Earnings Transcript for ABDN.L - Q2 Fiscal Year 2019

Keith Skeoch: Good morning and thank you for joining us, and welcome to Standard Life Aberdeen's Interim Results. It gives me great pleasure to be joined by Stephanie Bruce, our new CFO, for her first results presentation; as well as Campbell Fleming, our Head of Global Distribution. In a few minutes, Stephanie will take us through the financial highlights. But before she does, I want to take a moment to update you on what has been a busy first half of the year. Busy, but in a good way as we continue to drive the strategic transformation that will deliver the world-class investment company we aspire to. In the face of tough industry conditions, with flows difficult to come by and fees under pressure, we maintained our focus on delivering what we can control and building on the resilience we delivered in 2018. This focus continues to concentrate on the three drivers that are most fundamental to our business and to delivering shareholder return, attracting assets, intensifying our financial discipline and unlocking the value from our balance sheet. The first half did see a visible improvement in investment performance and continued resilience in gross flows, which are increasingly well diversified. We improved our access to savers and customers through new relationships with Virgin Money and Skipton, and we accelerated the build-out of our advisor business. We also retained 35 billion of AUM in our settlement with the Lloyds Bank Group. There was a modest improvement in net outflows, and with help from markets, AUMA increased by 5%. All of that, of course, was made possible by the most important of our assets, our people. I'd also like to note that the leadership changes we have made are working well. Multi-asset investments and wholesale distribution are both seeing a positive impact. Rose Thomson, our new Head of HR, is spearheading a program to improve engagement and embed a values-based culture. And of course, we are benefiting from Stephanie's fresh insights. In these challenging conditions, Stephanie has helped us intensify our focus on financial discipline. We are making progress in improving our operational efficiency through continuing to execute well on our transformation program. We have actions in place that will deliver two-thirds of our efficiency targets. The heavy lifting and investment to upgrade our infrastructure is now well underway. And despite the associated costs, continued careful management of our balance sheet has allowed us to maintain a strong regulatory capital surplus. We are therefore pleased to announce a maintained dividend of [7.3p] per share. While there are increasing signs of progress, there is of course still a lot to do to deliver the strategic transformation and take advantage of the opportunity that opens up. I'll return shortly to talk about those opportunities after Stephanie takes us through the financial highlights. Stephanie?

