covenants at the end of 2019 was 3.5 times pro form a underlying EBITDA. Our test changed to 3.25 times at the end of March, and we'll move down to three times at the end of March 2021. The two deals that we've announced post year end, the SAN private client business, that will bring us $5,300,000 of revenue, and we expect at least $2,000,000 of EBITDA. We will finance that with our existing facilities. That will be an all cash deal. NASF on the other hand is an all share deal. There will be no additional cash outlay and we anticipate an EBITDA contribution of $3,200,000 from that business this year. And the finance section covered I'll pass back to Nigel note. Thank you. Thank you, Martin. Now I'll take you through the business review for 2019. Including the methodology we bring in considering acquisitions and incorporating a review of the latest 2 of these NES Financial in the U. S, and some private client services in Jersey. Finally, I'll elaborate on resilience of the business and how it can spread in the face of COVID-nineteen. And finish with a view of the 2020 outlook. If you can turn to Slide 18 and the group overview. Of interest at group level is a shift in the balance of revenue received by each division with private client services or trust company business, as I prefer to call it, having a slightly larger proportion of revenue than in 2018. It was also more profitable than institutional client services in 2019. The first time since we reorganized into a 2 division business 5 year ago. The service line revenue split has been recast and now demonstrates the funds, corporate and private wealth related services more accurately with 70% of our services relating to fund and corporate services. As a group, we remain fully committed to both the institutional and private client markets, and we're very comfortable with how we are positioned in each. With our aim to be a significant business and a lender in both the fund and trust company disciplines. On the top right hand side of the slide, we identify why this is and we can return to this in the Q and A session of interest. During the rest of this year, we'll focus on dealing with the challenges and opportunities presented by COVID-nineteen. Integrating the NESF and some businesses and capitalizing on the wider opportunities they bring. We'll also keep an active eye out for any other potential acquisition targets and place real emphasis on technological development to deliver both efficiencies across the group and improve the client experience and interface. So now on to Slide 19, and institutional client services. As Martin said, we see good top line growth of 26.4 percent to 1000000 and an increase in profitability of 25.2 percent to 1000000. As you also said, our underlying EBITDA margin was a slight disappointment having reduced by 0.3 of a percentage point over the year. Which is an area of focus which should benefit from some of the process and technological changes we are introducing incrementally. And will and which will be accelerated by the NESF acquisition. Division recording an increase of 48% in new business wins by value and as a pipeline of GBP 20,000,000 at the end of the first quarter of 2020. In general, we should decide the mandate through a landing becoming greater and with the type of outsource service required, no longer limited to litigation of 3rd party fund administration only. On Slide 20, we can see that the private client service and condition has had an excellent year with revenue up to 44,500,000 an increase of 31.2 percent and profitability up 40.3 percent to 16,100,000 at an excellent margin of 36.1 percent, 2.3 percentage point rise over the year. A 2 have achieved a record year for new business wins of 1,000,000, an increase of 62% In particular, the vision number of clients, which annualized fees are greater than 100,000 have increased from 36 at the beginning of 2019 to over 60 today with an average annualized fee across these clients of GBP 215,000. This is indicative of the emphasis we have placed on family and private office services over the past 2 years, culminating in the prestigious and important step large Trust Company of the Year Award in 2019, and the Technology And Innovation Awards received in the year for our proprietary Edge consolidation platform. The nervous business integrated seamlessly in 2019, and we have the capacity expertise and capability to make make a success of the recently announced Saum acquisition, where we anticipate the delivery of similar margins to the rest of the division. So we now feel that every respect that we are clearly acknowledged as one of the market leaders in the global trust company industry. Could you turn to Slide 21 now, which moves us onto group acquisition strategy? Chasey's now completed 18 deals since our 1st in 2010. The amount of potential acquisitions we have presented with on an annual basis is still running at over 50 with 20 to 25 active at any one time as the industry continues to consolidate. We take a very disciplined approach to the process, have a preference for taking our time and getting to know in the market for each. Incumbent management and their motivation to sell. The key is knowing when to say no. To achieve this, we apply core acquisition criteria for the group, which takes account of a number of factors including what are our current strengths and weaknesses of the business and where are we focusing our efforts in the near term? A jurisdictional strength index provides us a rating of the relative strengths and weaknesses that JTC has in any given jurisdiction. Measured in terms of scale, financial performance, maturity, management capability and stability. Combined with a view of the overall market attractiveness or desirability for the jurisdiction concerned. This analysis scheduled our core acquisition criteria, which includes subsidized scale, bringing new territory, strengthening our offering, or provide cross selling or cost synergy opportunities or help to educate our current and medium term focus. Was remaining nimble and opportunistic at all times. Since early 2019 and over the past 12 to 18 months, This has been primarily to look for alternative assets administration businesses for our ICS division. Are newly located in the United States and or Luxembourg. We acquired Executive Partners in Luxembourg in the first quarter of 2019, and followed us up with the important and recently announced acquisition of NES Financial in the United States. We've been aware of NES Financial and been in regular contact with them since early 