Aberdeen Group Plc (ABDN) Earnings Call Transcript & Summary

Hello, and welcome to our 2021 results. I'm joined by Stephanie Bruce, our CFO; Chris Demetriou, René Buehlmann, Noel Butwell and Caroline Connellan, our vector CEOs. I will kick off with a summary of our 2021 results, my first [ school ] here as CEO. I will then update you on our progress in delivering our strategy, which demonstrates the power of our client-focused business model. Stephanie will then take you through the financial results in detail, and we will then open up for questions from the broader team. 2021 was a reset year. We set out a clear strategy and the results that we expected to deliver. Our strategy is based on creating long-term sustainable growth and in the short term, arresting the decline in revenue. And today, I'm very pleased to report strong progress for the first year of our 3-year plan. For the first time since the merger, we have reported increased revenue for the full year, up by 6%. This is in the context of disciplined cost management which has enabled us to improve operating leverage, our cost/income ratio and increase operating profits by 47%. On this graph, you can see our progress in improving operating margin, an increase of 6 percentage points in the year. In year 2 of our plan, we will continue our relentless focus on improving operating margin as we progress towards our target of 30%. This combines a 3-year revenue CAGR of high single digits and disciplined cost management to deliver a cost/income ratio of around 70% as we exit 2023. We are very alive to the heightened volatility of markets. So far this year, it's been evident to everyone, and I will shortly highlight how we will continue to improve our operating margin in spite of this environment. We will also improve our competitive position through the proposed acquisition of the U.K.'s leading subscription-based direct investment platform, interactive investor. We expect II to be double-digit earnings accretive in its first full year as part of Aberdeen. I'm also pleased to report that this year, our dividend is fully covered by the adjusted capital that we have generated. These strong financials are underpinned by the various bold actions that we took in 2021 to drive growth. Our strategic partnership with Phoenix is very important to us and that's why we invested our time early in the year in simplifying and extending it to at least 2031. As our single largest client and a leading life company in the U.K., we jointly bring best-in-class sustainable investment solutions to the U.K. pensions market. We have new and innovative solutions in the pipeline. And the first of these tax efficient, low-cost, sustainable funds is already winning open business for Phoenix. A lot of my time, in 2021, was spent on the effective management of our capital. We successfully realized capital from noncore asset sales, particularly from the sale of Parmenion and Nordics real estate as well as the monetization of stakes. Together with the increased earnings from the business, these actions generated GBP 1.6 billion of capital. In addition, in early 2022, we sold down some of our stake in Phoenix, and we're pleased to be returning these proceeds to shareholders. Our remaining holding of 10.4% in Phoenix represents a commitment to this key strategic partnership. We also have streamlined our operating model to bring decision-making closer to our clients and have established our 3-vector model with accountable strong CEOs driving performance. We have brought in new talent alongside promoting homegrown leaders, and I'm pleased to have René, Chris, Noel and Caroline here with us today. We completed platform integration in the investment sector, which simplifies our global investment operations and improves efficiency and collaboration. And we have replaced 5 different brands with a powerful single brand, Aberdeen, that works digitally and that we own globally. This successful implementation makes it simpler for our clients to understand who we are and serves to unify us as a single team. Let me talk a little bit more about growth. We have sharpened our focus on our core investment strengths to those where our clients recognize that we are truly distinctive. We will not try to compete across the entire waterfront. For the Adviser vector, we are building and capitalizing on our leadership position. When I joined the company, I described this business as a hidden gem and its strong results in 2021 reinforce why. In the Personal vector, the acquisition of II, The U.K.'s #2 direct investing platform, will transform our position in the rapidly growing U.K. wealth market. You can now see that 2 of our 3 vectors will be leading platform businesses, which we will support by investing in data, digitization, cutting-edge research and information that expands our capabilities. In 2021, we acquired Finimize, a global investing insights platform with over 1 million users. We are utilizing these insights daily alongside our existing capabilities in our Aberdeen Research Institute. Quality information, the signal and the noise sits at the heart of enabling clients to be smarter investors. Before I turn to individual vector performance in more detail, I'd like to reinforce the power of our strategy. This will be familiar to you. We