AJ Bell plc (AJB) Earnings Call Transcript & Summary

I'm Danni Hewson, Financial Analyst at AJ Bell. Thank you so much for joining us for our 2022 interim results video. We're shortly going to hear from Andy Bell and Michael Summersgill, CEO and Deputy CEO of AJ Bell. But first, let's go through some of the key numbers from the first half. Let's start with customers. And as reported in our Q2 trading update back in April, AJ Bell's total customer numbers increased to over 418,000 at the end of March. This is an increase of 21% over the last 12 months with the growth being driven by the company's platform business. Assets under administration, or AUA, closed the period at GBP 74.1 billion, up 13% compared to the same period last year. Total net inflows were GBP 2.8 billion, with the platform business, again being the key driver of AUA growth. Moving on to the first half results announced today. Revenue was up 2% to GBP 75.5 million. This was lower than the year-on-year growth in customers and assets under administration due to a 3.7 basis point reduction in revenue margin to 20.3 basis points. This reduced revenue margin was in line with expectation and follows the moderation of dealing activity in the second half of 2021, as well as a lower average interest rate earned on cash in the period compared to the first half of the prior financial year. Following recent interest rate rises, management are now guiding to an improved revenue margin over the course of the full year, something Michael is going to talk about in more detail later. Profit before tax for the period was GBP 26.1 million, the lower revenue margin, coupled with the investment in new propositions signaled in the 2021 annual results in December, saw a 17% fall in profit before tax compared to the previous year. You'll shortly hear more about these new propositions, including Dodl by AJ Bell, which launched in April. The profit before tax margin was 34.6%, which was ahead of the 32% to 33% range provided by management in their previous guidance for full year 2022. Management are now providing a guide to a profit before tax margin for the full year of around 35%, with a further improvement anticipated in full year 2023. Diluted earnings per share fell 19% to 5.08p per share, reflecting the lower profit in the period, as previously discussed. And let's end with dividends. The Board has declared an interim dividend of 2.78p per share. This equates to 40% of last year's total ordinary dividend in line with the company's stated dividend policy. You can find full details about these results on our website. Now let's hear from Andy and Michael and get some insight into what's behind these numbers and also their expectations for the full financial year and beyond.

The first half results have been really pleasing. Most importantly, the engine room of the business, which is the customer numbers and the assets have grown. And from that, the long-term financial performance will ultimately follow. There's been a large number of new customers have come on to the platform in the half year. We're very pleased with both the quality in terms of the average AUA they brought in and also the fact that predominantly been in tax wrappers, so either pensions or ISAs. And we see, particularly in the role at the year-end, we see the net inflows be really strong. In our results in December, we announced that we were going to launch Dodl by AJ Bell. That was launched in April. For those not familiar with it, that's -- it's an app-only investment proposition, really aimed at those who are new to invest in. And we're very excited about the potential for that in the future.

I'm still very positive about the platform market in spite of the tough macroeconomic environment. There's a long list of reasons, to be honest. But the main thing for me is the continuing growth of the industry. So in the time that I've been in the business, the platform market is growing at about 10% to 15% per annum and that's driven both the advised and the DTC sub-sectors of the platform market. I think that growth will continue. And the main reason is that the real drivers of that growth have been these big structural factors, so things like demographics, people are living for longer and they're having to work for longer to save for their retirement, and that increases the need and increases the opportunity for investment platforms. They got other factors like labor market mobility has increased, so people moving around between employees more frequently, that fragments their pension savings. So that consolidation piece becomes very attractive later on in their working life. So all those factors are as powerful now as they have been at any time I've been in the business. So I think the growth in the industry will carry on despite the tough environment. Inflation will definitely have an impact on inflows into the platform market, but not as much as you might think. And the main reason for that is that there's a lot of money in the financial system that's not currently on platforms that could be. So to talk through the numbers, there's about GBP 1 trillion of assets on investment platforms in the U.K., but there's about GBP 2 trillion that could be, and it's in similar products in adjacent markets, but it's not actually within the platform industry. So I mean, it's an industry of big numbers. I know about GBP 2 trillion. That's a huge opportunity there for platforms to go and they're not reliant on their existing customers contributing to access that growth. So that's one of the reasons that I think that actually the platform market will -- whether the inflation is still better than most industries. The way that we approach the market is slightly different to most of our competitors. Most of our competitors are either a D2C platform or an advised platform. We actually serve both. So we see them as distribution channels. And we have dedicated propositions, different brands and a dedicated customer service team in those 2 different markets, but very quickly, we pull things together into a single operating model behind the scenes. So it's the same IT. It's the same operational teams that are overseeing the transactions that customers process on the platform. And that means that we can operate very efficiently in both markets. So very quickly for me, the question becomes why would you limit yourself? Why only operate in 1 market, when you can operate in 2? So that's the way that we approach the market a little bit differently to most of our competitors, and I think that maximizes our growth opportunity.