Stephanie Bruce: Thank you, Keith, and good morning. In summary, the key financial headlines are as follows. Assets under management and administration have increased since year-end by 5% to 577 billion. Growth flows have been sustained and we are seeing an improved position on redemptions, which have reduced to a level below that which was experienced throughout 2018. Net flows remained an outflow at 15.9 billion. Adjusted profit of 280 million is 10% below June 2018, impacted adversely by decreased revenues and benefiting from further improvement on costs. Statutory profit after tax has increased from 111 million to 636 million, primarily as a result from the sale of 6% of the stake in HDFC Life. Diluted EPS has therefore increased by 20.8p since H1 2018 to 27p. Adjusted diluted EPS has increased to 8.9p. The interim dividend is unchanged at 7.3p. Let me now highlight a few – number of areas in more detail. So, assets under management and administration has increased to 577 billion, benefiting by 7.5% from the recovery in markets, offset by net outflows of 2.9%. On the right-hand side of the page, you can see the assets under management and administration relating to our platforms of Wrap, Elevate and Parmenion, which have increased by 11%, benefiting from uplift in markets and further net inflows of new business. Turning to gross flows. Overall, we have delivered 36.5 billion of new business, which is in line with the absolute levels of the prior half year, but also represents a continuation of the improving trends of gross flows as a percentage of opening assets under management and administration. Now leaving aside strategic insurance partners for a moment, the rest of the business has generated and won 27 billion of new business in the six-month period. This is a higher level than for the last two half year periods, 2% better than H1 2018 and 33% better than H2 2018. It was particularly pleasing to see improved momentum across a broad range of propositions. And turning to the specific asset classes. We are still seeing pressure on equities at almost 9% below inflow levels of the second half of last year. The market remains tough, with a continued focus on lowering risk profiles in the current global environment impacting demand. A higher spot for equities is the interest in the China A shares fund, which has delivered strong performance and is generating strong interest as the best-selling fund in that sector. In multi-asset, net inflows were recorded in areas such as MyFolio, with the pressure in this asset class still being evident in absolute return. In fixed income, we saw an increase of flows on the last two prior periods, supported by strong interest in our offerings in developed markets credits and emerging markets. We continue to see strong interest in private equity and European real estate. And our new index of hedge funds is unique in the market and has been the most successful USIT fund launched in the alternative space in the last 12 months, attracting 500 million since its launch in February this year. In quantitative, 3.5 billion of flows were received from Virgin Money, which represented the first stage of developing our partnership. I'm pleased to confirm the completion of the joint venture on the 31st of July, which enables the collaboration of our investment content and Virgin Money's customer base, now of course extended through the Clydesdale Bank acquisition. On platform, gross flows have reduced from the prior H1 2018 period, but have remained robust compared to the second half of 2018 as we see the impact of ongoing consumer uncertainty in the U.K. Turning to gross flows by our strategic insurance partners. Now, these by nature of the underlying business are much more lumpy and reflect the on-boarding of business in those insurance partners. In this period, we have received 9.7 billion of such inflows. This includes incremental flows from Phoenix Group of 1.3 billion. And in addition, Phoenix Group undertook a further bulk-annuity transaction which gave rise to 500 million of assets for management. To touch on global activities, we are pleased within EMEA we are reporting net inflows in this period, which is the first time since 2017. An area of disappointment is the fact that of our growth flows, only 3% were in Asia in this period following further difficult trading for equities. Now, moving to redemptions. The two key classes with adverse impacts were equities and secondly multi-asset, as shown by the purple blocks. The outflows for emerging markets, Asia-Pacific and global equities do remain elevated, while for multi-asset, the outflows are concentrated in absolute return, but these are 44% less in the second half of 2018. Overall, GARS assets under management in our Institutional and Wholesale channels are now 15 billion, which is 3% of assets under management and administration. For our strategic insurance partners shown in pale blue on the graph, the redemption flows in this period reflect the usual outflows for that book of business, namely the ongoing decumulation patterns for those clients taking income as the age and retire. We received new funds in on a lumpy basis, but once that business is received it tends to be persistent and moves to a natural pattern of drawdown. In other words, these flows are much less volatile on the way out than they are on the way in. We are pleased that Scottish Widows have chosen to retain 35 billion of assets with us in real estate and quantitative. Both of these areas are key capabilities for our growth agenda. Also, through the agreed terms, we now have the pattern for the movement of those Scottish Widows assets that will be transferred out. This will be a key movement in the second half and into Q1 2020. Therefore, overall, it remained disappointing to be in net outflows. However, looking forward, our current pipeline is stronger than in prior periods and encouragingly indicates many more new opportunities with new and existing clients. This reflects two key factors within the good work being undertaken by our distribution team

Keith Skeoch: Thanks, Stephanie. While we continue to make good progress with our strategic transformation in what can only be described as a challenging environment, it's worth reminding ourselves that, that transformation is proactively positioning the business for long-term growth. Over the next 10 minutes or so, I'll focus on the opportunities opening up for us, as well as the investments we are making to take advantage of them. Our vision is to create a world-class investment company that has global scale, well diversified by product and channel. We aspire to be a leader in new active investing, with reach to clients and customers throughout the savings and investment ecosystem via our platforms, advice and investment content. It's these characteristics that will bring us even closer to clients and customers, and help meet the rapidly changing demands across the investment landscape. As we continue to position the business for long-term growth, we are also helped, as Stephanie pointed out, by our strong balance sheet. This is not only a source of resilience, but also a means of funding the investments in innovation, technology and people that, together, will improve the efficiency and scalability of our operations. Unlocking value from the balance sheet is an equally important driver for shareholder returns. So, what are we going to do to take advantage of the opportunities generated by that rapidly changing investment landscape? As I did at the finals in March, I'll concentrate on three areas that are critical for successful delivery

Operator: Thank you. [Operator Instructions] The first question comes from the line of Hubert Lam from Bank of America.

Hubert Lam: I just got a couple of questions. Firstly, on costs. You're currently about two-thirds your way in terms of your cost synergies. Just wondering what do you think is the possibility of maybe increasing the cost savings just given how fast you've achieved your savings to date? Second question is on fee margin. As you mentioned, the multi-asset margin fell by 10 basis points over the half, but you also mentioned the possibility of it increasing if the performance improves or is maintained. Can you maybe discuss a bit in terms of what performance needs to go to for that fee margin to ratchet up again? And what the fee – how much higher the fee margin could be if it's triggered? Thank you.

