Brooks Macdonald Group plc (BRK) Earnings Call Transcript & Summary

Welcome to the presentation on Brooks Macdonald's half year results for the year, 6 months for the end of last calendar year. I'm joined by our Chief Financial Officer, Ben Thorpe.

Good afternoon.

And you'll hear from Ben shortly. Before we get started, though, I should say that whilst this is a presentation of our half year results, our foremost thoughts are very much with the people of Ukraine during the, frankly, terrifying and tragic invasion that they've been subjected to. They and all those who have been impacted, whether that's in Ukraine or their families and friends outside have our full support, and we are very much doing what is right to help where we can. Moving on to the results, though, I am pleased to be able to report another strong 6 months for Brooks Macdonald as we continue to build on our solid foundations. We've been gaining momentum in flow for some time now and the positive nature of which, together with the quality acquisitions that we've made, have driven revenues higher. When we [ ally ] that to the ongoing strong cost discipline, this has allowed us to report record underlying profits and importantly, record underlying profit margin, giving us the ability to invest sensibly to meet our exciting growth ambitions. In terms of our value drivers, which I'll come back to in a moment in terms of how they're going to propel us forward, the first 6 months of the year saw us make real progress on all fronts with improving flows across a wide range of services, and Ben will touch on that in a moment, in both the U.K. and internationally, [ out seeing ] the rollout of our digital onboarding solution, making intermediaries lives easier. And whilst we haven't undertaken any acquisitions, with the integration of Cornelian and Lloyds successfully completed, we're well positioned to take advantage of opportunities as they arise. Our success has been built on the hard work, the great attitude and the ambition shown by our people across the whole business. We've got an awesome team who are excited to be part of our growth ambitions in which we've got a real belief in our ability to deliver, both organically and inorganically. And whilst the macro situation has created uncertainty, we can have confidence having built an increasingly strong financial position. With which, I'm going to hand over to Ben on the numbers.