drive client-led growth and create value for our shareholders by enabling clients to be better investors. We have reorganized our business around our clients in 3 distinct areas: our investments business, our advisory business and our personal business. And we appointed leaders with clear accountability. As a result, we're diversifying our revenue streams, accessing new growth opportunities and serving a broader range of clients. We're focused on high-growth areas where we believe we have distinctive capabilities, Asia and emerging markets, private markets, sustainable investing, solutions and the U.K. adviser and consumer markets. This clear strategic framework is the bedrock of current and future performance. Here, for the first time, you can see the power of our client-focused business model. Each of these vectors has delivered growth in revenue, good profit performance and improved flows, a positive picture that Stephanie will look at in more detail shortly. Let me focus now on our Investments vector, our largest business and where I spend most of my time. Firstly, as I mentioned earlier, we simplified our relationship with Phoenix, a very important step in underpinning the assets and revenues from our largest client. In addition to René and Chris, we have made new appointments in wholesale and institutional distribution, and we flattened structures to speed up decision-making. We brought the public markets investments team together under Devan Kaloo to improve collaboration, sharing of ideas and efficiency. Within private markets, we consolidated our growing real assets business under Neil Slater. We completed the integration of our investment platform, and we've had the best flows since the merger. With more than GBP 100 billion invested, we are unquestionably one of the world's leading investors in Asia and emerging markets. René has tightened the focus in Asia to allow us to go faster, exiting some onshore franchises such as Indonesia, Taiwan, and focusing resources where we're in the best position to compete and to grow. We are an acknowledged leader too in The U.K. and Europe in real assets. In 2021, our AUM increased by 25%. We have accelerated in the growing logistics segment through the acquisition of Tritax. And you will have seen that we are the leading investor in the GBP 1.7 billion fundraising for Britishvolt Gigaplant. Our solutions capability enables us to address complex needs. The new solutions that we have created for Phoenix this year are helping them to win new business. And when they grow, we grow. In the U.K. wealth market, our investment content is increasingly well placed to compete [ in our ] and other open architecture platforms, and our connected ecosystem provides unique insights. This industry has a critical role to play in decarbonizing the global economy. There are 2 key elements here: direct investment in green assets and the greening of brown assets. We do both, and our actions match our words. In 2021, we publicly committed to a 50% reduction in carbon intensity on our investments by 2030. And we launched 4 new climate funds, and we have extensions of these fund ranges planned for this year. In the context of the deeply troubling escalation of conflict by Russia against Ukraine, we have acted to reduce our holdings in Russia and Belarus in a disciplined manner, protecting our clients' interests. And we have concluded that we will not invest in Russia and Belarus for the foreseeable future on ESG grounds. Central to our future success is our investment performance. For the third year in a row, our rolling 3-year investment performance has improved, now standing at 67%, up from 50% in 2018. Importantly, this figure includes 79% of assets outperforming in the critical institutional and wholesale channel. These performance numbers are a testament to the significant work that has been undertaken in recent years by our investment teams. It is the combined power of our 3-vector model that will continue to deliver profitable growth through time. Let me cover just some of the highlights. Firstly, investments. To reinforce my comment in the previous slide, our focus in emerging markets is twofold. Firstly, we want to be the go-to place for investors seeking asset exposure to Asia and China, in particular. And secondly, we're enhancing our distribution in Asia and emerging markets for clients seeking exposure to global investment solutions. In real assets, we will continue to accelerate growth and our logistics capability and are also building on our strong position in infrastructure and European residential. We have a number of new funds and products across thematics, sustainability and wealth solutions planned over '22 and '23. At the same time, we will work towards rationalizing our existing fund suite, which is currently too broad. I have mentioned our growth partnership with Phoenix, which will be further enhanced in 2022 by additional tailored solutions and workplace pensions, and it will support their announced acquisition of GBP 5.5 billion of bulk purchase annuities. Beyond our Phoenix relationship, we're launching a newly created Aberdeen Pension Master Trust, which is a consolidation vehicle for U.K. DB pension schemes. Our strong pipeline of GBP 11.3 billion is up 20% on this time last year. We have