So when we're developing our propositions, we will focus on predominantly 3 things. One is price or value; 2 is the service; and 3, will be the ease of use and making sure it's a comprehensive proposition that is really suited to the target audience that we have. Both of our propositions, both advised and D2C have won awards in the half year, and it's really pleasing that we've grown our market share in both segments. And then one of the benefits of having the dual-channels both in advised and D2C is you get the economies of scale of having a single platform, but distributed in 2 separate markets. Both of those markets are growing strongly, both double-digit growth is expected in the future and certainly being demonstrated in the past. I think at the moment, your cost of living is -- you focused on everyone's mind. We are regarded as one of the best value platform providers in the U.K. We have taken this opportunity. We've always been a believer in sharing our economies of scale with our customers, and we've taken this opportunity to announce with our interim results further reduction in charges both on our advised platform and our D2C platform. I'm a big believer there that charges or pricing will attract new customers, but it's actually a service that keeps them with us, hopefully, the full investing journey. Our retention rates have increased now above 95% in the half year, which I think is testament to that approach. Brand awareness is key in an industry like ours. We have come on a journey since we IPO-ed. I think we're far better known now than we ever were. What brand does is help demonstrate our values in our business. And ultimately, trust is second to pricing. Trust is probably the other major factor on which people choose which platform to go with. Part of our spend on brand has been on a new TV advertising campaign, again, part of trying to get our name out there. Really, the message is that, we have a proposition for all types of customer be they advised, be they investment hobbyists, or just be they need to invest in. Yes, it's a very competitive labor market. There's no doubt. And like most businesses, we've had to transition through COVID. Our aim, as we've always focused on, is to attract and retain high-caliber talent. We've now introduced a permanent hybrid working model, which I think is part of that approach to making sure we are an employer that the people want to come and work for.

We've talked for a few years about the attractiveness of simplified propositions. We can now start to talk with that in more detail with Dodl because we've launched it, but everything I say it applies equally to the advised market and so the Touch proposition that we're currently still building in that side of the market. I think the important thing for us to get across to people about Dodl is that it's being launched to supplement you invest. So your investors seen rightly, I think, is one of the strongest propositions in the DC platform market. It's the main focus of our growth in that part of the business, and we're going to carry on investing in it and developing it to keep it at the forefront of the market. What we've said for a few years now is that we think that the customers who are new to investing, that's a big enough market now that it warrants its own proposition. And so that's what we're trying to do with Dodl to have a very simple proposition that can better appeal to those customers without having to strip things away that the new invest customers value is having on that platform. It's still very early days for Dodl. It's only 1 month old as a product. So we're not drawing any firm conclusions at this stage. But there are a few exciting and promising aspects of the data that we've been able to gather so far. So one of the things that we're keen to do is to appeal to that broader audience, the need to invest in customer. And we're seeing that the vast majority of early accounts on Dodl have been from customers that are new to AJ Bell. So this isn't about new invest customers transferring across. So there's a positive sign that we've hit our marks there. And the other thing that we're really trying to do was to make sure that it was a really simple proposition, really simple journey. And if you look at what people are investing in, they're not coming to Dodl to invest in shares. They're generally all investing in our AJ Bell funds, one of the themed investments that we've put together. So promising signs, but as I said, still, still early days. So we'll keep a close sign and see how it develops.

Looking at the impact of the cost of living challenges out there. I think it's impacted differently on the advised customers and our D2C customers. On the advised side, they are typically wealthier on average, slightly older. And hence, we haven't really seen any major impact in terms of activity. They've also had the benefit of advisers who act as a fair filter, and we broadly expect things to carry on in that part of the market. In terms of our DTC customers, they are typically younger in age, probably not as wealthy. There has been a small impact in the sense of slightly lower either contributions into pensions or subscriptions into ISAs. And we have also seen, as we've come out of COVID, we've seen a leveling off of dealing activity. And really, if you look at asset allocation through the period, they haven't really changed significantly. Maybe the 1 notable change has been a slight increase in investment into overseas shares. So we're winning lots of customers, partly COVID was that wake-up call reminding people that they do need to look after their own personal finances, be they go to an adviser or do it themselves. I think the sort of customers that we attract not really the day traders that, that we saw a flurry of last year, and more people are looking -- put together long-term diversified investment portfolios and often within a tax wrap, and not always bought in the main through a pension or on ISA. I would say to anyone who's looking to invest is just the golden rule is to have a diversified portfolio. Clearly, they should be using the tax allowances where possible. But if you have a broad spread of assets, then if there's any bumps in the road, you'll be as well positioned for them as is possible.

