Earnings Call: H1 2025

Dec 11, 2024

Summary

Revenue was £81m and adjusted PBT £25.8m, with operating margin just under 31%; AUM was just over £26bn. Priorities include £4.5m annualized savings, a 72p FY dividend target, and investment in distribution and the operating platform.

Good morning, and welcome to the Liontrust Asset Management PLC half-year results investor presentation. For us to record a presentation, investors can be in listen-only mode. Questions are encouraged, and they can be submitted anytime just by using the Q&A tab situated in the right corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question that we receive during the meeting itself, however, the company can review the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. Now I'd like to hand over to CEO John Ions. Good morning to you, sir. Good morning, ladies and gentlemen. We're here this morning to present the half-year results for financial year 2025. Myself, John Ions, Chief Financial Officer, Vinay Abrol, and Marketing, Tamin Gilbey are here. It's been a year of challenge and change within the industry and within Liontrust. But we continue to strive to be the best we can, and stay true to our core beliefs of active management and excellence in brand and distribution. We've diversified our product range. We've broadened and strengthened our technological data and digital capability to ensure we continue to serve our clients to the best standards and the standards they expect. The highlights or points for the half-year financials are net flows, or high flows of GBP 2.1 billion, AUM a little over GBP 26 billion, adjusted profit before tax of GBP 25.8. Business still retains a strong capital position and nearly GBP 60 million there, and we have maintained our financial half-year dividend of 22p. If I just talk very much there. The dividend at Liontrust has become high as a percentage, getting up to 16%, 17%. But there's some commentary in the press and from analysts as to whether that dividend could be maintained through more challenging trading periods. The Directors and management team were very keen to target a dividend of 72p for the financial year. If I just say that, we realized that dividend may be slightly uncovered, maybe somewhere around GBP 46 million by the end of the year. If you look at the way our dividend is paid out, we have the interim now. We're looking at a final year dividend of 50p in the summer. This time in a year's time, we'd be following through with the next interim. So really the only strain on the dividend is about 20 months away. What we were keen to do by that is to give guidance that it gives us time to look at the underlying performance of the business. We'll go into reasons why we're confident that that position is maintainable, sustainable. But we wanted to move away from short-term comments about does the dividend need to be cut or not. So in reality, it's a 20-month period where we have to make that time, and the benefits of that to us is that we can continue to monitor the underlying core trends of the business, which we believe we have more grounds for optimism on. Alongside that, there'll be a small share buyback. Again, a reflection of confidence in the business and the fact that we think that the shares are trading at the wrong price currently. On top of all of that, Vinay will go into our business transformation program, which will result in cost savings of around GBP 4.5 million going forward on an annualized basis. If I now go into where the market backdrop is. Asset management has been a bad neighborhood really for the last couple of years, especially in active management, which has led to some pressures on the industry. Organic growth has been scarce. We've had a tremendous rise of low cost of passive alternative products, and the dual challenge of higher expected returns from alternative products. Interest rates, whilst coming down, have not come down as quickly, and you can see from the high cash levels that are building up in banks that interest rates staying higher for longer has entered people's appetite or shifted people's appetite to risk. We still continue to have economic and geopolitical uncertainty, therefore leaning more towards the risk off trade. More specifically in the U.K., having said at the time of the election that a Labour government coming in could be the opportunity to provide stability and direction for the U.K. economy. In the run-up to the U.K. budget, where there was much uncertainty, that uncertainty around tax, around how pensions would be treated, and specifically AIM stocks. That's where very lackluster U.K. economy where significant amount of our assets sit in U.K. equities. Through October, we saw a higher level of redemptions, predominantly from people taking tax-free portions out of their pensions. If you think about the investment profile of those investors, those eligible to take the tax-free lump sums of only a test of 55, they've been invested in the U.K. for a longer period of time and a disproportionate weighting towards the U.K. equity market. Since those elevated periods in the run-up to the election, we have seen a tail-off in the outflows from that side. The U.S. election is behind us now, and a lot more focus will be on the economic growth trajectory in the U.S. and probably a more domestic orientation towards that from Trump. One of the others I've put down is the consolidation of wealth managers and IFAs. It's both an opportunity and a threat. Inside of that consolidation, it means that you've got a smaller number of decision-makers. We believe that's actually an opportunity for ourselves because those people are more discerning and looking much more as to the underlying investment process, which is particularly strong on Liontrust. We look to benefit from where those entities or amalgamating joining together to be able to get a larger part of those savings. That's where the headwinds are. The opportunity side is we believe the outlook for active managers is looking much better. 