Thanks, Andrew. So we're very pleased with the results and our achievements in H1. And I'm going to go through the summary results now. But I think importantly, we've delivered what we said we were going to do, which is strong results and positive net flows. Background, as Andrew said, it does now look like H2 will be tougher than we first expected. However, we are very well placed on both new business and from a cost control point of view. So turning to the highlights themselves. Income was up by 10.7% to GBP 61.9 million. Underlying profit was up by 25.7% to GBP 17.6 million. Our underlying profit margin is up to 28.4%. Statutory profit was down by 6.4%. But if we exclude the one-off gain we had last year from the acquisition of Lloyds Channel Islands business, we're actually up by 45%. Basic EPS is up by 20.7%. I'm pleased to say that the interim dividend is up by 13% to 26p. So turning to my next slide, Slide 6. So total FUM at the half was GBP 17.3 billion, and that was up by 5.3%, 3.3% of which was investment performance and the balance of 2% was net flows. Therefore, we are firmly back in positive territory on flows with an annualized growth rate of 4%, which is exactly the guidance we gave at the full year. Turning to my next slide, Slide 7. The graph on the left shows we've now had 3 consecutive quarters of positive net flows with the last quarter being 55% higher than the one before. I think it's important to call out that the progression on net flows won't always be linear, and we will have quieter quarters. This is in part due to seasonality, and you can see Q1 was flat on Q4 last year, and that's really due to being the tail end of the summer. Also, we have our new business which is doing very well, Brooks Macdonald Investment Solutions. That's quite lumpy in nature, and that will introduce some variability to our quarter-on-quarter close. Then look at the table on the right-hand side, and that details our performance by product and business on a quarterly basis. You can see the progression we've had. BPS is growing again with a broad recovery across our branch network, and in particular, we've had strong performance from our specialist offerings. MPS continued to be very strong across the piece with [ firming out ] in Brooks Macdonald Investment Solutions been up by 50% in H1. The funds business continued to see net outflows, although they are very much improved on where we were last year. The defensive capital fund has now stabilized and is performing well. However, we still had net outflows in the quarter. Therefore, we really are focused on this under management level. Finally, it was great to see our international business again contributing positive net flows. And we fully expect this to continue into H2. Turning to Slide 8. This is a new one for us. And this is looking at our flows on a gross basis, and it really does underpin the strength of the story. You can see that in H1 on the far right of the graph, our gross inflows were just under 15%, really strong. That's up 50% from over a year ago. This clearly shows that our energized and focused distribution efforts are working. Attrition is also continuing to moderate, as we said, with further reductions expected. Therefore, encouragingly, the trend of improving net flows is underpinned by improvements on both sides of the equation. Turning to Slide 9. So margin progression and the embedding of operational gearing has been one of our key achievements over the last 3 years. And this year's -- this half's record margin of 28.4% is testament to a lot of hard work across the group. Revenue grew by 10.7% despite weaker transaction income and cost growth was contained to 5.7%. Therefore, the jaws ratio, which is defined as the difference between the percentage increase in revenue and the percentage increase in costs continued to be positive at 5%. Given current market volatility and the seasonality of our costs, especially the FSCS levy, which all comes due in second half, I would expect our margin to be down in H2, but by how much is very difficult to predict at this point. Turning to our next slide, Slide 10. Total group yield is down by 5.5 basis points from FY '21, driven by non-fee income with the decline now due to lower transaction income rather than the lower interest income we saw in the year before. This is because we had a stable asset allocation in H1 and activity levels were low. However, we do expect them to pick up in H2 off the back of current market volatility. I think this is also a really good example on when doing the right thing for clients can impact short-term business performance. Longer term, however, we see a fee-only rate [ charge ] is the best way forward. And in the first half of the year, over 90% of our inflows into BPS are on fee-only basis. We've also seen a moderate yield impact from the change from mix as we grow more strongly in Platform MPS and our new offering of BMIS. I'll turn to my next slide, Slide 11. We continue to be focused on costs and our disciplined approach allows us to invest while supporting continued margin progression. As you can see from the chart, all the year-on-year increase in costs are due to the inclusion of Lloyds for a full 6 months rather than just the 1 month we had last year. And finally, there's been a small impact to the shape of our cost given the transfer of headcount to SS&C in the first half of last year, where we've seen pretty much a straight swap between the staff costs and non-staff costs of GBP 1 million. Turning to my next slide, Slide 12. Our capital position is strong and improving with surplus capital up almost 70% from the full year. This clearly gives us lots of options, whether it be funding smaller acquisitions or growing the dividend. So turning to my final slide on guidance. As you can see, we provide quite detailed guidance, but I think the backdrop is to say these are tricky times in ways to provide guidance. And we're definitely in a different position today than we were only 3 weeks ago. I think we need to draw out that our pipeline is strong, and we have lots of confidence as it has been positive in the half, but we would expect current events to have some impact on conversion times, especially in our bespoke business. Also just like to reiterate that we fully expect our international business to be positive for the second half after a period of outflows. As I mentioned earlier, we would also expect higher yield to recover in the second half as portfolio activity picks up off the back of the market volatility. On costs, we would expect H2 to be the same as H1 plus a little bit for the FSCS levy, as I mentioned, close to the second half. And finally, please note on slide for those of you that are interested, we have actually given much more detailed guidance on EPS and the diluted count. So in conclusion, we have again delivered a strong set of results, and we are in a business that despite the macro headwinds is very well placed for future success. Thank you.