made progress on Morningstar ratings as well, which are a key indicator for the wholesale market. And we have 52 positive consultant ratings, which are important to our institutional clients. In Adviser, the focus of our team is constantly improving the adviser experience to ensure that we sustain and build on the leadership position that we have. New technology and development will enable advisers to be more effective and more productive for their clients and will encourage advisers to use us as their primary platform. New capabilities like Junior ISAs will be rolled out in '22 and '23, and we will continue to improve our service to advisers and to their clients. Together, this will enable us to serve more advisers, more of their clients and sustain an already high retention rate. In the Personal vector, our market presence, scale and profitability will be transformed by the acquisition of II. The connectivity between II and Aberdeen will enable us to offer clients a full range of capabilities so that together, we can grow faster. Our existing discretionary management business, for example, has top quartile performance and is very well placed to continue its growth journey, supported by our financial planning business. Let me now take a more detailed look at the acquisition of II, which is being put to shareholder vote later this month. II is the U.K.'s leading subscription-based direct investment platform. As I said, when we announced the deal, this is right on strategy for us. We are building a leading position in a high-growth market. Direct investing is the highest growth part of the U.K. retail and savings market, and II is the clear #2. It is the disruptor and the consumer's champion. This, along with its simple pricing model and higher average customer balances, is what sets it apart. It has leading and scalable technology already. So does not require significant technology investment nor integration. II has continued to have good momentum during the second half of 2021. During which time, the business added around 17,500 new customers, a bit 12% higher than in the comparable period in the prior year. It also continues to retain high levels of assets per customer with trading volumes remaining significantly above pre-COVID-19 levels. II will transform the Personal vector and will give us both scale and client reach. There is scope to develop the existing offering for II customers over time through a thematic investment content, discretionary fund management and digital advice. In conclusion, I look forward to welcoming Richard Wilson, CEO of II, as part of the Aberdeen executive team to ensure continuity and delivery of this plan. The ownership of II by Aberdeen will provide the resources and the stability to drive further growth to realize our full ambitions. Over to Stephanie now.

Thank you, Stephen, and good morning, all. Our financial strength and strategic focus enable us successfully to navigate the impacts caused by the pandemic and the ongoing uncertainties in global markets. I'm pleased to report the strong progress towards our financial aims while recognizing that we have more to do. With stronger markets persisting for the majority of 2021, fee-based revenue was 6% higher. Encouragingly, strong revenue growth was delivered in all vectors. In Investments, our activities in Asia and the U.S. returned to growth following restructuring of these businesses. EMEA was impacted by the Nordic sale and The U.K. remained constrained largely due to the decline in insurance revenue. In Adviser, growth benefited from both the restructuring of the Phoenix arrangements and strong underlying growth of 12% on the lower base of 2020, which, of course, was during the height of the pandemic. Within Personal, Aberdeen discretionary reported its best-ever year. Higher levels of revenue growth in the Adviser and Personal vectors are delivering the diversification benefits we are seeking. Together, these represent 18% of group revenue compared with 15% in 2020. We've also been working hard to improve our operating leverage, and we delivered a 6 percentage point improvement in our cost/income ratio to 79%. Again, the improvement is evident in all 3 vectors. The benefit from both increased revenue and lower cost results in an increase of 47% in adjusted operating profit to GBP 323 million compared to 2020. This result is also 7% higher than 2019, the last full year period of reference before the impacts of COVID. AUMA have increased by 1% to GBP 542 billion with the strongest growth recorded in the Adviser vector, which saw a benefit of 8% from market and 6% from positive flows. Overall, the net outflows, excluding Lloyds and liquidity, are GBP 3.2 billion, which is a significant improvement compared with net outflows of GBP 12.3 billion in 2020. So 2021 was a period of reset, as Stephen has outlined. Arresting the decline in revenue was key, and this is the first time in 5 years that revenue has increased. Markets were positive through '21, which benefited growth of AUMA and revenue. Now an important contributing factor for revenue growth in '21 is a diminishing drag on revenue from both the impact of prior year outflows and in-year outflows. The impact on revenue of net outflows arising in the current year has encouragingly now reduced to less