2022, 2023 were very weak years of performance. Over the last 10 years, if you look at the performance rate of the S&P, even 11%, 12% returns compounding over that 10-year period. That has been that fundamental trade of innovation disruption combined with a sort of momentum trade of the rise in assets. I think once you start to see that passive funds are now going equally weighted, that itself is an active decision. If you start to look at concentration and risk, we think we're more likely to be entering a period now where you will be rewarded for picking the right stocks. Price discovery comes back into selection. Recently, when I've been speaking at events, one more recently in Madrid, I've warned three of the heads of the investment consultants around the world, the two things that they were looking most for was the search for alpha and how to allocate to the right active managers and delivering sustainability. I think the outlook is there. Attractive valuations exist, particularly in the U.K. With a savings rate that continues to be too low at 8%, it should be closer probably to 16. There are still a lot of tailwinds behind the industry, and if we go out in this sort of evil last 10-year period going forward, there's going to be plenty of opportunity for discovery on prices. Liontrust is very much is that pure discipline, active management, respecting asset distribution. I've touched already there on where it should be is the reasons behind the rise of passives there. I think that concentration and growth, with Liontrust, now that everybody has an NVIDIA chip, it is the companies that have those chips that ones that will start to win and start to be attractive for active managers where you can start to demonstrate where you can get alpha and not just index returns. The outlook is we're much more optimistic on having gone through some difficult years. I hand over to Ben now more for the financials. Okay. Hi. Thank you, everyone, and good morning. Maybe I'll pick out a few key points from our financial results for the period to 30 September. I'll start with maybe just spending a few minutes on our capital position, given what Tom's talking about the dividend. The business remains in a very strong capital position. Our regulatory surplus capital is just under GBP 60 million. Even if you take into account the dividend, I think the percentage of dividend paid in January, we still have just under GBP 50 million of surplus capital with the business. So we remain a strong capital position with circa GBP 90 million of cash on the balance sheet. In terms of revenues were GBP 81 million for the half year, which is down from the equivalent period last year. But just to note, the equivalent period last year did have significant performance fees included, which were on a couple of funds which had redemptions we've got in relation to a few moves. So like to like, our revenues are down, but that is a combination of reduced AUM and revenue margin, which I'll touch on in a moment. Overall, that has impacted our adjusted PBT. So adjusted PBT at cost GBP 25.8 million, again, down compared to last year, but pretty much in line with the performance in revenues and revenue margin. Operating margin, which is a key measure that we use to see how well we're doing. At just under 31%, again, amongst our peer groups, an operating margin of over 30% is a strong operating margin. So it shows that we're running the business efficiently. Again, the equivalent period last year and the full-year number was around that 35 level. Last year half year number and the full-year number both impacted by performance fees, which we tend to load in the second half. Nothing really unusual there, just the business performing very well. The dividend John's touched on, 22 pence if cleared, and that will be payable to shareholders on January 8, 2025. The shares go ex-dividend on November 28. If you look at our adjusted profit, just a bit more detail here. I will just show you the reconciliation between the stat accounts and the adjusted profit. Key points to point out here. Professional services fees remain high. That is in relation to our business transformation program, which I'll touch upon in a moment. Intangible amortization is now 4.5 million, which is a good number to look at a run rate going forward, and no impairments in this time. On the next slide, we've got the detailed adjusted income statement. I'm not going to go through this line by line, but the key points here maybe are to look at costs. We have been in an environment where revenues are down, but our costs, both staff costs and other admin expenses, are both down 30%. It shows, again, we are managing our costs well, and that's a credible performance in a high inflation environment, albeit inflation has been coming down. Cost management has been strong, both in terms of staff costs and in terms of non-staff costs. The other thing I'll touch on is maybe the revenue margin. You'll see the revenue margin is 60.3 basis points, which compares to last year's full year of 62. Again, it's come down. We tend to guide that revenue margin will come down about a basis point or so. This is really mostly related to revenue mix. The mix last year, particularly in the first half, had some higher margin