Thank you very much, Ben. Just moving on to slide, which I'm guessing is 15. Excellent. Thank you very much. As you've heard there, the strategy is paying dividends in terms both of net flows but also financial strength. But we need to really keep driving this forward and focusing on our ability to be the best that we can be. With this in mind, we've got a number of initiatives that we are undertaking in each of the value drivers to build on our momentum. So those value drivers being the 3 corners of the triangle that you can see and indeed, people and culture on the right-hand side. The top of that triangle is organic growth. So from an organic growth perspective, fastest-growing segment of the market is Managed Portfolio Services on platforms. And our focus is on ensuring that we are the provider of choice in this area. Our business-to-business proposition, Brooks Macdonald Investment Solutions is a great entry point to this market, provides us with a real opportunity to offer investment support to firms at points of real change for them as they go through their life cycle. Our bespoke services remain hugely important to us. And by building strong relationships from the sale of our model portfolios we're finding that the opportunity to cross-sell bespoke services for those clients who need them is increasing, allowing us to deliver positive flows across all discretionary services. But it is also key that we build a balanced business, and I'm pleased to say that our Private Client division is now contributing significantly to gross flows as we build a quality solution for those clients who choose to come to us direct. Our relationship with SS&C, our technology partner, the U.S. company is clearly key to our ability to deliver service and operational excellence, but it is important that we aim to be the best we can be across the whole of the business, not just digitally. In 2022 and beyond, we will have a real focus on providing both a superior experience to all clients and intermediaries and delivering on our digital transformation, whilst we ensure that we're getting value for money where we invest it. And inorganically, we remain ambitious in what we can achieve by acquiring quality companies who add real value and great cultures to Brooks Macdonald. One last point around the priorities for 2022 is the delivery of what we call our promise, which allows us to attract, retain, engage the best people by offering fulfilling careers in an inclusive culture that values ambition and recognizes high performance. This is, after all, a people business and a people industry, and the quality of our colleagues will set us apart from the competition. So it's hugely important that we create an environment that attracts the best people. On the next slide, I want to look in a little more detail of our value drivers and at 3 of the priorities in particular, first of which being organic growth. The attractiveness of our proposition to the market that we're targeting is, of course, key. And we've worked hard to ensure that our offering of Managed Portfolio Services on platforms is best-in-class. In terms of flows, we turned the corner here towards the end of our company year 2020 and then really got some significant momentum going in full year '21 with the launch of Brooks Macdonald Investment Solutions, reaching a growth rate of 73% in calendar 2021. Our ambition is to keep a high rate of growth in this sector in which we believe we're well placed to do through stronger identification and execution of opportunities. This will also allow us to build the relationships, which are important in maximizing the distribution of the full range of our products and services. That range now covers the full investment life cycle of any client from accumulation to decumulation from investing GBP 100 a month to GBP 1 billion, whether they're vulnerable client or whether protecting assets for inheritance and all with ESG as part of the investment process, and all critically designed to maximize the potential for a client to achieve their ideal outcome. We strongly believe that this is most likely to happen when guided by financial planning, and therefore, we continue to focus on our ambition to be the leading investment manager through intermediaries. The second priority I want to touch on, on Slide 17, is delivering digital transformation. To enable our growth, we must differentiate ourselves in the intermediary marketplace. And to do this, where price and performance are, frankly, hygiene factors now, it is key that we are as easy to use as possible, working hand-in-hand with intermediaries and their businesses at all levels. Our digital transformation enables us, and this is progressing with our SS&C-driven solution benefiting from their purchase of Hubwise is integration into our delivery adds a bit of time, but much more in terms of the development of our capability going forward. Delivery of the full remaining migration to their systems and our new client portal will occur when we are comfortable that they are already delivering on the benefits that we set out to achieve. The rollout of our new digital onboarding solution is being well received and gaining the hoped-for plaudits. It significantly streamlined the process of bringing clients into our world and has given us a real insight into the possibilities as we continue to transform digitally over the coming years, enabling us to become a truly easy-to-use provider. Finally, in terms of our priorities on Slide 18, I just wanted to touch on M&A. We've maintained our criteria of only buying quality businesses who add strategic value, create economic benefit for us and crucially, fit culturally with Brooks Macdonald. If we purchased a firm which isn't culturally aligned, that could be very quick value disruption. We remain actively engaged in the market. And whilst our criteria mean that there are not hundreds of businesses out there that we will fit with, it does mean that those that are will integrate well and add value to what we do and to who we are. Last but not least, on Slide 19. I just wanted to touch on the work we've been undertaking on our corporate social responsibility agenda, which, together with our guiding principles, which are that we care, that we're connected, that we do the right thing and that we make a difference really does help to drive the culture of Brooks Macdonald. In diversity and inclusion, we have with our partner, Zircon, devised a recruitment process to remove as much unconscious bias as possible, which has resulted in a diverse group of 18 joining our trainee cohort in the last 6 months through the 3 schemes. We've continued to upgrade the quality of our offices, moving into city centers so that benefit our colleagues and our clients and our introducers, and we're deliberately selecting suppliers who align with us in terms of their CSR ambitions and who will enable us to achieve net zero as early as possible. I could go on as there is much ongoing. But as a final example, we're trying to make a difference through the partnership with the Dame Kelly Holmes Trust, supporting them in tackling youth inequality, whilst also enjoying working together for a good cause in the year of our 30th anniversary. So to conclude on the final Slide 20, we are proud of the results we are presenting to you today, and we are excited by the opportunity, which presents itself to us at this time. We have got a high-quality ambitious team in place to drive this forward. And we're focused on our value drivers and the priorities that we've identified this year, which will enable us to hit our ambitious growth and financial targets. With which, thank you very much for listening, and hopefully, we've got some questions.