than 0.5% of annual revenue. It is worth reflecting overall that by comparison, the impact of net outflows in 2021 is 4x less than 2020 and 6x less than the impact in 2019. So this is a helpful tailwind now for revenue growth. And importantly, current year inflows are into higher-margin assets with gross flows into equities and real assets increasing by 7% and 43%, respectively. Revenue from acquisitions, primarily through Tritax, was broadly offset by revenue for gone through disposals, of which the largest were Parmenion and our Nordics Real Assets business. Overall, total revenue yield improved slightly to 27.3 basis points. We also generated an increase in performance fees, a total of GBP 46 million in total for 2021. Now in terms of flows, excluding liquidity, the positive trend that we reported in the first half of 2021, pleasingly has continued in the second half of the year. In quarter 4, total flows, excluding liquidity, were positive. The improvement in flows was seen in all vectors. Now within Investments, it was really pleasing that flows in Asia, EMEA and the U.S. all moved to positive net flows this year. In Investments, while Institutional wholesale remained in net outflows for the full year at GBP 2.1 billion, the improvement of GBP 6.8 billion, excluding liquidity, creates a stronger position entering 2022. This improvement was most evident in private markets and fixed income with good progress also in equities and multi-asset. An improvement of 14% in the level of redemptions, excluding liquidity, was a significant contributing factor. Now turning to Adviser and Personal vectors. Here, net inflows more than doubled in 2021, driven by higher gross flows in both vectors of 44% and 55%, respectively. Adviser delivered the highest net flows in 3 years and Personal generated record flows from Aberdeen discretionary. Now turning to costs. As I highlighted last year, our plan reduced costs in the near term and focuses on improving the split between fixed and variable costs in our business, so that costs can track performance in the medium term. It is essential that we take costs out of our existing structural cost base, thereby creating capacity for investing in the business and our ability to pay for performance as the business delivers that performance. This greater efficiency ensures delivery of our target operating margin and builds protection from market volatility, given our reliance on ad valorem fee revenues and, of course, inflationary pressures. So let me explain about progress in '21 and looking forward. In 2021, our costs have decreased 11% compared to the 2019 pre-COVID period and reduced by 1% compared to 2020. Now while our cost/income ratio has improved to 79%, we have more work to do as we progress to our 2023 exit target, particularly on driving down the level of our existing structural costs in our Investments vector. The reshaping of the cost base undertaken in 2021 included GBP 82 million worth of reductions in costs, some 7% relating to legacy technology services, disposals of noncore activities and a 14% reduction in overall staff numbers. This, in turn, generated the capacity for investing GBP 72 million into the business, a 6% increase relating to the investments in Tritax, ESG, brand and increased compensation levels. We have also now achieved the GBP 400 million synergy target set in the context of 2 the historic transactions with our large integration migration program completed in Investments and the separation program from Phoenix completing in 2022. And I am confident that the reshaping of our cost base can now move further and faster. The key is addressing costs in our largest sector, Investments. Now here, the cost/income ratio improved in 2021 to 79%, not yet where it needs to be. We have, however, shown really good progress in Asia, U.S. and EMEA to deliver the levels of efficiency required where cost/income ratios are already at 72% or below. However, costs remain too high in the U.K. The new vector leadership team are focused on delivering growth, building on the momentum of '21 in the areas of core strength that Stephen has just highlighted. With this very clear focus on our growth priorities, the leadership team are also now able to drive faster the reshaping of the existing cost base in Investments and are doing so with a turnaround plan that is already underway. The main focus is threefold: simplifying the U.K. operational model, rationalizing noncore activities and subscale funds and streamlining the complexity of specific mandates. This will result in further reductions in headcount and supporting operational costs to create the efficiency we're looking for. The extent of future investment and performance-related costs will depend on the achieved of this efficiency. If we perform well, I would expect costs over the medium term to track the improving profile of performance of the business as we have increased our ability to pay for performance and invest in the business. If performance is not delivered then the absolute cost will have decreased from the current levels as a result of our turnaround plan. In addition, it's worth noting that II obviously adds both revenue and cost to our business. But at the margin of 34%, II is already more efficient than our overall growth. Now turning to