We have seen a very -- a bit of a roller coaster ride with revenue margins over the last 2 financial years. But there's a very positive trajectory there now for the business. And the main reason for that is interest rates. But that's not the only thing that's happened here. So if you were to look at the revenue margins for both the advised and the D2C platform over the last financial year and this financial year and say, break it down, it's a 6 monthly periods. You see a nice huge shape to the revenue margin on both sides of the business. The main reason that the uplift is there now is because of interest rates, but there are other things going on as well on the DC side of the business. We don't get back to the sorts of revenue margins we've seen in the first half of FY '21, where it was over 40 basis points. And that's because trading was very high, but that has now come down to what we see as a more normalized level. So it's an output of our very balanced revenue model, but there is now a very strong trajectory for revenue margins. I was concerned that we wouldn't see the benefit of rate rises. We treasury manage the money that customers place on the platform because of the type of deposits that we are, there's sometimes not the greatest demand from banks for that -- for those deposits, that hasn't proven to be the case, which is pleasing. We have seen the increase in rates to transmit tools. And so that means we've been able to share that benefit with our customers in a number of ways. So we're increasing the interest rates that they receive. We're reducing various charges that they pay and that still leaves us in a position where we've got a stronger revenue margin going forward into the next financial year than we've had in the first half of this financial year. The decision to reduce the charges that our customers pay isn't a simple case of interest rates have gone up, so we're going to reduce the prices. There's a few things that give us the confidence to do that. One, we've got a very balanced revenue model. So there are various different revenue streams that drive the revenue of the business. So we're not reliant on interest income. The second thing it gives us the confidence to reduce these charges is that we're scaling the business very effectively as we grow the business, profit margins increase, and that gives us an opportunity to be more competitive by lowering charges to customers, investing in the propositions. So this is something that we're doing now. It's something we've done in the past, and it's something we might well do again in the future. I understand the investors scrutinizing costs in the platform market at present. There is an awful lot going on that's impacting the cost base of businesses very differently. For AJ Bell specifically, where we're looking to launch new products. So it's a fair question to say, okay, how much is that impacting your cost base. If you look at our technology costs, which is one of the areas that, that shows through Dodl hasn't significantly impacted at all. And if you were to take the costs of the development and the work that we're doing ahead of launch on the Touch proposition, if we adjust for that, costs have increased by 17% per annum. So I think that the underlying increase in technology cost is very much in line with what you would expect for a growing platform business. And then the key one for me is the operational cost. That's what you can judge the effectiveness of how we're scaling the business by. And there, the underlying increase in operational costs, if you allow for the different level of customer activity year-on-year is about 10%. So you can see that compare that figure to the growth in the business, particularly in terms of the number of customers acquired and it's certainly a cost line that we've got a tight control. Inflation will have an impact on numerous cost lines. We're no different to a lot of businesses there. So the key lines of cost for us would be IT contracts. They do have an inflation provision in them, as you would expect. And then the key one is salaries, salaries for our staff. We're a growing business, so we need to be able to attract and retain our staff through this period. So we've got to find the right remuneration package to make sure that we're able to do that in an inflationary environment. The area that we are slightly different is that our profits do have an element of inflation protection because, of course, we have that interest income that we've already talked about, yet we've got inflationary pressures. It will impact on cost, but profit margins importantly won't suffer as a result. I've got hugely positive view of the outlook for AJ Bell. If you look at our position in the market, I mean, firstly, the market itself, I think, will continue to grow over the next few years and beyond that. We're improving our competitiveness within a very attractive market. So we're bringing new products to market. We're reducing the prices that our customers pay. And we're doing that while still strengthening our financial performance. So if you look at it from a shareholder perspective, we're seeing profit margins increasing. We've seen revenue margins increase as we look forward to next year. So I think that's a very, very powerful combination. I think we've put ourselves in a position where we can really weather this inflation restore very successfully and keep a focus on what we need to invest in to make sure that we maximize our long-term growth opportunity. And it's that combination that excites me and makes me think that AJ Bell is in a great position.

Scale is clearly important in our sector. We have got a trust with our customers. We're a [ 40 to 50 ] business. We look after over GBP 70 billion of assets. We've got a sustainable and profitable business model. The structural growth driver in the market that were very attractive back in 2018 when we came to market are as valid now as they were then.