Earnings Call: H1 2019

Sep 17, 2019

So good morning, everybody. Welcome to the presentation of JT's Plc's interim results for the period ended 30th June 2019. For those of you, we have met previously, our Nigel Lieutenant CEO of the group, presenting me today is Martin Fotheringham, our group CFO, also here as David Viera, our Chief Communications Officer. Over the next 30 minutes or so, we'll take a quick look at the CEO highlights before I pass on to Martin to pick up a more detailed financial review. I will then take you through a deeper business review for the first half and our plan for the rest of the year. I could ask you to hold your questions until the end of the presentation. Where we have time set aside to answer any that you may have. So turning to the next slide and to summarize my quote, We are pleased with our results for the half year as anticipated our momentum from 2018 carrying forward into this year. Both of our divisions are contributing and performing well. We've continued to look for acquisition growth opportunities and are pleased with the first quarter acquisition of executive partners in Luxembourg, and we feel the business is in good shape through to the end of the year and beyond. As always, I'd like to thank our team for their ongoing dedication and support. And if we could just move on to Slide 5, Chick Tea has been around for over 30 years, but we are relatively new business to the listed environment. There are a number of fundamental pillars upon which the group has been built, which I feel worth reiterating in terms of stability, consistency and robust nature of the business. These include our having a 31 year history of successful revenue and profit growth, well established scalable global platform, supporting both acquisitional and organic growth, an experienced and entrepreneurial management team a proven track record and significant stake in the business. And most importantly, every staff member has ownership in the company. The question for us each year at JTC is not whether we will grow, it is by how much. Turning to the half year highlights, I wrapped up my presentation of the 2018 results in April, suggesting that we will, we were well placed to deliver more of the same in 2019. And it's precisely what we have seen, and we expect it to carry through to the year end. Taking each of the first half highlights in turn, It's delivered on the expectation of net organic growth in the 8% to 10% range at 8.2%. That's 13.8% growth. Our EBITDA margin expectation was in the range of 30% to 35% and this has been delivered at 30.6%. Importantly, as I mentioned before, both divisions have contributed positively. We've acquired executive partners in Luxembourg which we see as a vital acquisition adding strength to the existing team in a very important jurisdiction. Steady investment and the platform has featured greater emphasis on technology this year with upgrades to our workflow capabilities including the incorporation of AI intergroup processes, leading to improvements in commercial and operational efficiencies, with, for example, the introduction of an automated billing system and a global onboarding team and process. The role of the Chief Commercial Officer and the Commercial team was established in April. And as expected, we are seeing opportunities to material and consistent improvements in the commercial performance of the group with tangible results beginning to filter through. All of the above delivered by evolution and progressively through prudent and experienced management, whether a significant impact on the operational delivery or the margin of the group as a whole. Looking forward, and as I've mentioned, we feel in general terms to be in good shape through to the year end and into 2020. So onto the period on period CEO highlights, where we have seen revenues increased by 32% to 46,600,000 underlying EBITDA growth of 35.2 percent to 14,300,000 an improvement in the EBITDA margin from 29.9 percent to 30.6 percent. Our annualized new business wins in the first half are up 22.9 percent to 5,900,000 and our organic new business pipeline is 22.2 percent higher at 33,100,000. And incidentally, we've had an excellent 3rd quarter with a further 6,000,000 of new business landed already. Finally, onto the dividend, we aim to distribute 25 percent of our profits as dividends year on year. On a 1 third, 2 third basis. And as a result, we declared an interim dividend of £1..7 per share, which will be paid on the 25th October. I'll now pass over to Martin for the financial review. Thank you, Nigel. I guess the highlights for me for the first half of the year has been very good revenue growth. The margin has improved period on period. I think our philosophy we've always said is that we will grow steadily sustainably. We won't chase every dollar to increase every pound of margin we're building as we always have done a business for the long term. I will apologize now for the impact of IFRS Dean and trying to, understand the accounts, but in the next couple of pages, hopefully, we can try and just get to what the true underlying performance is so that you can see that. If you look at, slide 9 with the group income statement there, I think the highlights from that, as I've already said, revenue growth, 32%. The net organic growth, which we'll look at in the following slide, it's 8.2%. The underlying EBITDA margin improved to 30.6%. I'm pleased that, this period, the non underlying costs are significantly down from the same period last year. You'll recall last year, in half 1, we had the IPO costs. We also had the 1 off EBT capital distribution costs that ran through the P and L, which created quite a lot of noise, none of that through this year. So it's a much easier story to get down to the underlying trading. IFRS 16, and this is the detail of that is included in Note 3 on this, on this slide. The impact of that is that the EBITDA reported is 1,700,000 higher period