Earnings Call: H1 2021

Jul 28, 2021

Good morning, welcome to our 2021 interim results presentation. I will shortly run through the flows, funds under management, and the partnership before handing over to Craig to cover the financial result. It will be back to me to cover outlook and lead the Q&A session with the full executive team. Having announced our new strategic goals in February and hosted an in-depth capital market event in May, today's interim results presentation will naturally be shorter than normal, which will leave more time for questions. Let's start by recapping on those medium-term targets we announced back in February. First, we aim to grow new business by 10% per annum, supported by a growing number of advisors and increasing productivity. Second, by maintaining strong retention of client investments, we will see net inflows also growing by 10% per annum. These flows, together with modest growth in investment markets, would see funds under management reach more than GBP 200 billion by the end of 2025. Third, while we will continue to invest in the business to support our continual growth and maintain our market-leading position, the technological foundations that we have put in place over the last few years provide us with greater operating flexibility and efficiency such that our controllable expense growth going forward will be around 5% per annum. We went on to say that the combination of these planning assumptions, together with the increase in cash emergence from funds in gestation over time, should provide for strong growth in the underlying cash result over the coming years. Just six months into the five-year plan, how are we doing? Well, let's start with the partnership. During the first half of the year, we have attracted a net 139 advisors to the partnership through a combination of recruiting experienced advisors and academy graduations. That's growth of 3.2%, a good start to our 2021 ambition of growing the partnership by 3%-5%. This takes the size of the partnership to 4,477, and I'm pleased to say we've recently gone past the milestone of 4,500 advisors. Furthermore, it's very encouraging that the pipeline remains strong, and we currently have 277 individuals at various stages on their journey through the academy. Looking now at productivity. After experiencing a tricky external environment over recent years, I'm pleased to say that the productivity per advisor is back on an upwards trajectory, having increased by 23% compared with the first 6 months of 2020. Although productivity is now more or less back to the highs of 2018, there remains plenty of further potential growth, as Peter Edwards talked about in some depth at the capital markets event. That strong growth in productivity, supported by the growth in the number of advisors, naturally flows through to new business. I'm delighted to report that gross flows are up 27% in the first half of the year at some GBP 9.2 billion. We have continued to experience strong retention of client funds, providing for net flows for the first six months of GBP 5.5 billion, higher by 23%, and equivalent to 8.6% of opening funds under management on an annualized basis. We're often asked why our retention is so strong. I put this down to a number of factors. First and foremost are the excellent partner-client relationships and the high-quality advice and service. To pick up on the advice word, our business is advised, part of a holistic financial plan, which includes a steady hand for clients during challenging environments. Furthermore, client investments are both held within tax wrappers and long-term in nature. It's not transient money or money following the latest trend or fad. As highlighted at our capital markets event, clients can switch between our funds and asset categories free of charge and, in most cases, free of a tax event. They also have the added benefit of knowing the assets are held on their behalf by SJP and that we select, monitor, and where necessary, change fund manager. Finally for me, it's important to remember that our client relationships are well diversified, as indeed are our advisor relationships. What do I mean by that? Well, put quite simply, whilst we're disappointed to lose any clients, an individual client withdrawing their investments does not have a real impact on the balance of our funds under management. Translating this into investment speak, I would say that the quality of our earnings is very strong. It also helps to explain why we can be confident of strong retention in the years ahead, which together with new business, will continue that historic trend of net inflows every quarter of every year. I have to say, this is one of my favorite slides. It clearly demonstrates the resilience of the business as we have recorded net inflows through all market conditions, including during those challenging years of the financial crisis back in 2008 and, of course, the recent pandemic. If we were to extend the chart back over the years, the pattern of net inflows every quarter would be the same. I do not recall a quarter throughout our history where we experienced a net outflow. Whilst we're clearly delighted and very encouraged with this outcome, the strong growth compared to the first 6 months of 2020 should be considered in the light of the particularly difficult trading conditions last year. Perhaps a better measure of our progress is growth compared with the first 6 months of 2019, a period where gross flows were GBP 7.4 billion and net flows were GBP 4.4 billion. On this basis, our gross and net inflows for the first half of 2021 represented compound growth of some 12% per annum over the 2-year period. Turning now to funds under management, those net flows, together with the positive impact of investment markets, have resulted in funds under management closing the half at a record GBP 143.8 billion, up 11% year-to-date and 15% compound growth over the 2 years. In