Keith Skeoch: Okay. Hubert, I'll go – we go to Stephanie first for costs and then go to Campbell on the question on the fee margin.

Stephanie Bruce: Thank you. Our priority is to deliver the 350 million of savings and to make sure that we're doing everything that we can do in terms of the efficiencies. As you see, we are already on track – sorry, we are already two-thirds of the way through in terms of creating those actions, which again is pleasing. As you would expect, in terms of financial discipline, I want to see coming through, we are going to do everything in terms of – particularly in the business-as-usual space, to make sure that we are doing everything that we can do to adjust in terms of the environment that we're in. It's not about setting new targets, it's not about trying to raise to another target in an external environment, particularly at this point. The real focus for me is making sure that we're delivering on the savings we have and being able to – make sure that we can get that financial discipline to make – apply it in all areas of our business-as-usual activity. And that's really where I mentioned that we want to accelerate as much as possible things that were already going to be planned, either towards the end of the transformation period or beyond. And it's those sorts of areas that we will be bringing in. But those are the sorts of things you would expect us to be doing as part of the business-as-usual discipline in terms of the current environment.

Campbell Fleming: In relation to the fee margins, I think if you look at Slide 13, as Keith alluded to, you'll see a significant improvement at that vital three-year number and also the one-year number. If that continues, then we hope that, a, the outflows will continue to reduce and that also the inflows in those products, which are currently we still receive flows into them, will also pick up. As to when and how that might happen, it's very difficult to forecast and we prefer not to, but you're seeing the margin impact come through, I believe, in Slide 24, which is the mixture of the exacerbated outflows we saw in that asset class in the last half and also some of the fee variations agreement that we've had put in place, which, by the way, if performance continues to see – to improve, there will be the ability to claw back some of those fees that have been reduced. So, the trend I believe is significantly improving in terms of performance. And as and when that comes through to the margin pick-up and the flow improvement, that's very difficult to predict. But I think if you look at the overall trend, as Stephanie picked up in terms of the raw increase in gross flows and the improvement in the net flow position with the overall increase in our assets under administration and management, I'll take that in these very difficult trading conditions that Keith has also referred to.

Operator: Thank you. The next question comes from the line of Gurjit Kambo from JPMorgan. Please ask your question.

Gurjit Kambo: Hi, good morning. Just a couple of questions. Firstly, just in terms of the revenue margins. So, in equities, the margin sort of increased a bit, a couple of basis points I think, in the first half. So, just trying to think about the dynamics there. Are we sort of saying that the – what you're losing, what you're bringing in is actually not at that different levels and maybe the inflows are slightly higher to drive that revenue margin up in the first half? So, that's the first question around equity margins. And then second, just more broadly around sort of the flows in areas like private markets. So, I guess the broader industry has been awash with a lot of cash coming in. And for SLA, we've seen a sort of couple of halves now where you've continued to see outflows. So, just sort of what's going on there? And then on MyFolio, in terms of the sort of dynamics there, it feels like the inflows have sort of held up versus the last kind of couple of half years, but – half periods, but the redemptions have picked up there. So, what's sort of coming of going on in MyFolio and Parmenion?

Keith Skeoch: Okay. On revenue margin, we'll go back to Stephanie, but I think we're largely talking about a mix impact. Stephanie?

Stephanie Bruce: Yes. I mean in terms of specifics on the margin and equities, as you say, we are seeing an improvement on that second half of 2018 and a consistency with the first half year period of June 2018. But as you say, what really is driving it through, therefore, is the overall mix and volume that is moving across the overall book. I think what is pleasing is that certain areas and asset classes actually are holding or in some cases improving in their margin overall. And therefore, in terms of our diversification across the activity in the period is therefore helpful in terms of our overall average margin.

Keith Skeoch: On flows?