on period. However, depreciation is $1,600,000 higher. And ultimately, the total impact on PBT is $300, adverse. From an EPS perspective, we are the adjusted underlying basic EPS is 7.82p, an improvement on H1 last year. And as Nigel has said, a dividend of 1.7 pence is decoyed. If we turn to Page 10, we have here the revenue bridge, which we've looked at in previous periods as well in exactly the same format. And what we can see is that the The attrition in the period is, 3,300,000, which is 5.6%. That is lower than we've seen in previous periods. And, you know, we're very pleased with that. What that means is that if we take the start, if we take the, the revenue brought forward, 99% of that has been retained going forward. From a net new organic LTM revenue basis, we have 8,100,000 in the period, which compares to 9,900,000 for the pre for the 12 months as at the end of December 2018. Figures down and a little bit disappointing. I think when we've met with you before, we've we've always said that where we think that we're potentially leaving a bit of value on the table is in the existing clients. And the CCO role that Nigel referred to is going to be really important to picking up that additional revenue, we started to see a little bit of that already. But I think there's an awful lot more to go for. And typically, we would expect to see existing clients that figure being higher than the new clients. But also quite to in Q3, we're still got 2 weeks to go in Q3. And as Nigel said, we've had a very strong, amount of new business wins. And already in that, in this quarter, We've had a higher new business wins than we did in the first half of the year. It's been the best quarter we've ever had. So that augurs extremely well, for the organic growth going forward. If we move to Slide 11, the adjusted underlying EBITDA. The EBITDA has improved in period on period from 29.9to30.6. Within the two divisions, and this is the first time that we've been able to show this because we've got comparable properly comparable data, you'll see that ICS has improved by 2.6% and PCS has come back by 2%. The ICS improvement frankly, I think 9 to 9 would say that we're a little bit disappointed. We think there's more to go out there. We continue to invest in in people and processes and in our back office in South Africa, but I think we feel that there's still opportunities there to improve the processes in to make that tighter. And we'll we continue to look at the options we have, around that. On the PCS side, we had a very strong margin in the first half of last year. And at that time, we said that we felt that the right thing to do for the business was to invest some of that for future growth. So we've done that and we've invested in people, particularly around the business development and the growth side. And what that's done, of course, is taken a little bit off the margin and it brought our efficiency back a bit, but we believe that we're starting to see the benefit of that coming through in the new business wins. The quarter 3 new business wins It's not just institutional. It's private client as well. We've got we've got a really good, momentum behind us there. So I believe that there's opportunities within ICS to improve the profitability, and that's something that we're going to be working on hard and continue to focus on. The indirect costs have increased by 2,600,000 period on period and half of that is to do with acquisitions. The remainder is the ongoing investment into the business and into the infrastructure. If I move to the balance sheet on slide 12, there's not too much that I would, report here, say for saying that clearly, there's been an increase in goodwill and other intangibles as a result of the acquisition of executive partners. Mirrored on the liability side by an increase in loans and borrowings. I'm pleased to say no impairment of goodwill all of the acquisitions that we've made continues to perform in line with expectations. Been really pleased to see, an a significant improvement in net investment days in the period. It's Nigel referred to already, we we've improved our billing process, particularly in the private client part of the business. And what that's meant is that we've been able to get a lot of invoices out within 1 or 2 days without previously taking us some months to do. And what that's meant is, of course, that we've accelerated cash collection in see the benefits of that through the cash conversion. Clearly, IFRS 16 also has an impact on the balance sheet and you see a corresponding increase in property, plant and equipment and other financial liabilities. With regard to cash flow on Slide 13, the key headline for us in the period is cash conversion is 101%. That significantly improved from this time last year where we were 56%. But you would recall at that time that I explained that this was, a legacy of the Bank of America acquisition that we made whereby we were billing 6 monthly in arrears and then it was a 3 month collection period That has all now worked its way through the numbers. We're now on apples for apples in terms of, cash collection. Our guidance on long term cash collection is 85 to 90%. I still believe that's the right number. And I expect in the second half of the year that the 100% will come back towards the top end of that range. I would still be hopeful that we will be better than slightly this year. Based on improving the, the process, but 85 to 90 is still a very good number to be, to be focusing on. Please bear in mind that the cash balance shown does include 2,700,000 of EBT cash that isn't JTCs, but because of the, the need to consolidate that through our accounts. We have to show it within our cash balance. If you turn to slide 14 in terms of the, cash conversion and net debt, the top graph there shows you the historic cash conversion, adjusted cash conversion, sitting comfortably in that 85% to 90%. We've had a very good period, in H1, as