products where we haven't seen the par. But the reduction to 60.3 is as expected, and we expect with revenue mix, the guidance is that you will see around one basis point margin erosion on a year-on-year basis going forward, and we will stick to that. Again, here, just a bit more detail on the capital position for the business. As mentioned earlier, we remain in a strong capital position with just under GBP 60 million of surplus capital at the end of September. Even if you take into account the dividend, which is paid in January, by which time we'd have four more months of profit being added to our capital, which is not shown there, we still have, after four single dividends, a strong capital position of GBP 45 million. This slide just shows you our capital allocation framework. For those of you who've seen us present before, you'll see that there's a new line in the share buyback. But in terms of how we allocate our capital in the business, top priority is organic investment, organic business to run the business day-to-day, and to expand that. That is the key purpose of capital that we have in the business. Then obviously dividends, then share buybacks. We've instigated this share buyback program. I'll touch on it more in a moment. But again, now that is a new addition to our capital allocation framework. We have annually for many, many years taken the appropriate authority to buy share buybacks, but we haven't bought back any shares for probably over 15 years. Share buybacks are now an important part of our capital allocation framework. Then obviously, the last element is just if there's any inorganic M&A or key hire type opportunities to expand our product range or distribution, we would look at that. But after we look at the organic dividend share buyback process. The business transformation program. John's touched on this already. If you look at the elements of the business transformation program, there's a number of fund and product-related changes that we've made, in particular about merging some smaller funds, closing a number of funds. We closed four funds in October, which shows that we're managing our product range. But also we've decided to merge our Fixed Income team into our Multi-Asset team and for the Multi-Asset team to use the skill set that they have within the Fixed Income team to allocate their fixed income exposure to the in-house team, which happens to be part of that team. Again, that allows us to scale up our Fixed Income team. Although revenue neutral, that would allow us to have larger, bigger fixed income funds to take out to the market. Another key element of our business transformation has been the transformation of the operating platform that we have. We've invested in both front office systems and data management, partnering with BlackRock's Aladdin business, and also taking further outsourced services from BNY, Bank of New York, which gives us much greater scalability and stability in that operating platform, as well as having a cutting-edge data platform, which will over time have AI strategies, for example, developed to make use of our data, make use of AI in our data plate in terms of operations, distribution, and financial. The other element of the business transformation program, which we started in this second half, is effective management of the cost base. A lot of the work that we've done in terms of making the business more efficient in terms of that business transformation, due to the product range, having more focus to that, has allowed us to implement some cost cutting across the cost base. We've outlined that we're going to have a staff reduction of circa 25 people. Some of these are as a result of the business transformation that we've done as we outsource certain functions, relying more on BNY and other partners to do the work. It allows us to reduce our headcounts and our cost, and also just a matter of fact, smaller scale with less product. The GBP 4.5 million cost saving that we've outlined is mostly staff-related cost savings. There are lots of operational savings as well in there, but mostly GBP 4.5 million. We hope to plan to implement this before the end of the financial year to see the full benefit of those savings in the next financial year. I'll hand back over to John for our performance. Performance. I touched on that earlier, that again, coming out of 2021, this was generating significant inflows. It went into a weaker year, then a poor year in 2022 in terms of performance, and 2023, we had a heavy bias towards quality growth because our active strategies are towards mid and small caps in the U.K. and exposure, obviously, to the interest rates of certain stocks, which do affect the performance. The point here is that 2024 has been a much stronger year for us in performance. If we flip the next slide, maybe drill down into some of the teams. Standout performance, obviously, European Dynamic from the Cashflow Solution team, which also demonstrates the effectiveness of the power and the process, and the ability to go on and gain assets there. The fund has gone from GBP 1 billion under size to over GBP 2 billion now in the last 18 months, with excellent performance behind it. I think it is the only fund that is European in the top 10 gross selling funds in quarter three in the industry. So two good reasons to be optimistic there for growth and team. The Global Innovation team, innovation and disruption, as I talked about earlier, and this is how you could play away on fundamentals and away from just that concentration and the risk that is associated with the driver patterns in this space. Again, the team has over GBP 800 million, now