Earnings Call: H2 2018

Apr 3, 2019

Good morning, everybody, and welcome to presentation JTC Plc's first annual results for the year ended 31st December 2018. Those of you I haven't met previously, I'm Nigel LaCaine, CEO of the group, and presenting with me today is Martin on my right, who's our Chief Financial Officer. We're also joined by David here, who's our Chief Communications Officer and has responsibility for Investor Relations. After an introduction and a brief look at the CEO highlights, I'll pass on to Martin to pick up the financial review. I'll take you through a deeper business review summary and outlook slides. Good morning, Dave. But quick starting quickly with a quote from the RNS and to paraphrase that longer quote, Very pleased with our 2018 results with good contributions from both of our divisions and we have a positive outlook for 2019. So you'll recall, like, at the interim, there's a natural impeters of JTC HingeED Offer history of constant revenue and profit growth in our 1st 30 years, creating an environment to expect progress year on year. The only question being, not whether we will grow, but by how much. This together with a 2 pronged growth strategy by way of organic growth and growth by acquisition, delivered on a scalable platform for supporting delivery in both. This drives momentum for new business flows, opportunities for acquisitions, and appropriate investment in people and infrastructure. All of which is underpinned by ownership for all where every staff member mistaken the business, creating a true differentiator to JTC. And that all adds up to strong, sustainable and consistent results. So let's turn to 2018 and take a look at how this played out in our first full year results, the PLC. Key message I'd like you to take away from Zedge. We've been very pleased with 2018 and taking some of those highlights, sorry, David, back of Zai. Fun. Taking some of those highlights, obviously the listing of the business was a huge and historic event for the group and testament to 30 years of hard work. Our 31st year was again a successful one with 2018 arguably in actual terms, our best year ever, with profits almost doubling on a pro form a basis when the full year effect of the acquisitions of 20172018 are factored in. Most pleasingly, we had indicated a return to an EBITDA margin of around 30%, which was achieved. We've added significantly to our group capability in terms of talent geographies and services. And we have successfully delivered our ownership for all program into the listed environment, organizing ourselves to ensure that the concept of shared ownership continues in the PLC world. Taking each of our business growth drivers in turn, we have delivered 17.6% of growth or 8.7 percent of net organic growth, if you'd prefer. We've completed 2 deals. Vandon and Minerva since IPO in 3rd late last month, the very recent announcement of the executive transaction in Luxembourg. Fully integrated the businesses acquired in 2017. We are pleased with the progress made in integrating those made in 2018, and we're looking forward to starting the process with the executive team this year. We're seeing very strong new business flows, particularly in the second half of twenty eighteen, the pipeline up 25% year on year. As well as the executive transaction in Luxembourg, We continue to have a very strong pipeline of new acquisition opportunities with more activity possible perhaps in the second half of this year. And we have made a number of senior hires and launched our Lion Leadership Program designed to ensure we create our own future leaders and allow ongoing development of the business by evolution. This cost all underpinned by all employees being owners of the business. And I have to say having shared our recent group off-site, I've never been happier with the quality and the depth of the team and the palpable enthusiasm to succeed in 2019 and beyond. So simply put, we did what we said we would do in 2018 and quite a bit more. So on to the results. This will manifest itself in revenue growth of 29.3 percent from 2017 to 2018, from 59,800,000 to 77.3 sterling. An underlying EBITDA growth of GBP 9,400,000 year on year from $14,400,000 to $23,800,000, rise of over 60% and underlying EBITDA margin improvement from 24.1 percent to 30.9 percent year on year, which is a great effort and sets a benchmark for us this year. And with annualized new business wins of $9,700,000 in 20.18, pipeline of $32,000,000 and $2,700,000 of which is 1 pending on boarding. And as indicated previously, we are proposing to pay a final dividend 2p per share, taking the total dividend for the 9 to 10 month period to 3p. I'll now pass to Martin for the financial review. Thank you, Nigel. Good morning, everyone. Slide 8 is the check that you have. There is a clear really to summarize after anything in 4 figures. Very pleased with the EBITDA margin improvement that was primarily aiming for us as a business this year. And to recover that to over 30%. With the organic growth, you will see that it strengthened in the second half of the year. The cash