I say, I expect that to come back in the second half of the year. And from a net debt perspective, we've always guided that we will sit between 1a half and 2 times on a pro form a basis. That continues to be our guidance. We will look at opportunities. That may take us above that if we believe that it's the right thing for financing that deal and it's the right thing for the business. So we're not hide bound to stick it to we will consider going up to say 2.5 times, but on a normal ongoing basis, 1.5 to 2 is where we expect to be. I'll hand back now to Nigel. And if there are any questions, I'm very happy to take those at the end. Thank you, Martin. Now for the deeper dive into the business. And a quick reminder, our dual growth strategy revolves around consistent organic growth year on year, complemented by growth from acquisition. Our organic growth is driven by the performance of our 2 fee earning divisions, which is institutional client services and private client services. So over the next few pages, we'll review their respective performance in the first half and take a look forward to the year end in each case. But I'll start the review at group level, which encapsulates the collective performance of the 2 divisions combined with the efforts of the group head office and operations. So on the left hand side of the slide, you'll see our group revenue growth and EBITDA performance, with the contribution to each broken down by division. It's worth noting that both of them have once again performed successfully in their own right. As I've said before, JPC remains committed to both markets and remain comfortable with how we're positioned in each. We've also included the latest split between our 3 service lines, which continue to indicate the preference of funding corporate services over pure private wealth on a 2 third, 1 third basis. I'll discuss some of the macro market characteristics later on, but in general terms, the landscape remains largely unchanged, with business consolidation continuing the industry, and with the key drivers remaining strong for both our divisions and all three service lines. Notwithstanding some of the current uncertainty in the global land gate, we believe we are well placed geographically and commercially to capitalize on greater complexity, regulation and additional compliance burden that will inevitably follow. We continue to see acquisition opportunities for further consolidation across both divisions the environment becomes more competitive for smaller participants whilst remaining largely fragmented. During the first half, we considered over 30 deals of different types and sizes, but have maintained our discipline of ensuring the business gives us more I. E. The 2+2 equals 5 approach. Given the amount of opportunities that there are in the market, have honed our immediate search primarily to institutional businesses in locations where we know there are significant growth opportunities. As a result, we have concentrated our efforts on seeking out a meaningful institutional acquisition in the United States, where we have made good progress. We've also targeted our searched criteria to jurisdictions where we already have a presence that can see an opportunity for growth and make a material improvement to our current offering as demonstrated by the executive deal. One feature of 2019 and most likely beyond has and will be our greater emphasis on technological development, both in terms of the group infrastructure and the client experience. This has and will be delivered by further development of our established technologies combined with greater penetration of our workflow capabilities and incorporating use of AI. To be clear, we see this as an evolution. It will be introduced progressively and will deliver improvement We do not, however, anticipate a step cost change, the degree this would adversely affect group margins. This is merely a change of focus and emphasis. Looking forward, as I've mentioned earlier, we anticipate delivery on both our net organic growth target and our EBITDA margin. We'll anticipate an acquisition for the Institutional Division. We'll complete moves to new landmark offices in the key locations of London and Amsterdam, And finally, in July, we were delighted to welcome our Group Chief Operations Officer Wendy Holly to the Plc Board. Wendy has been with the group for 12 years and played the pivotal role in the progressive development of our operational platform and the integration of our acquisitions. As well as being a leading advocate for our shared ownership culture. And now turning to our division, starting with institutional client services. This division has continued to perform well period on period with a 20 27.6 percent increase in gross revenue to 25,400,000 and a 41% increase in adjusted EBITDA to 7,100,000. Revenue growth was once again strong for the division with continued focus in the alternative asset classes. From organic growth perspective, the annualized value of new business wins was up to $3,200,000 with new business wins sorry, new business pipeline, up 9 percent to $22,100,000. What has been particularly pleasing is the new business wins in the third quarter. Where we have, which has been particularly strong at approximately £4,500,000, a feature of which the general size of the mandates trending towards larger engagements. Ultimately, we are pleased to see that the investment made in the industrialization of our business development and marketing team function in Institutional over the past 12 to 18 months coming to fruition. Turning to the market characteristics. We see continued demand for alternative asset classes due to the low return environment. Coupled with an increasing trend to outsourcing services and of late, a degree to which managers are prepared to do so, with more middle and back office functions being added to the outsourced proposition. So not just fund administration. The key is as we see it