And thank you both for that who counted through the presentation. And as a reminder to everyone, you can ask questions via the option at the bottom or perhaps the top of your screen. But we do have a few already. There's been quite a big drop in gross outflows in the first half. Could you comment on the reason behind this? And if there are any specific actions you've been taking to achieve this?

Yes, I can kick off. Yes. I mean it's important to say that we did guide that there would be a decrease. We did a lot of restructuring the business back in 2019 to get us match fit. And that did have an impact on gross outflows in terms of -- we lost some investment managers. We also looked at some of the mandates we were running and making assessment on their quality, and some of them we decided didn't really fit. So it was elevated back in H1 FY '20, as you can see on Slide 8. So we're down to 10.6%. So significant inroads made. And that has helped us get to the 4% positive in the half. But there's more to come. We would expect us to be able to knock up a couple of percentage points next year and then more in the year after. And that really underpins why we think we can get to somewhere around 7% to 8% next year on a net flow basis. So there's lots of individual actions that help get that number down. We get into the detail of outflows every couple of weeks. We understand if clients are leaving, why they are leaving. On the other side, why we're winning, and we're very precise in how we act. But generally, it's because that period of restructuring is now well behind us. I think I would just call out on the other side, on a [ gross ] basis, as I said earlier, we've had a significant increase in gross inflows over the past year or so. And so that new business entered is also really performing well.

Great.

Good. Okay. The Lloyd's acquisition, can you talk through what revenue benefits you're seeing from it and the potential for to growth? Obviously, you've got an Isle of Man office to take advantage of the cross referrals. So how is it going? What kind of customers and business are you attracting?

First, to kick off on the financials [indiscernible]. I mean from a financial point of view, it was a cracking deal. We pretty much got all our money back in cash terms just over a year after buying it. So we did a lot of work to get that deal over the line. We restructured the shape of the business as it landed. Lloyds are running a lot of it in-house. We outsourced a lot of it to our part of the Jersey Trust Company. We in-sourced the investment management, which is clearly what we're good at. And [indiscernible] transformed the economics of that business. So it's been very, very successful. In terms of, over and above, what's already been a very successful acquisition, it really is that partnership with Lloyds and the opportunity to provide investment management services and the buy services to their offshore clients, their expat clients, and opening of the Isle of Man office, which is now complete and really starting to help us win business was a critical step because a lot of their clients offshore are domiciled in by their Isle of Man entity. So we needed to be there. So yes, that's performing well and more to come, I think.

Yes, I think so. I think it's also worth saying that when we went out into the Channel Islands, it's very much a trusts and direct business and a local business, so dealing with the Channel Islands and obviously now we're going into the Isle of Man. Our success in the U.K. has been predicated on our relationships with financial advisers. So we've taken that expertise out into the Channel Islands. And we're working with financial advisors now across the current dependencies. But also in the U.K. where advisers have international clients that they don't want to -- or their PI doesn't allow them to look after. So we help them with those. And in the likes of South Africa and Dubai, European Offshore financial center, Switzerland working with -- normally with U.K. or IFAs or expat IFAs more accurately to look after their clients in those jurisdictions. So running assets in typically in sterling, euro, dollars for those clients. So those are all growth opportunities. And also, in that trust world, our exposure is very small. So we're starting from a very small base and anything we win, and we are starting to build some really good partnerships out there, I think will only help to see that business really take off.

Okay. Can you say anything about the post-period-end performance, specifically the war in Ukraine and the related market turbulence? Has it led to significant outflows?

No, it hasn't really. If I talk about the client side a bit, and you can talk about the business side of it, clearly, whenever you get any market volatility, it's really important that you spend time with your clients. It's very easy to talk to them when things are going up. We have a good decade from that perspective. But really, you get judged on how you react when the times are more difficult. So our investment managers, relationship managers, financial planners are all spending a lot of time with clients, explaining what's going on, explaining how their portfolios are positioned and handholding them through the volatility, which is the right thing to do. We have a very balanced structure in our portfolios at the moment, which I think is right as you go through this sort of period and we'll rebalance as markets fall and rise. So spend time with your clients, it's the message to all of the guys at the moment. So that's what we're doing. So no, we haven't seen outflows at this stage.