fact, looking over the longer term, funds under management have seen compound growth of more than 15% over 5, 10 and 15 years. A resilient performance through all market conditions, another favorite slide of mine. Growth in new business and funds under management have resulted in strong growth in income, whilst controllable expenses for the first six months were modestly lower than the first half of 2020. The combination of the income and expense outcomes, together with the increase in cash emergence from funds in gestation, has resulted in a strong financial result. An opportune moment to hand over to Craig. Thanks, Andrew, and welcome from me, too. This morning I'll summarize the key areas of our half-year reporting, namely the cash result, which should be seen as value emerging in the period as cash, the embedded value result, which gives an indication of value created which will emerge in the future, and capital, all of which have shown good progress during the first half of the year. I'll also touch on the interim dividend declared this morning. Let's start with the cash result, where we see a very different profile to that of 2020. Net income from funds under management increased by 27% to GBP 278.2 million. This reflects higher mature funds under management, driven by new ISA and unit trust business that's revenue generating from day one, as well as funds in gestation maturing and therefore generating income for the first time. Another key factor has, of course, been the markets, which have been consistently strong for much of the first half, particularly when compared to the second quarter of 2020. The margin on income from funds continues to be within the guided range of 63-65 basis points. This is the range you should continue to assume in your models. I've touched on gestation already, but it's worth emphasizing that the first-half result has benefited from somewhere in the region of GBP 20 million from maturing funds under management. At the 30th of June, we now have GBP 47.3 billion in the hopper, which is yet to contribute. This balance, based on some simple modeling assumptions, will generate an income stream of approximately GBP 375 million of net income from FUM in six years' time, and GBP 1.4 billion cumulatively by the end of year six. It's worth noting that we're now beginning to enter the period where we'll benefit from some of the significant growth years that followed pension freedom in 2015. The overall margin on new business has increased broadly in line with the growth in new business and stood at GBP 73.8 million. In our outlook statement today, we've indicated the potential for growth in new business in the second half of around 20%. This should, for modeling purposes, mean that the margin on new business in the second half also grows by approximately 20% compared to the second half of 2020. Controllable overheads grouped together on this slide reduced by 3%. It's important to note, however, that the operating environment has impacted on the phasing of expenses in 2021, and the full-year outcome is still planned to be in line with the commitment that we set out in February. For your models, you should still assume 5% controllable cost growth for 2021. Putting aside this phasing of expenses, we made a good start to the cycle of investment that Ian MacKenzie outlined at the capital markets event with a number of areas of focus, including the launch of Salesforce within the partnership and the development of our next-generation client experience. Beyond that, we've also launched OPAL across the partnership, which is a goals-based planning tool that helps advisors support clients in defining and prioritizing their financial goals. All of these projects will support a superior partner and client experience and make SJP easier to do business with. As we look to the second half, we have plans for further work on intelligent automation, on decommissioning peripheral legacy systems, as well as making further headway on our Salesforce rollout. Net investment in Asia is lower by GBP 4.3 million, and this reflects good cost control, stronger markets, and stronger flows, which were up by some 20%. This marks a further step towards break-even in 2025. In your models, you should assume a net investment for the year of approximately GBP 14 million, which will be 20% improved on 2020 and will be in line with the path to break-even that Iain Rayner set out at the capital markets event. Net investment in DFM is lower by half a million. DFM has also benefited from strong gross inflows up by 33%, and an increase in funds under management to GBP 3.2 billion. At the same time, we've continued to invest substantially in future-proofing DFM operations. We've now agreed a deal to outsource our DFM back office to SS&C, which will be a game-changer for this part of our business. Further investments is planned over the next 18 months, which will influence the shape of the path to break even in 2024. This is within the plan, and the expected outcome for 2021 is expected to be approximately GBP 10 million, with a similar amount for 2022. We will then see a sharp reduction in the net cost in 2023. Taking all of this into account, the Underlying cash result for the first half was GBP 189.3 million, up some 65% half-on-half. If you ignore the outcome in 2020 as an exception, this represents compound growth of around 23% since the first half of 2019. Which shows there's no sign of 2020 having impacted on our long-term growth trajectory. The restructuring cost below the line of GBP 9 million is the full charge for the year, and this, together with reversing variances, takes our total cash result to GBP 175.8 million. That's up by 41%. I'll just pause here to mention the FSCS levy, which continues to be very high and a real source of frustration for all advice firms that work hard to do the right thing for their clients. Although there's no sign of any short-term improvement