is to demonstrate subject matter expertise in the areas of complex regulation, where the high cost of potential failure is a driver to outsource, together with the deployment of appropriate technology to meet their reporting requirements. From a jurisdictional perspective, we see the USA as a key market, where there is a greater opportunity for outsourcing with market penetration estimated at 30% of the addressable market when compared with Europe and closer to 70. These together with potential winners from Brexit and other regulatory factors, which would include Luxembourg and potentially Ireland. You can also see the need for greater substance and jurisdiction for existing clients led by the Bets OECD initiative driving greater demand for wider assistance and creating opportunity for greater share of wallet. Turning to the H1 highlights. John Jennings has settled in seamlessly the position vacated by Tony Whitney's move to Chief Commercial Officer. We've continued to see our margin improvement, seek out margin improvements in the division and to take advantage of the talent and capability a global service center in Cape Town, South Africa. And we anticipate an uptick in the margin from H1 into H2 capitalizing on some of the investment in technology, new workflows and processes. We've had the additional executive partners in Luxembourg and this combined with the upgrade in the Netherlands led by Van Doorn, the addition of the lift out of the Fisko and Oaktree And the move to new premises, these are the Benningtonlux region in a much stronger position than 80 months ago with over 100 staff in the region. There's also been new senior hires bringing additional technical expertise coupled with business development capabilities in both London and Luxembourg. Strengthening our offering in both. So turning to the second half, we've got great momentum from these new business wins in the third quarter. We have an expectation of an acquisition in this half of the year. We complete the move into new premises in London and Amsterdam and we see operational improvement from refinement of process and use of technology. So Sean said there in his quote He is reason to be pleased with his 1st 6 months in the role. And let's move to the Private Client Services division. PCF continues to be a great story for JTC, with period on period revenue up 37.7 percent, standing at $21,200,000 and the adjusted EBITDA up by 30 percent to 7,200,000. This performance is particularly pleasing given that we have always believed in the potential and longstanding value embedded within this part of the business. As anticipated and highlighted previously, the margin did decrease to 33.9%, while remaining well within our range. As investments made in senior management, particularly the business development team, in function and organization, together with the investment in the recently launched private office offering. We've seen significant revenue growth as a result of the acquisition of Minerva and the investment I have just alluded to. And it helped to deliver new business wins of $2,700,000 in the first half, which is an increase of 58.8% period on period with an improved business pipeline of GBP 11,000,000 against GBP 5,600,000 in the equivalent period last year. Private Client Services has also had an excellent third quarter with around 1,500,000 of new business wins. From market perspective, globalization trends and increasing global wealth provide positive structural tailwinds. Total Kyn assets estimated to rise threefold over 20 years to $345,000,000,000,000 by 2025. This coupled with a desire to be compliant across the world in an era of politicized regulatory change, together with a better understanding of the need for succession planning generally and across borders. Further consolidation by acquisition also features as the ability to provide a global offering to an internationally mobile families becomes more important. We also need to provide expert advice delivered with consolidated and value added reporting available on a mobile platform is key. And this led to our development of our award winning edge platform and private office offering, which continues to gain traction. In the first half, the division has benefited from the operational efficiencies that Martin alluded to in the period including the introduction of automated billing processes, which would significantly improve cash conversion and debt cycle and investment in process and automation seat to our clients on boarding. For the introduction of Michael Halsey as MD, we have seen improvements in the Cayman Islands and Caribbean region, which will include a move in the second half to new prestigious offices. Our strong new business pipeline is driven by the reputation of the experience team in a consolidating market, which has been particularly good in the Channel Islands. In the second half, we expect further traction in the private office value offering, with the addition of Natalia Spells to head up the business line from Geneva and the addition of another senior director based in Monaco and supported by a new Managing Director for Private Client Services in New York. And so on to our key takeaways. In the first half, we have delivered net organic growth of 8.2% and a margin of 30.6% with an expectations. We've acquired a great business in the important jurisdiction of Luxembourg. We've established a commercial department and already identifying low hanging fruit opportunities. We have placed emphasis on technological development and will continue to do so. So second half, we expect to deliver on growth and margin expectations, to make an acquisition for the Institutional Division, the most likely in the United States. I think we're going to have a stronger and best ever half year new business, and that technological emphasis will continue through. So ultimately, we expect progressive strong delivery through to the end of 2019 on a no surprises basis.