And we're not changing guidance. We would expect to do at least the same on a net flows basis in H2 as we did in H1. As I said, we've indicated there might be some slowdown in conversions, probably [ I don't ] think it will be the margins.

Yes. I think there's a natural -- if you're sitting there with a lump sum to invest and the markets are going all over the [ park ], say where we are at the moment to be frank, it's natural to want to sit back and go, actually let's just wait until this comes down a little bit. So I think your lead time to investment might stretch a little bit. But I don't think there will be a long-term reduction in investment.

Okay. You touched there, obviously, on the ongoing digital transformation and the rollout that you're seeing. Are you hoping to complete it then in 2022?

Very definitely in this year. There's a -- I don't think it would be right to hide from the fact that any digital transformation is a massive project and any massive project comes with its ups and downs. And like any project, we've been through those. But we are -- unlike where you're just employing somebody to undertake some task for you, this is a partnership between us and SS&C. And where we've come across sticking points, we've worked together to try and provide a better solution, a better end solution. They're developing as they go, as we want them to because this is a 10-year partnership. It's not a 1-year contract. We want to get to a base level that then allows us to continually develop our digital capability. But it's really important we get the base level right. Otherwise, everything will go wrong as we go on through the years. So if that takes a little bit more time, then that's okay. And financially, because it's a partnership, we're both investing in this [ decision ]. It's not just a big cost to us.

Understood. Now this one a little bit looking towards the future. As we know, the grace in younger people getting involved in investing through new fintech platforms. And what is the pathway for these investors to become Brooks Macdonald clients? And over what time frame might this occur? Is it something that could take the form of a fintech acquisition? Or is it positioning that you do as a business?

That is a really good question. So attracting that demographic is something that we thought long and hard about. And there's a couple of angles to this. Well, one is that we are not Google or Amazon or Vanguard. And we don't have hundreds of millions of pounds to spend on marketing to get individuals onto our platform. So let's not pretend we're going to compete with that. We're not. What we're trying to do is to make sure that we've got very high-quality service that can attract individuals who are financially minded, maybe a little bit more financially sophisticated, get into the whole intergenerational wealth transfer so when we or the advisers that we work with are talking to the parents, encourage them to talk to the next generation about what it is that -- what their wealth is in the first instance, actually because too many people don't talk about it and then how that money is going to feed down into the next generation and what they're doing. So it's an educational piece for that generation, which we hope will attract them to either direct to us or through the financial advisers that we're working with. We don't have a D2C offering at this point in time. Where equally, we are not a technology company. That being said, it doesn't mean that we are not open to expanding our vision and thinking about how we might be able to provide platforms and the like for that sort of clientele. But again, it's very expensive. And we do understand where our expertise lies and our focus at the moment is really on making the most of that.

Good. Okay. Thank you. Final question here so far, if anyone's got any more, now is the moment. Brooks Macdonald Investment Solutions, can you expand on why this is proving successful and what makes it different in the market?

Yes, absolutely. I mentioned earlier, but the price and performance are hygiene factors in the model services market, which means that you really have to add value in some other way. And we believe that with financial advisers, one of those routes to market is by partnering with them and providing them with solutions that not only provide their clients with ideal outcomes, but also assist the adviser in both distributing to their clients, helping them towards their goals and giving them something that they're not necessarily going to be able to get elsewhere in the marketplace. So it's all based upon our centralized investment process. That doesn't change, about how you actually deliver it changes. So we'll help them with the marketing, we'll help them with getting their own advisers, minds to understand what it is that the new offering is. It is a change point in an adviser's life cycle. So a good example would be that they might have spent 20 years running portfolios on an advisory basis and have now decided that the risk is too high or they want to spend more time just focusing on financial planning and they're going to outsource. That is a big, large changing decision in an advisory firm. And so we will come in and we'll handhold them all the way through that process through working with their advisers, through working with and explaining it to their clients. And so it's about building partnerships.

Runs through every element of the business. Well, thank you very much for your time today. A reminder to everyone who's listening. We did initiate coverage this morning. You can find that on our website. Otherwise, gentlemen, thank you again, and we look forward to hearing from you in another 6 months' time.

Thank you very much.

Thank you very much.