nearly close to the GBP 900 million of us under management with strong process, a very clear established track record that is going well. At the moment, first under technology fund, also being first quarter over more than three years. The Economic Advantage team, if I go back four or five years, we would have had a much higher advice of our terrible assets in U.K. equities. One of the things we have tried to theme, either through the Global Equities team or the Global Innovation team, is to move more towards client demand for global offerings. Mark Hawtin, who joined us from GAM, he combined with the experienced team that we had in place beforehand, gives us another global team with GBP 1.4 billion under management across 10 funds that they run. Again, a strong performance through India, emerging markets, the Balanced Fund, and the Global Alpha Fund. Economic Advantage team, very much at the core, much facing the headwinds of the U.K. equity market. To show that team through the micro-cap, small-cap, special sits all the way up to the large-cap. If I look at the Sharpe ratio, how much return do you gain for risk taken, number one, in the sectors, and also that through the active alpha generation showing the capture there. Even though the U.K. equity market still faces its challenges, there are certainly signs more in the last quarter or so that fund managers are now beginning to get rewarded for stock selection. What I do see is that team still has an excellent long-term track record. It is very much at the heart of the existing client banks that we have of U.K. asset holders, and it is still delivering against a very challenging background. This is just to highlight where those valuation opportunities exist, very much in the mid and small-cap areas. All I think that has required is a small turn in sentiment, and you will see some of these significant discounts to market levels start to come back into more realistic levels. So at least there's an opportunity. We manage one investment trust and we manage two by about GBP 1.1 billion in size that came from the Majedie acquisition. Again, just to show the very strong share price returns in his more concentrated large cap portfolio how that has developed. Multi-Asset, I think Vinay touched on Phil Milburn and Donald Phillips and rates and credit will be moving into that Multi-Asset team. Currently, for the Multi-Asset team, we have about GBP 1.4 billion that sits in other people's mutual vehicles. Together with our fixed interest exposure, with our own resource and team and the experienced managers that we have, that money will come back into being managed either directly or through the vehicles that Phil and Donald run, which will give us the ability to scale up some of their credit funds and their strategic bond proposition, which will make them more competitive, certainly in our European distribution, where the fund selectors look for funds that are more than 200-300 million euros in size. It will also give us the benefit of adding that investment expertise and specialization into a significant part of the managed funds. With sustainable, I think as with commentary and the performance headwinds over the last couple of years, and you can see that very clearly demonstrated in the three-year performance numbers. Again, you can see the improvement and the turnaround in performance in the one-year numbers going forward. I think that the long-term case for growth in ESG remains strong, with the rise in performance and appeal for that. I think also there's material scope to gain more further market share here. The FCA are putting in place classifications for ESG to remove greenwashing, green hushing. So the adoption of the labels from the FCA, and we hope to have ours in place by January or in January, will clearly cement the leading position that this team has in that sustainable space and the opportunity set to become a core proposition for intermediaries wanting to offer sustainable solutions to investors. I think with the changes we've made across the business, the strong brand that we have, the high levels of engagement we had, I think we had over 103 events with intermediaries this year. A few weeks ago, we had over 350 wealth managers at the Science Museum for our annual conference. A few months ago, we had 60 or 70 of the top U.K. fund buyers at an event at the House of Commons. So we still have that excellent connectivity with the client base. The brand remains strong. It was fourth out of 120 asset managers for communication, eighth for client servicing skills. If we look at our LinkedIn profile, I think it's grown by nearly 40% this year, and videos we've done using our connection with London Zoo have had 5 million views. So we still have an awful lot of connectivity. It's very important for us for a business that's got 90% of its investors in retail and 30% of its PLC investors in retail as well. That confidence in the brand, getting our message clearly out to our investors is a key target for us alongside of our. In summary, we've got a very well-established business. It's committed to true active fund management and best-in-class distribution. That strong brand, excellent client engagement, and an impressive long-term performance track record and despite the headwinds of three years, the short-term performance over the last year with the outlook for active managers improving strongly going forward, I think puts us as well-positioned to have the confidence where we are. I think the improvements we've made to the business generate even more efficiency, both financially and in harnessing data to be able to deliver. The platform