Campbell Fleming: Yes. I'd just add to that. When you do have improving performance, improving market levels and things you can maintain pricing, you'll see that there's been a range of good wins across the fees from many regions both in new active equities, both in alternatives and things. In relation to the alternatives and private markets picture, there is a thing going on there that as strategies come to their end, they are either recycled or replaced with new strategies. And that means that until we actually draw down on those commitments, the commitments that we've won do not appear in the flows. So, if you have a look at the outlook there, both in terms of real estate, private markets, private equity and the like, we do have a decent pipeline of won and not funded and committed and not yet drawn down. So, it's a normal cycle of what happens in that asset class. In relation to the MyFolio flows, there was one significant client loss in the period, which impacted it, as you've picked up, and we've also launched new versions of MyFolio, new folio life and the like to take advantage of people wanting lower-priced products. So, we now have basically a bronze, silver and gold version across the piece for MyFolio. These were launched specifically with Virgin Money in mind, but also through the Skipton partnership which we hope will continue to grow over the next 2 to 3 years. So going back to Keith's point that you saw with those access to those many millions of customers, we're now able to offer a range of outcomes and services at [0 points] of the price spectrum to take advantage of those people that are prepared to pay for good active and constraint strategies right down to those people who just want a passive or better wider approach.

Gurjit Kambo: Great, thank you.

Keith Skeoch: Okay. Next question.

Operator: Thank you. The next question comes from the line of Bruce Hamilton. Please ask your question.

Bruce Hamilton: Yes. Thanks for taking my questions guys. I've got three. Firstly, on the sort of performance numbers, I mean I take the point from the – some of the bright spots you flagged. But when I look at the table, I mean, your three-year in equities, which is high margin, still looks very weak at 27% above benchmark. So, can you walk through which areas are still really weak and where you need to see an improvement? And also, on the multi-asset, which I guess is another high margin area, the three-year has clearly improved a lot, but the one-year 21% above benchmark suggested that's probably going backwards in the short-term. So, I just want to understand a little more. It looks like the 65% is kind of helped by lower margin areas and the higher margin still have quite a lot of issues. So, maybe just help me understand that. Secondly, on sort of liquidity risk, which obviously been a market topic. How do you assess the risks that the FCA could look at changing rules around, particularly say, open-ended real estate funds where liquidity mismatches perhaps looked more extreme than other areas? And then finally, on the sort of strategic investments and balance sheet, you mentioned the ability to invest in tech and so forth. Can you give us a little bit more color on which areas do you think look most interesting for investments? Is it really technology or are there sort of asset clauses or other things you'd like to get your hands on? And for some of the 5 billion of strategic investment value on the balance sheet, any of that, that we should think about in terms of divesting or not being core to strategy going forward? Thank you.

Keith Skeoch: Okay. On the performance numbers, the one area which I think I called out that we are – is not doing as well – it's getting ahead of benchmark, but the progress is nowhere near as strong as global equity. And in particular, one of our large global equities has an emerging market tilt, and that's what it's being sold to investors. So, the time when the U.S. economy and the U.S. market is being relatively robust, it will take time for that swing around. So, what you're seeing is a lot of components kind of coming through. On the multi-asset, you're looking at averages there rather than point forecast because it's – and we are seeing across the piece, I would reiterate, that the bulk of our multi-asset funds and GARS in particular is now ahead of benchmark at 1, 3 and 5 years and it is doing its job. On liquidity risk, I think a couple of things on that. This is a market perennial that's been around for a long time. I've been through several, several cycles. Certainly, my interaction with the FCA suggests that they're in an appropriate strategic place. If you think back to what happened with the lock-up in property funds and the way in which that was dealt with post Brexit, I think it was dealt with relatively well. And conversations are ongoing about how you deal with that. So, I don't see any signs yet of a knee-jerk reaction. I see rather sensible conversations about the wiring and plumbing and the liquidity ladder. And the other point I'd make on that liquidity ladder, when you look at firms like us and somebody else, although it pains me to say it, we've had those outflows from GARS and we've never gated the fund. So, there are people out there that are doing things in the right place. On strategic investments, kind of a couple of comments. When we were talking about investments in technology, we were really talking about the Charles River and the technology that connects our middle office with suppliers where we are making investments and funding them off the balance sheet and significantly upgrading our own technology, which helps bring the teams together, and we're expecting to make significant progress on that in the end of 2019. In terms of those strategic assets or the assets on the balance sheet, we've made it clear the investments in Phoenix is strategic. I would view the AMC in India as strategic, but I would note, and I think it's important to understand, that we had an IPO a year ago and we need, together with HDFC, to facilitate a minimum public shareholding of 25%. There needs to be a 25% free float in India and we have until August 2021 to do that. So, there will be – we'll play our part in making sure that happens.