here, we are nonetheless encouraged by the attention this is receiving at the FCA, and we welcome their commitment to reduce the cost in the medium to long term. I'll turn now to the embedded value, and there are a number of noteworthy impacts on the result for the first half. Firstly, in recognition of the fact that over time we've been keeping business on the books for longer than anticipated within our modeling, we've reviewed our persistency assumptions. As a result, we've booked a positive assumption change of approximately GBP 250 million. Our revised assumptions remain prudent, but now reflect the gradual lengthening of contract duration that we've seen over the past few years, as highlighted by a steady stream of positive experience variances that we've been reporting. Secondly, our EUV new business margin increased from GBP 365.3 million to GBP 525.6 million. This increase is primarily driven by higher new business volumes, but there's also a positive gearing effect as a result of lower expense growth. Added to this is the benefit of longer estimated investment lives. Finally, you'll see that since embedded value is a forward-looking statement, we've made an adjustment to reflect the effect of the tax rate change or the opening position, and this amounted to GBP 408.5 million. We've also reflected the new rate in the operating profit after tax for the year, this has amounted to an additional amount of around GBP 50 million, which is in the main tax charge shown. Taking all of this into account, the EUV net asset value per share at the 30th of June stood at GBP 15.31. That's up 20% from the same point in 2020. It's worth remembering that this doesn't take account of the additional embedded value of around GBP 400 million that falls outside the current contract boundaries and doesn't therefore get included. If it was, this would amount to an additional GBP 0.74 per share. Turning to capital. Given the simplicity of our business model and our prudence approach to capital management, our capital position remains strong. Our reported ratio has been somewhat distorted by the effect of the equity dampener over the past 18 months, which has little bearing on a unit-linked business such as SJP. Fundamentally, however, the structure and resilience of the business model means that we remain and will continue to be in a strong position. Turning finally to the dividend. Back in February, we announced the simplification of the way in which we plan for interims, and these are now set at an amount equal to 30% of the prior year full dividend. In line with this approach, the board has declared a dividend of GBP 0.1155 per share or 30% of the total dividend for 2020 of GBP 0.3849 per share. Well, that's it on the results. Overall, this was not only a strong first half for new business, but also a strong first half generally for the delivery of our financial results. A good start to 2021 that shows the business is in great shape, and it bodes well for the full year. With that, I'll hand back to Andrew. Thank you, Craig. Strong gross inflows, strong retention, and strong expense discipline combining to drive a strong financial performance. These results show we have made an encouraging start on our journey to achieving those ambitious strategic goals. What of the outlook? Let's start by considering the remainder of 2021. The pandemic, the various lockdowns, and changes in investor sentiment have had a profound impact on the timing and value of flows in 2020 and the first half of 2021. This will naturally result in a variable pattern of year-on-year growth and normal phasing of business. Taking this into account, together with a strong start to July, we anticipate growth in gross inflows of around 20% in the second half, despite strengthening comparatives in the latter part of that year. Looking further ahead, we remain convinced that the market for trusted financial advice continues to grow. Whilst at the same time, there remains an advice gap to meet this growing demand. Through the partnership, we are ideally placed to take advantage of this situation. The partnership continues to grow. There's a strong pipeline of industry-experienced recruits and 277 individuals training in our well-established academy. We also consider there to be considerable scope for continued growth in productivity. All bode well for the future. However, our progress will not be linear. It's important to remember, as I said back in February, and to repeat, there will of course be years when new business is better or perhaps behind the medium-term target. As we progress through our planning horizon to 2025, it's important to measure success on a cumulative basis rather than discrete months, quarters, or years. What do I mean here? Well, let's take gross inflows. If we were to achieve our 10% annual growth goal in a linear manner, the cumulative goal year on year would look like this. To achieve 10% growth in 2021, we would need gross inflows of GBP 15.7 billion, the bottom segment of the column on the slide. As we go forward, we would see a further 10% increase in gross inflows in each of the subsequent years, providing for a cumulative flow objective for the five-year period of around GBP 96 billion. It really doesn't matter how we get there. Any variation from year to year is second order. Of course, the strong first half performance is an encouraging start and increases our confidence. I will finish with a summary of the results, which you can see on the current slide. A very pleasing, strong operating and financial performance by a business that is in great shape. As demonstrated by these results, the combination of achieving our goals, together with that increasing emergence of cash from funds in gestation, means we will deliver strong growth in the underlying cash result and consequently return to shareholders. That's it. Thank you for your attention, and as a reminder, the live Q&A starts at 9:30 A.M.