conversion for the full year has been strong. It was a little bit hard to hear when we explained that, and I'm pleased to see that, as we guided that from us. At 4 point, we're ahead of consensus. Of the six slides have followed the, there's a degree of granularity about it. There's some that can't in terms of the reporting that we did at half year. And hopefully that will help you understand more The do think the statement is sent out on page 9 and I'm conscious that this year's results again, our 1st year of post IPO, there's quite a lot of noise in the figures with IPO costs and EBT distribution etcetera. So what we've done here is identify the non underlying items so that we can have a good view of looking underlying business looks like. As Nigel's mentioned, we had revenue growth of 29.3 percent in the year, which is split 8.7 percent Organic and $20,600,000 was from the acquisition. We did incur $18,600,000 of non underlying costs, which are and set out in note 1 just below the table. The biggest part of that being the EBT capital distribution. The margin returns to roughly 30%. The full year was 30.9%. If you recall, this year, we were at 29.9%. One of the features of being a PLC is that you carry costs every year as being a PLC and we estimate there are approximately GBP 1,000,000 of ongoing costs that are through the underlying cost of the business and will repeat year on year. Just to be clear, that's separate to the 1,000,000 that was incurred as 1 off IPO costs. We set out the underlying adjusted diluted EPS here at 18.4p. Which compares favorably with 2017 of 13.8. There's a detailed explanation of that in the RNS and in the annual report. It seeks to make the probability with the EPS with what the analysts you guys and your teams have been setting targets. As Nigel has mentioned, dividend proposed as per share, and that's in line with forecast. Turning with page and going into a bit more detail on the revenue bridge. You will recall that at half year, we provided a revenue bridge and we split the revenue build up into electrician and group within electrician, we identified it as being regretted and non regulated And that led to quite a lot of discussion and questions about, well, what's regretted and what's not regretted. And we took it we took it that away and decided that in fact we needed to get greater clarity on that. And what we did was that we we went back through the attrition and we identified it into 3 distinct buckets. The biggest bucket is where a structure or a trust or a client, the service you're giving them comes to end of life. And that comprises GBP 4,000,000 of GBP 5,000,000 worth of the attrition that we saw in our backlog. There's 2 other main buckets, one where the client group service provider, and that can be because of service issues. It could be because of pricing. It could be because of, you're unable to provide them with, within the jurisdictional cover that they require. The other part of the attrition comes from JTC deciding that we want to exit the client because our clients does it meet our risk criteria or, we have an issue with them in terms of them paying appropriate fees for the work that we're doing. If you take the non end device revenue, and you take the proportion of revenue drop forward, you can see that 98 point percent of revenue repeats, so it occurs from that cohort of clients on an annual basis. With regard to New York 1, $9,900,000 went through the numbers this year, which $5,500,000 came from existing client relationships and $4,400,000 was from new clients. $13,000,000 of revenue came from acquisitions and there's a small table, the other breaks down, how that breaks down by each acquisition. As Nigel was mentioned, the new business pipeline is strong at the end of 2018 and it continues to grow in 2019. We're particularly pleased that 2 of the acquisitions that we acquired in 2018, Minerva and Vandorvo, we both see good cross selling opportunities And those cross selling opportunities weren't factored into our valuations of those businesses when we acquired them. With Minerva, they have a very strong treasury team that generates significant treasury income. And we believe that applying back to you to our booting the rest of the business at JTC, there's a potential somewhere between 2 $50,500,000 worth of additional revenue. Vandorra and Interesting business, they are incredibly dynamic of individuals and run that with a great team behind them. Their corporate services business, which typically fits within our ICS practice. They've been part of JTC for 6 months and already in that time, they've identified or referred and we've won a private client a private client mandate, it's worth £260,000 a year. That's a great cross sell and we can get that type of the following slide is rate down this is a number of deadweight from the half year on the underlying EBITDA bridge, basically going to 14,400,000 to 23.8 13.7 of the improvement came across margin level, which was broadly split between the PCS division and ICS division. The ICS division in fact, slightly better on the efficiency, which