for the business is as strong and robust as ever. I think with fortunes we think are about to change will be more positive for true active managers that can deliver alpha, and companies with a clear identity, strong brand, aligned with strong distribution are well-positioned to benefit from this. Thank you for your time. Great. Thank you, John. Thank you, Vinay. If you would like to ask any questions, please do post them. We do have two or three questions already, so do post any others. John, Vinay, you talked about the cost savings. You gave some of the details. Some of these are about the details, which I think Philippe's covered. A follow-up question to that is, how does that affect our ability to compete and to maintain profitability in the long term? I think if we look at where we were, if we go back a year ago, probably more than 18 months ago, we talked about costs and putting in place the right target operating model. That's been something we've been looking to do, and a lot of the headcounts come from those efficiencies. Building a more robust, scalable platform which can deal with all aspects of the business enables us to use data in a better way. Other things we've done is to use outsourcing to as best degree as we can, i.e., the only things we want to take place inside of our buildings are the things that we can add value on. Simple things like outsourcing fact sheets to be able to get them produced at a lower cost per unit, but more efficiently and effectively delivered from people who have better skills than that with us. We have been able to reduce those costs. We have made some changes on the sales team, but we have brought in three or four new people as well to enhance that dynamic and bring that forward, and I have been delighted with what the sales team have achieved. Despite a very difficult three-year period for the business, the level of client engagement they have, the communication and enthusiasm within that sales team is strong. On the fund management side, no real difference in terms of headcounts coming out of the cost savings. Those of you that know us will know that the fund managers have a revenue share, and that revenue share is split between the members of the teams. So even if somebody was taken out of a fund management team, the revenue pool would remain the same. It is just distributed between the people there. Some of the costs come out from, we do not have a Bloomberg Terminal or like that. But in terms of the ability to operate the business going forward, I think we have got a much more robust platform, a much clearer way through data what to be able to handle data and digitalization and delivery, and a stronger operating platform moving forward. One from the ability to load on new teams or other areas as well. So the efficiencies have not come at the expense of the growth. Yeah, I think as well, we strongly feel that as we grow from here, we will see more benefits from the model that we have got in place and will have greater profitability going forward, because of the steps that we have taken to make the business more efficient and on a stronger platform. Great. You talked about the market context. Do you want to talk more about why our assets under management have fallen is the question. Our two largest of assets impact would be the Economic Advantage team, where there has been negative sentiments towards U.K. equities really over the last six or seven years and declining and a shrinking pool of assets is well documented. Then probably more structural issues that need adopting and changing with the U.K. equity market. So in the face of the headwinds, despite having an excellent long-term track record in that space, we've seen outflows as have all other major players in the marketplace in U.K. equities. With sustainability, the interest rate sensitivity and maybe the more negative threshold that sustainability over a couple of years has also led to the outflows there. Those would be the big areas of outflows. So basically asset depreciation and outflows as to where we are, I think. If I look now we have inflows in the Cashflow Solution team in Europe, and pivot more towards the Global Equities teams, the company. And I think a resurgence in the Multi-Asset team as well. Again, the performance of that team over the last year and a half has been strongest since we put the risk-reward profiling tools in place. I think the recent changes in the budget will move things away from more of model portfolio services more towards the multi-asset fund business for tax reasons. So again, you can be more optimistic on the opportunities for improvements in flows. But, I also touched on the debate between active and passive. There comes a time when that mispricing becomes silly, and managers that have the courage to deviate away from picking stocks that are rising because of weights of cash and capital allocation. I think the outlook going forward is significantly improved. Can you talk about what we're doing to enhance profit, gross profit, and perhaps profit? Yeah. I think, key elements of that business transformation program has been a greater efficiency in our target operating model, which will help us keep our costs down. We have seen some of that in our costs compared to the equivalent period last year. A lot of people costs coming down by 10%. The headcount reduction, there are two levers you can pull to increase your profit. One is to increase your revenues, and the other is to reduce your costs. John's already talked about the events and the efforts that we are putting in distribution to increase our net flows, which in turn will increase our revenues. You