Bruce Hamilton: Great, thank you.

Keith Skeoch: You’re welcome.

Operator: Thank you. The next questions come from the line of Arnaud Giblat from Exane. Please ask your questions.

Arnaud Giblat: Good morning. I've got three questions, please. Firstly, if I can come back to the open-ended real estate funds. You mentioned that conversations were ongoing with the FCA. But how do you approach any liquidity risks from your side? Because when you go back to your gating experience from 2016, clearly that was triggered by Brexit with the risk of a hard Brexit coming up and well the U.K. property market is not exactly performing really well, do you see – how do you reposition those portfolios for eventual redemptions? And my second question is on the management fee margin in the multi-asset product. Part of the drop you mentioned is – part of the reprice. Is the revenue margin you're reporting on a run-rate basis that the repricing happened during the half and should we be looking – another way of asking that question is, should we be looking at that run rate being a bit lower? And finally, if I can come back to Slide 9. You mentioned a 25 million difference between the cost synergies that have been achieved and those on a run-rate basis. So, is that what we're looking at for H2? You're starting off with that 25 million lower run rate cost base to which we take off some cost synergies to come and add back some investments? Thank you.

Keith Skeoch: Okay. Well, if I can do the ROIC, Campbell will do the fee margin, and then we'll come back to Stephanie on the 25 million. We have been working hard to make sure that ROIC and, more accurately, our pace are in absolutely the right space. And at the moment, they are open, but one thing I can say is, we have a principle that says we will do whatever is the right thing for our clients and our customers, and we'll work with the authorities to make sure that that's in a good position. So, I don't really have much to add. I think it's pointless speculating about those issues. We're aware of the issues and we've managed through them in the previous period. And I think our track record actually speaks for itself. Campbell, on the fee margin?

Campbell Fleming: Yes. On the fee margin in respect to multi-asset, it is a very idiosyncratic thing happening here with a vintage of clients that got into the funds and then experienced a difficult period. So, they're the clients in which we varied the fee arrangement and reduced – and introduced a performance fee and stayed with it. And then secondly, the assets that are coming in, we are winning those assets at sort of traditional rates, which remain anything north of 65 basis points and up to 80, 85 basis points depending what [rapport] it's in and where it is. So, there's an idiosyncratic thing going on here in relation to a vintage of clients that we have come to sensible arrangements with and the new business that's coming in is at sort of traditional rates. So, that coupled with a mixture that we've got there has resulted in that margin drop in that particular segment.

Stephanie Bruce: In the first half of this year.

Campbell Fleming: In the first half of this year.

Stephanie Bruce: So, I think in terms of how we are looking at the guidance for this, we would not see that having an additional impact as we look forward to the second half of the period because of the reasons that Campbell has said. If I just turn to then your points about the run rate. I think your question refers to the 103 million of annualized run rate and costs that I mentioned that are applied for the first half of 2019 versus the 40 million in the equivalent period in June 2018. I also mentioned, when I was just running through the presentation there, that our expectation is very much that we will see an increase in the run rate that we've seen in H1 2019 for the simple reason that a number of the areas were always planned to come through in terms of the benefits in the second part of the year, and particularly quite a lot of heavy lifting that's been done in the back end of 2018 and into the first half of 2019. Those benefits were never planned to materialize until – into the profit and loss account until the second part of this year and into 2020. So, as we're looking at the cost profile, we are working with the discipline to make sure that we come in at an increased run rate in the second half of this year. And I'd also just go back to an earlier point, which is that whilst we are, as I said, very much focused on delivering the targets, a key part of the discipline that I'm driving towards in terms of the financial costs is to make sure that we continue to focus in on those BAU costs and bringing them down at the same time as well. And that includes actually where we will add on costs and how we will add on costs. And again, as I've referenced before, that's about getting very good discipline around the ongoing business as usual expenditure, reflecting the tougher conditions that we're in.

Keith Skeoch: Okay. Thank you, Stephanie. And thank you for your questions and thank you for coming on the call on what I know is a very busy day. And I know that Stephanie and I will be available and meet those who would like to follow lunch at Bow Bells House today to answer some more questions. So, thank you very much for your questions. Thank you very much for listening, and please enjoy the rest of your day. Thank you.