2019. And we had had conversations initially about establishing a strategic working relationship. As a result, we had the opportunity to understand the team the culture and the businesses' capabilities. And it became clear towards the end of the year that we should consider focusing on an acquisition of NESF although it was a complicated process. The acquisition itself has a number of benefits for the group. Creates our platform, fund services, institutional practice for the United States. It opens up a new market strengthens our offering and it brings market leading fund technology capabilities from an experience management team based on the East And West Coast of the United States. In addition, we can see extensive cross selling opportunities given our shared real estate focus and technology capabilities, which we can leverage across the group. Some acquisition is more opportunistic, It is an accretive deal, relatively easy to execute, bringing more strength to the Jersey practice and some excellent clients and providing some cost synergies. So if we can turn our attention now to Slide 22 and our business resilience. The outlook for 2020 is of course now colored for all of us by the COVID-nineteen pandemic. The duration and the short medium and long term effect that it will have on the world economy remains difficult to predict. More pertinent for today is for me to demonstrate what we believe the knock on effect may be on JTC and its business community. I mentioned earlier in the future of the business that make us resilient and robust and how this positions us to deal with the macro market challenges as they arise. Our well invested global platform was put to the test from the outset of the pandemic with emphasis on the safety and security of our team. And stakeholders, including advisors, clients and shareholders. Today, we have all 900 plus staff with a facility for remote working to support self isolation and social distancing, whilst ensuring that data protection and client confidentiality is maintained at full service levels. Engagement with the teams was absolute and a great validation of them as individuals with the behaviors underpinned by our ownership form model. We have an experienced and stable senior management team at JTC. And in my 2019 year in the business, and have been imposed during some seismic changes, including 911, 2001, and the financial crisis of 2007, 2008. On analysis, our audit results for the 3 years following these events, we've seen revenue and profits grow by 30% 35%, respectively, in 2001 to 2003 and 58% and just short of 100% in 2007 to 2009. We do accept that this is a different type of world crisis and we were a smaller business at those times, but our observations were consistent The clients will typically require even greater attention in times of significant change, requesting more assistance to organize or reorganize their businesses all personal assets. We are already receiving feedback from the teams that this trend is once again a feature this time around. So we should expect more work from existing clients and extension to existing mandates with the assets being held for longer to be realized in better times and a possible slowdown in new mandates in the short to medium term. Experience and understanding the likely fallout also allows us to take a proactive approach to seeing issues before they arise and provide the ability to assist our clients defensively or opportunistically in what will follow. Looking to add value to these relationships at all times. From a financial perspective, we remain a cash generative business with a strong balance sheet, operating well within our tech covenants and with facility headroom. As you've heard, we look to stay at around a 2 time net debt ratio and will be our intention to remain in this range. Our revenue is recurring, By nature, particularly, we retained 98% year on year. This is topped up annually at a rate of 8% to 10% by net organic growth than average life span of 10 years and will further and with further growth added by acquisitions. This ensures that the book is constantly and naturally increasing in size by refreshing the vintage, introducing new relationships and negating the relatively low attrition rates. JTC's income, 85% is derived from fixed and activity fees based on a time spent basis. An analysis of the 15 percent of income linked to the value of underlying assets or AUM suggests that we will see a neutral effect due to the fixed element of minimum fees and the opportunity to render out of scope fees in special circumstances. Our cash conversion is typically 85% to 90% and we are well diversified with 2 growing successful fee earning divisions. Both of which are acknowledged as experts in their chosen disciplines where we operate in 20 countries and access to several markets. Our top 10 clients group wide account for 12.25 percent of revenue with no one client at more than 3%. Demonstration and resilience in the book to a negative effect suffered by any single client losses? Ultimately, we believe the defensive feature of the business mean we are resilient, experienced, diversified, prepared, and in control of what we can influence. But not in the slightest complacent as to the full effect of the pandemic. So finally, on to our key takeaways on Slide 23. So to wrap up 2019, we experienced excellent revenue and profit growth with record new business wins in both divisions and a private client services division having a particularly successful year. We performed within guidance in terms of margin improvement and net okay growth. In addition, we have improved the business in terms of talent premises and with a relatively quiet time for M And A and 1 acquisition and 2 small bolt on and our unique approach to shared ownership received recognition from Harvard Business School as part of their MBA program. Looking forward to 2020, we will have to acknowledge that we are living in unprecedented times and remain in the eye of the storm of the pandemic. As a consequence, forecasting the effect of this globally, locally or for JTC and its business community remains difficult. That said, the reasons we've presented, we do believe we have a very robust and defensive business, which should in relative terms be protected from the worst. As a result, we have not adjusted our target expectations. We'll continue to drive improvements in our jurisdiction, capitalize on recent M and A activity whilst remaining aware of other potential targets that may arise. So thank you for listening and for your ongoing support.