is a reflection of the improvement that comes through from using the global service center in South Africa. I think it's fair to say that we anticipate there'll be more improvement to come there. The private client business did a great job on rightsizing the business, taking into account the Panel acquisition. Did that very early in the year. And in the latter half of the year, it really turned their attention to building resource and the team from a business development perspective and we've seen some good traction on that in terms of the pipeline. With regard to balance sheet and working capital, we'll summarize, balance sheet on page 12. What pointing out that the EBT is consolidated into the 2018 results. And as I reported, at half what that means is that JTC is sticking with cash in its accounts that it doesn't actually own. So you should disregard 6,100,000 of cash out of the $32,500,000. The capital structure that was in place pre IPO is obviously all nared out. So the investment bond notes and the pre IPO debt has been cleared out. And we have a facility now where we have facilities up to $100,000,000, taking into account the existing partners transaction, we are just under $90,000,000 drawn on that. I will talk about leverage and debt later on. At the year end, we had deferred consideration of GBP 8,200,000. Of that, since the year end GBP 5,500,000 is due to the Grand Dawn teams in fully met their air rights. 1,000,000 of new facilities in the United States is a final installment of their air rights. Majority of the balance that's left is for the Norco, which is GBP 2,000,000 and that will be paid in the next 3 to 4 months. One other thing to bear in mind is that when the IPO took place GBP 15,500,000 approximately was realized in value for the EBT. And of that $2,600,000 of that was reinvested into JPS shares on behalf of the staff. And this is all part of ensuring that we everybody is at warner in the business. With regard to cash flow, Slide 13 sets out the summarize with some highlights. And I think the main thing I would like to draw attention to is the cash conversion. So it's moved from 56% at half year to 80% during the year. And that is a result of the Bank of America Merrill Lynch action whereby at half year, I explained that we only had 3 months' worth of revenue but 9 months' worth of sorry, 9 months' worth of revenue and 3 months' worth of cash. By the year end, we have 12 months worth of revenue and 9 months worth of cash, but there's still a small amount of unwinding to come there. The dividend in 3 dividend amounted to GBP 1,100,000, the final dividend over to GBP 1 2,000,000 items that we have in 2016. If you turn to Slide 14, it's the final one of the sections, but it's a little more detail on the cash progression. FX. And as I mentioned, with the year end, we had 80% cash conversion. If you look at the trend over the last 3 years, it's gone 91 580. If you adjust for the Bank of America situation, the figure would have been 89%. We've had very strong cash collection in the first quarter of the year as the cash is coming from that transaction in line with the billing arrangements that we have with BAML and your clients. And I would expect that going forward that we should be in the range of 85 90% on cash conversion every year. With regard to leverage at year end, we were at 1.9% just under two times 2018 EBITDA, which is a lower than 2017 under 5 equity structure, where we were three times and we did for that would be up closer to 4 times. Pro form a net debt, including executive partners, is at 2 times. And if we do no deals this year, later on this year, I anticipate we'll be somewhere around 1 point £2 net debt by the dealers. The target is a range of 1.5 to 2 types. However, if we identify a deal that we felt was worth pursuing and we could see a cash generation coming through consistent with the way our business runs, I think we'd be comfortable despite that. 2.5 times. That's the finance section for me. I'll go back to line to Greg. I'll provide a deeper dive into the business itself. As I said before, we've got this 2 pronged attack to growth, which is organic and by acquisition. We'll look at the performance of the 2 fee earning divisions in a little while, but start perhaps at group level with a view encapsulating collective performance and head office group initiatives. On the left hand side, we have the revenue growth, EBITDA, performance and business pipeline, which we talked about earlier. We shade them to reflect the relative performance of each division when viewed holistically. And what is worthy of notice both have been very successful in their own right. And that means JTC remains committed to both markets and are very comfortable with how we are positioned to take advantage of opportunities as they present themselves. Across both divisions and all three of our service lines. And whilst on the service lines, you can see there's now there's a preference for corporate, and fund services over private wealth, 68% to 32% think on a run rate basis, that's more like 70%, 30% for us with the Bank