earnings per share. Adjusted diluted EPS has increased to 13.7p, a movement of 4.9p, reflecting the increase in adjusted operating profit. Adjusted capital generation benefits from the increased operating profit, increasing by 40% to GBP 366 million and creating a 45% improvement on adjusted diluted capital generation per share. The dividend is retained at 14.6p on a full year basis. And on this basis, dividend cover improved to 1.18x. We have also continued to strengthen our balance sheet in terms of both capital and liquidity with surplus regulatory capital increasing by 50% to GBP 1.8 billion on an IFPR basis and cash and liquid resources of GBP 3.1 billion at year-end. Overall, our disciplined approach to capital management generated GBP 1.6 billion of capital during the year, which Stephen highlighted earlier. In addition to the stake sales and capital generated from the business areas, we also issued an additional Tier 1 debt instrument of GBP 0.2 billion, making us the first asset manager to offer this capital-efficient security. Capital was deployed to support key growth priorities within private markets and digital content through the acquisitions of Tritax and Finimize, and circa GBP 0.3 billion was returned to shareholders through dividends and the share buyback, which completed in February 2021. For the proposed acquisition of II for circa GBP 1.49 billion, we will fund the purchase from our existing strong capital resources. II immediately improves growth in revenues and profits, and the acquisition further diversifies our business from ad valorem revenue streams. Supplementing our regulatory capital, we have significant further capital resources through our stakes in our listed financial investments. And we factor all these resources into our disciplined approach to capital allocation. Looking forward in 2022, our pro forma surplus post the acquisition of II is around GBP 0.7 billion. Our listed stakes as of last Friday are GBP 1.8 billion, following our successful monetization in January 2022 of a 4% holding in Phoenix, raising GBP 0.3 billion. We have no plans to dispose of the remaining 10% holding in Phoenix, which remains our strategic partner. Over time, we plan, subject to market conditions, to monetize our Indian stakes, releasing further funds for deployment. Our capital allocation framework evaluates each opportunity in the context of the generation of long-term sustainable value for shareholders. We also balance within our capital allocation, an appropriate management buffer for the business above the regulatory capital requirement. Now following the deployment of capital to acquire II, we have a clear view on the management buffer over the period to 2023. Subject to the regulatory and market environment, we plan to maintain a buffer of GBP 0.5 billion. Now we will either invest our capital in those areas which create value for shareholders or deliver returns to shareholders. We will invest to innovate our business and accelerate growth within organic bolt-on acquisitions. This includes strengthening our wholesale offering and innovating our ESG product suite, digital skills and capabilities. On returns to shareholders, we evaluate both dividends and other return programs. For example, the buyback, the last of which was completed in February 2021 of GBP 400 million. Following our recent monetization of the 4% stake in Phoenix raising GBP 0.3 billion, we announced our intention to return this to shareholders and the details will follow as soon as practical. We will continue to evaluate opportunities for further returns. Our dividend policy remains as previously communicated, set at the level of 14.6p per annum with the objective of growing the dividend based on our estimates of sustainable growth once the dividend is covered 1.5x by adjusted capital generation. We are very focused on delivering our pathway to achieving that cover. We expect the acquisition of II to positively contribute to this objective, given its projected contribution to earnings. And I'll now hand you back to Stephen.

Thank you, Stephanie. To summarize, this was the reset year for Aberdeen, the first year of our 3-year plan. And I'm proud of how our people have contributed to delivering a great performance. We set out our strategy to return the business to long-term sustainable client-led growth. We have both arrested the decline and indeed generated growth in revenue and profits while improving our flow performance across the board. I recognize that there is still much to do. I have set out for you my areas of focus for years 2 and 3 of this strategy. We will continue to invest in high-growth areas in a disciplined manner and remain laser-focused on improving productivity and efficiency across our business. Despite the geopolitical uncertainties, we are positioned for both resilience and growth. We will adapt along the way to the challenges posed by the external environment. I'm confident that we have the right strategy, the right leadership and the right focus to drive the growth agenda that we have set for this business. Taking account of all the progress we have made in 2021 and our future plans, the company that is now emerging looks very different to the one that was created by the merger. Thank you, and we'll be right back for your questions.