AJ Bell plc (AJB) Earnings Call Transcript & Summary

Hi. I'm Danni Hewson, financial analyst at AJ Bell. Thank you so much for joining us for our 2022 annual results video. In a moment, we're going to be hearing from Michael Summersgill and Peter Birch, CEO and CFO at A.J. Bell. But first, let's run through some of the key numbers from the year. Let's start with customers. And as reported in our year-end trading update back in October, AJ Bell's total customer numbers increased to over 440,000 at the end of September. This is an increase of 15% over the last 12 months with the growth being driven by the company's platform business. Assets under administration, or AUA, had opened the year at GBP 72.8 billion. During the year, AJ Bell's platform business delivered strong net inflows of GBP 5.8 billion with GBP 3.3 billion being advised and GBP 2.5 billion being D2C. Following the planned closure of the institutional stockbroking business, non-platform net outflows were GBP 2 billion. Adverse market movements reduced AUA by a further GBP 7.4 billion, resulting in AUA closing the year down 5% at GBP 69.2 billion. Moving on to the full year financial results announced today. Revenue was up 12% to GBP 163.8 million. This was driven by higher average AUA compared to the previous year and a slight increase in revenue margin to 22.6 basis points. The uptick in revenue margin was largely due to an increase in the average interest rate earned on cash following interest rate rises particularly in the second half. With interest rates having moved beyond the level expected at the time of our interim results in May, management are now guiding to further improve platform revenue margins in full year '23. Profit before tax for the year was GBP 58.4 million, up 6% from the GBP 55.1 million reported in 2021. The percentage increase in PBT was lower than revenue growth due to the investments in new simplified propositions, Dodl and Touch. The PBT margin was 35.6%, which was slightly ahead of the guidance provided at the half year due to stronger-than-expected revenue margins in the second half. An improvement in both revenue and profit margins is anticipated next year with management guiding to an improvement in PBT margin of around 2 percentage points in full year '23. In line with the increase in profit before tax, diluted earnings per share increased 6% in the year to 11.35p per share. And let's end with dividends. The Board has proposed a final dividend of 4.59p per share. This takes the total ordinary dividend for the year to 7.37p, representing a 65% payout in line with the company's stated dividend policy. You can find the full details about these results on our website. Now let's hear from Michael and Peter to get insights into what they think is behind the numbers and also their thoughts on full year '23 and beyond.

FY '22 has been a good year for AJ Bell. Strong growth in the platform business in what I think everybody will accept has been a pretty tough set of market conditions. The platform business has continued to grow well, so we've seen that both in terms of customer numbers and the assets attracted to the platform. So customer numbers have grown about 16% over the course of the year. And it's been a similar rate of growth on both the advised and the D2C side of the business. Inflows have been strong as well, and that's been particularly the case in the advised market. That has proven to be very resilient in these market conditions. There have been a number of changes in the senior management team over the course of the year, and the most significant is obviously Andy, who's stepping down as CEO. I think the way that we've done that as a business probably says a lot about Andy. Now what Andy has achieved here has been incredible in the time that he's been the CEO of the business. And through this transition for him, it wasn't about him stepping down, it was about me taking over and the way that he supported me through that and helped me and the rest of the team focus on what comes next. And I've been here for a number of years. And the way that, that succession has been executed, it's given me the chance to build the team around me. And so I think we've got a great business model and a great team, and I'm looking forward to the challenge ahead. Service is something that we always take very seriously at AJ Bell, and FY '22 has been a strong year on that, no doubt about it. All the measures of service that we have, from how quickly we answer the phones to the feedback that we get from customers have all been up around sort the all-time highs that I've seen in the business. And the customer retention rate is the ultimate test there, and that's up in the year and well over 95% now. It's been a really strong year for AJ Bell Investments. It's still quite a small part of the business but a very important one and one that's growing really quickly now. So in the year, we've seen GBP 1 billion of new money attracted into our investment solutions. And the performance of all of the investment solutions has been terrific. And we're getting up around the GBP 3 billion mark now. So you can see that the scale of the business is coming there, and it will be a bigger part of the business in years to come.

So financials have also reflected that strong performance. Revenue and profits, they're both up in the year. The revenue model of the business is well diversified, and that's a real strength that enables us to deliver a strong performance in different market conditions. In the previous year, we had a lot of dealing activity, which drove transaction revenue. That settled down a bit more this year as that -- the market conditions there have been a bit harder. But at the same time, we've had a rise in interest rates, and that has flowed through into an overall higher revenue margin whilst, at the same time, reducing some of our charges to customers. So yes, pleasing set of results with both revenue and profit.