of America deal still slightly skewing. The numbers in relation because it was a pure private wealth deal. And our natural home is probably 75%, 25%. I'll pick up on the macro drivers separately in the divisions. Suffice to say here that market drivers across the sector remain strong, and a similar in each division to those highlighted on previous occasions. From a group perspective, as indicated earlier, the market will continue to consolidate as it remains fragmented. JC continues to have a significant amount of acquisition opportunities, as a destination of choice for many. On a more holistic basis, we are a global business and as a result is going to be well insulated from an helpful legislation for political headwinds with global clients, a diverse offering and an international footprint. There's a natural balance to the challenge and opportunities that come our way. Indeed, it'll be fair to say that often change is good for our industry. So we're well placed to capitalize on greater complexity, red tape and additional compliance in that inevitably feature. Our experience has also been that in the general downturn the business remains resilient. From a 2018 perspective, I've covered most of the bullets on the slide already. The one I think worthy of further elaboration is the enhancements to the senior group management talent, our wider offering and our geographical spread. We've added to the senior team significantly from internal promotions, hiring and by acquisition with a new Chief Risk Officer, head of the U. S. For Institutional Client Services and new country heads in the UK and the Netherlands. We've widened our services with the launch of the private office offering, and our new depository license in Luxembourg and have new offices in Dubai and Mauritius and have added scale in the Netherlands. As importantly, the mix of the senior team has widened our appeal in nascent markets in the Middle East, Indian Subcontinent And East Africa. From the 2019 outlook, I'll pick up on the new Chief Commercial Officer role designed to assist the group heads the commercial output of their respective divisions and allow them to capitalize on cross divisional opportunities, both top line and in cost controls. This position has been filled internally by Tony Whitney, with effect from the beginning of this month, who was formally the group divisional head. As the Instituteional division. This will allow us to capitalize on Tony's 20 plus years for the business and his work at various times in all three service lines and in both divisions. He is uniquely placed to fulfill the requirements of the role and add some proper value here. Time will be succeeded as group head of institutional by John Jennings, our co member of the UK, which will continue to manage as well and take global responsibility for the division. In addition, it'll be remissimally not to mention acquisitions, and we have spoken at length on our view, our approach as a group, in the past, including our history, strategy and pipeline. We currently find ourselves with several opportunities to lift outs of smaller teams or client books bolt ons and transformational deals. These are constantly monitored around our criteria and we complete on probably less than 5% of the opportunities that present themselves. So it's a case of really for us of what not to do. With our most recent activity, we are delighted to have acquired the executive business in Luxembourg, the Corporate Services business, with a very strong senior management team of 5 and a total staff of 28. And for JTC, the great new senior management team, increasing our bench strength enormously, but very culturally aligned business in a key jurisdiction, which gives us about eighty people there on the ground now. Turning to ICS It was a great year for the division. Key metric of margin improvement was hit and as Martin alluded to, we've got more to go from there. Particularly out of South Africa. The new business flows are strong and the team makeup is excellent. From a financials perspective, enjoyed revenue growth from 36,100,000 to 43.4, a 20.2% increase EBITDA growth from 8,100,000 dollars, $12,500,000, an increase of 54.3 percent and EBITDA margin improvement 6.3% year on year. The division had annualized new business wins of 6,000,000 at the end of the year, a pipeline of 22,200,000 dollars, $1,800,000 of which was 1 pending on boarding. From a market characteristics perspective, we continue to see global trends towards outsourcing and alternative assets. And indeed inside of the alternative asset sector itself and a preference for a multi service global provider with ideally one senior relationship point and consistency of delivery. On the 2018 highlights, I've little to add other than to mention the exemplary client testimonials received by the division during the course of our ambassador program. Underlying that, our commitment to client service excellence is as strong as ever. So on to the 2019 outlook. Tony's handing over the reins to John Jennings for the division in good shape. And we'll remain close enough to assist