can see if you look against some of the slides that we have shown earlier, performance has been improving. We had a challenging 2022, that is becoming more and more in the rearview mirror now. The one-year numbers on a lot of our funds are looking pretty strong. So the building blocks of returning to net flows and growth in revenues are there. But we still need to have that positive environment to get those flows. So I think on the revenue side, the engagement that we are doing, the changes we have made on the distribution side to make it more focused, I think will pay off in the initial, medium, and long term. On the cost side, again, we are managing those costs. So we are not sitting here sort of not doing our plans, but we are taking proactive action that includes more focus in our product range. So, we have closed the smaller funds. All funds, they take resources to look after them, manage them, and to do the admin that goes around that. So making sure that we have a product range that is fit for purpose is obviously very important. But it is not all about closing funds. We have just launched three funds for our Global Innovation team in our Dublin range for marketing in Europe. So it is about closing funds that are subscale and do not have that view to raising money. But also launching funds where we think that in the short, medium, and long term, that we will be able to raise money. We think those global funds in Europe will have the opportunity to raise cash. So a combination of those are our efforts to grow revenues, keep costs under control, and obviously grow dividends, support dividend, and support our capital allocation policy and so make lots of buybacks. Next question is up and asked, do you see scope for consolidation in the industry? Yes. In short, I think the industry probably has too many providers, too many unambitious providers. When I mean unambitious, there's a vein of sort of the very large asset managers, insurance companies that sort of run funds on a cost plus basis. The corporate aims of governance and risk bring them back closer to the index. I think if they're not delivering alpha and not delivering returns, the move from defined benefit to defined contribution, where you have the individual owns their assets, and they will make more of a rumble of their feet. It's always a difficult thing to sort of see where and when it is. But definitely, with the challenging phase of the last sort of couple of years, I think people are beginning to question some of their business models, the ones that aren't as robust. Renee talked about are still maintaining an operating margin over 30%. Some of them are very much in the low teens, it's all questionable. But consolidation, for us, when we make positions, it's part of what can If we can see something that we can add value to and generate for. We're not looking to just consolidate to take costs out of things. It's got to be things that feed into our own benefit, either on the manufacturing side. Is it much stronger investment teams? Is it businesses with a track record with critical mass that we feel we can grow and develop like we did when we took the sustainable team on board from Alliance Trust? Or businesses that bring us an enhanced or broader distribution opportunity. But I think the U.K. remains a very attractive marketplace to international investors. Still got one of the largest pools of investment capital in there. I think, as the outlook improves, you will probably see more changes in the space. We've been asked what Alliance Trust's key competitive advantage is and how- Instead of our clients who are in retail, we have an excellent, very strong brand, and we have great connectivity on the distribution side. With a group of our size, we are in the top 2 or 3 on connectivity with platforms for distribution, most above our weight in terms of brand. We are very clearly focused on the parts of the market we want to service. We combine that with positions of investment excellence, strong adherence to process, creating the right environment to attract the best talent out in the marketplace to deliver those alpha performance out to our clients. That is where the differentiation is. Everybody strives for it, but if you look at where the strength of the brand is, the connectivity with the distribution feedback we get, I believe is there. Great. Thank you both very much. That brings the Q&A part of this presentation to an end. Perfect, John. Thank you very much for answering those questions from investors. Of course, the company can review all the questions submitted today. We will publish those responses out on the Investor Meet Company platform. Just before redirecting investors to provide you with their feedback, which is particularly important to the company, John, could I just ask you for a few closing comments? I think we covered as much of it as we can. If I could just say, I think it has been a challenging period, but I think the improvements we have made to the business on the operating platform, the strong brand, strong distribution, and the improvement in the one-year performance, I think looking at a move away from the relentless flows of passes and a real price discovery will suit our investment team well. I think Alliance Trust is in a strong financial position and is well-positioned to capitalize on those opportunities ahead. Perfect. Thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, so I am sure it will be greatly valued by the company. On behalf of the management team of Liontrust Asset Management PLC, we would like to thank you for attending today's presentation, and good morning to you all.