There are some challenges in the platform market at present. There are some short-term headwinds for sure, and that's true in so many parts of the economy. The way that that's impacting the platform market is lower investor confidence, and markets have also been very volatile as well. I think the thing to remember about the platform market in an environment like this is that although confidence of retail investors is low, and so you might not think that people are opening new accounts and contributing new money into those accounts. There's a lot of money already in the financial system that is well served on platform. So of the GBP 3 trillion total available market, total addressable market for us, GBP 2 trillion of that is not on platforms at present. So people can consolidate those assets on platforms, so that gives me confidence that we will, even in this challenging market, be able to carry on growing the business. There are short-term challenges, but I think that we're well positioned to deal with them. I mean, first and foremost, we have a trusted brand, and we're a scale player. So if investor confidence is low, I think that people will gravitate towards the trusted and established players in the market. I think you need to have scale to be able to continue investing in the business and offer sharp pricing to customers, and we're in a position where we can do that. I think they are factors about our business model, but I mean, they're particularly well positioned as well. So the fact that we're in both the advised and the D2C parts of the platform industry means that we've got the best growth potential in what could be a challenging market. And our revenue model as well, we're not overly dependent on any one revenue line. And that means that we know that the financial performance is going to be at a certain level in a wide range of scenarios, so I think we should prove to be a resilient business in this market. I'm excited about the long-term opportunity in the platform market. It's a market that benefits from structural growth drivers. And the key one for me is demographics. People are living for longer. They're working for longer to save for their retirement, and that means that the need for services like ours are greater. There's a long list of those structural growth drivers, technology, legislation, the list goes on. So it's a market that's very attractive as we sit here today, which should carry on growing for many years to come. I think we're well placed in that market. But what I want to make sure that I do and the rest of the management team here focus on is investing in the business, thinking about where we need to be in 3 years' time, in 5 years' time and making sure we carry on investing in those aspects of the business now so that we're best placed to take that long-term opportunity. The way that we were going to approach the platform market going forward is to have the full-service propositions that we've always had, so Investcentre in the advised market and AJ Bell in the D2C market. They will carry on being the growth engine of the business for years to come, and we'll carry on investing in them to make sure that they stay at the forefront of the market. But we're also investing in simplified platform and bringing those propositions to market. We've launched Dodl in the year, and we're going to carry on developing that proposition and adding new features. And we're still in the build phase of Touch on the advised side of the business. And that is an area of ongoing investment. By introducing those simplified propositions and having those 4 platform products going forward, the aim is to increase our footprint and appeal to as broader range of customers as possible.

So the cost of the business there are broadly in line with what we set out at the beginning of the year in terms of our expectation. There are 2 aspects to our costs: so we've got the cost that we're investing in the future growth of the business; and then we've got our sort of BAU costs of running the business. So if you look at our technology costs and distribution costs combined, those were up 29%, and that's because we're investing in the future growth through our simplified propositions and developing them and marketing them. Whereas our underlying operational support costs, they're only up 8%, and the reason for that is we've got those under control, they're tightly controlled, and we're delivering some operational gearing there. So the impact on overall profit is that both profit and profit margin are ahead of the expectation that we set at the beginning of the year. And that is a really pleasing outcome for us.

Pricing is something we've always had a keen focus on. And as we grow the business and we scale the business effectively, we should be able to carry on reducing prices to customers and still increase returns to shareholders. That's something that's in the DNA of the business, and we've taken the opportunity to do that this year. So we've reduced charges to customers by about GBP 5 million on an annualized basis over the course of FY '22. This kind of thing as we carry on growing, we want to make sure that we retain that focus and we share the benefit of our growth with customers going forward. If we're going to maximize the growth opportunity in the platform market, we need to have a stronger brand awareness than we do. So there's a few things that we're doing there to try and to strengthen it. Yes, we've looked at new sponsorship arrangements, and there's more brand advertising going on. But we're also trying to really funnel that as effectively as possible in the D2C platform space. So we've dropped the Investor brands that we've carried for a number of years there, and our full service proposition will simply be called AJ Bell going forward. So as we increase the brand awareness and we simplify that journey for a potential new customer, hopefully, it maximizes our growth potential.