in the delivery of the 2019 objectives. Some acquisition activity may follow in the second half of the year. And in the U. S, our search for an institutional platform is still current, but we will not overpay unnecessary for a suboptimal business. As a result, we have some ideas of how best to achieve a US presence in the medium term. In 2019, we should expect a successful integration in Luxembourg with new impetus from the jurisdiction to match that of their colleagues in the Netherlands. And as alluded to, continued operational improvement from the Global Service Center in South Africa. Onto the Private Client Services division. This is a very good year for PCS with a as mentioned, significant margin improvement. The organic growth was tougher than in the institutional side of the business, but improved significantly with greater focus in the second half of the year and some investments in the business development team and the launch of our private office. Turning to the financials. We've got revenue growth from 23,700,000 to 33.9000000, 43% increase EBITDA rose from $6,300,000 to $11,300,000, a seventy 9% increase and EBITDA margin improvement was 6.9 percent year on year. The division's new business wins of 3,700,000 had a pipeline of 9,900,000 at the year end, $900,000, which was 1 pending on boarding. Market characteristics continued as before, ultrahighnetworth and highnetworth communities increasingly Internationally mobile and active in business with increased interest in alternatives. As an asset class and a need for the provision of a holistic service to stay ahead of regulatory complexity and global compliance as a priority. This couple of the need for wealth preservation and legitimate privacy remain key factors in the desire for a cross border coordinated services ideally from a single service provider in a manager of the manager's role. Whether of note from 2018, the excellent job rightsizing the Bank of America Global Trust Business that Martin alluded to, the launch of the private office, which I mentioned before, and as with institutional client services, excellent feedback from our ambassador program. Looking at 2019, we look to complete the Minerva integration, which was largely done, as I speak, developed the Bank of America cross sell opportunities as they come along, continue to work to improve our operational and commercial outputs very strong team doing that in private funds. Focus on the pipeline growth for new business and onboarding of new business. Where we have a new approach and a team lead there and capitalize on new leadership in the Cayman Islands where we also just established a trusted license. The potential for some acquisition activity, but less to a lesser degree than in the institution side, part of the business. I mentioned September when presenting the interims that all of our teams, the owners or otherwise play their part in the commercial success of the business. We use this slide previously to demonstrate the underlying strength of the group and highlight the efforts of the whole business. So the slide is back picking up some of the same but with some new statistics to demonstrate our risk professional strength, diversity and social conscience. That's our risk mitigation, by the way. So starting back at number 1, 1 PI claim of less than GBP 200,000 from 31 year history demonstrates a well run well organized business with the refined ability to mitigate risks as they arise. We've got employee turnover of 8% which demonstrates we value our employees through ownership, the JT Academy, JTC Gateway And JTC Wellness programs, and keep staff equity and look to keep staff equities around 25 percent of the whole protecting our key commercial advantage. We are well diversified with only 14 percent of revenue deriving from our top 10 clients and clients from over 100 countries around the world. We support local charities in all twenty of our locations. We are experts, 70% professionally qualified or part qualified, And 2018 was arguably our best year ever, as I said before, the 90% increase of pro form a EBITDA from 2017 actuals. And finally, we are committed to staff ownership, as all 100% of our employees or shareholders, making us stronger together, So on to the key takeaways from 2018, delivered growth and profitability and improved margins both divisions delivered growth of 17.6 percent or net organic growth of $8,700,000. We won $9,700,000 of new business organically. We made 2 accretive acquisitions integrated the 2017 acquisitions well, all adding up to make in 2018 our best year ever. And looking forward to 2019, what might we expect, we're going to target net organic growth in the range of 8% to 10% or 17% to 20% at a gross level. Target EBITDA margin in the range of 30% to 35% aims to improve commercial and operational efficiencies with the assistance of the new Chief Commercial Officer and his team. Should anticipate more accurate acquisition activity in the second half of the year? As a result, we are well placed to deliver more of the same, which is very good news for all of our stakeholders.