So I think there's lots of benefits to us investing in the brand. It should mean that we bring more customers onto the platform. It makes it easier for us to do that. More customers with more assets means a business that's got greater scale. You combine that with the operational gearing of the business, and we've got a business that makes more profit. Yes, we can reinvest that profit. We can reinvest it in pricing that customers pay. We can reinvest it in our people, our propositions. And the other benefits of having a great brand are that our people really like working for a business that's well known and has a positive brand. That helps us with recruitment and with retention. You wrap all of those things up, and you get a business that's generating better returns for shareholders. So I think, yes, everyone benefits from the investment that we're making, and I'm pretty excited about how that's going to play out.

It's been an important year for focusing on the pay and benefits that our workforce receive. Every business has had to do that as a result of the inflationary environment. And it's something that we gave a lot of thought to here. We wanted to make sure that we gave people the right level of salary increase but also that we focus whys of that and put things in place that reinforce the very positive culture that I think that we've got at AJ Bell. And the bit that was particularly close to my heart was the new share scheme as we've always had a culture of share ownership here. And it was something I wanted to make sure that, that became a meaningful and permanent part of everybody's pay. So for everybody outside the senior management team now, they'll receive GBP 2,000 per year of AJ Bell shares. And obviously, as those people stay with us long term, build and develop their careers with us, that should become a very meaningful part of their overall package.

As we're investing for the future, we will make decisions around certain areas of cost that we will invest in. But we will also make sure we keep our costs under control. We'll be quite careful where we make those investments around things like our simplified propositions and our brand but all the costs we will keep under control. So you will see the benefits of a highly profitable, highly cash-generative business come through over the foreseeable future. And we're confident that we can make those investments whilst at the same time growing both profits and profit margins.

In the D2C market, it probably splits into 2 categories. So the first-time investors, less sophisticated investors, the target market for Dodl, there has been an impact there. It's been difficult for people to add more money to platform, so that's been a difficult and challenging market to grow that proposition in. But it's a fantastic proposition and one that I think will have a great future. The full-service platform on the D2C side, AJ Bell, there, the customers have been able to carry on investing. There has been a reduction year-on-year certainly. So the average customer has added about GBP 10,000 to the platform compared to GBP 13,000 last year, and that is the inflationary impact on those households. In the advised market, it's been quite a resilient customer base over the course of the year. These are generally people who are higher earners and have more accumulated wealth. So it's not that people are immune to inflation. Clearly, there has been a reduction year-on-year, but it's been less significant than on the D2C side. So in the advised market, your average customer has added about GBP 14,000 in the platform compared to GBP 15,000 in the prior year. So nobody is untouched by inflation, but you can see there the different extents to which our customers have been impacted. D2C customer really has changed in the year, but some of the long-term characteristics haven't. So people are still using tax wrapped accounts, and it's that long-term investing, long-term buy and hold mentality that we're really trying to appeal to and design products for. Customer activity has dropped in the year, so trading activity has been lower. But that makes perfect sense to me. I think in an uncertain time like this, with market volatility as high as it has been and the market correction that we've seen, it makes sense that people are just a little bit more cautious about buying and selling assets on the platform. So it's not something that's a concern to us as a business. It's very normal behavior. I would expect over time for people to start trading a little bit more and return to those long-term averages that we used to.

I think FY '23 will be a good year for AJ Bell from a financial performance perspective. We've updated our guidance in terms of the revenue margin that we'll generate, and that's been driven by a higher interest rate environment. But we're keen to make sure that we use that position to be able to deliver to all of our individual stakeholder groups. So from a customer perspective, we'll be investing in our propositions and also looking at our pricing. From a people perspective, we're making investments into our remuneration. And Michael talked previously about the free share scheme that we've put in place for our people. We should have long-term benefits for the business. And then clearly, we've got our shareholders. And we're fully expecting that our levels of profitability and our profit margins will also increase through FY '23. So all in all, we're pretty confident that we can use our strong financial position and the diversified nature of our revenue streams to deliver really well to all of our stakeholders.

I'm excited about the long-term future for the business. I know that there are short-term headwinds. I'm not blind to that. But I'm looking through that period. I think we've got the right business model to succeed in the platform market long term. I think that combination of being in both the advised and the D2C market and setting ourselves up to our full-service and simplified propositions really does maximize the growth opportunity for the business. I think the fact that we operate on a single tech stack means that we'll scale effectively. And I think I've got a great management team, and I think there's a good culture and a great workforce here at AJ Bell. So I'm looking forward to working with all the people in the business to drive the business forward for many years to come.