Impax Asset Management Group Plc (IPX) Earnings Call Transcript & Summary

Hello, and welcome to the interim results for the 6-month period ended 31st of March 2020. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded [Operator Instructions] I will now hand you over to your host, Ian Simm, to begin today's conference.

Thank you. Good morning, everybody. I'm here with Charlie Ridge, Impax's CFO. And we hope you all have access to the interim slide deck, which is on the impaxam.com website. So just turning to Page 3, which is the highlights of our first half for financial year 2020. So I think 4 key points. We've had a resilient performance through the COVID-19 crisis. We've had continued strong organic growth with record net inflows. Investment performance has been robust. Assets under management down in the 6-month period, but there's been a sharp recovery. And 1 month into the second half, i.e., the 30th of April, we'd posted AUM of GBP 15.8 billion. So on Page 4, some financial highlights. Charlie will come to the details in a moment. But you can see the progression of the assets under management and, of course, GBP 15.8 billion by the end of April, that is a strong improvement in the month of April. Revenue up quite nicely, as was adjusted operating earnings and adjusted EPS as well. Adjusted EPS include a number of factors potentially linked of -- inclusive of the mark-to-market of the value of share-based schemes. But again, Charlie will cover that in a bit more detail. We're also pleased to announce a 20% increase in the interim dividend, which reflects the continued strong performance of the company and strong prospects. So turning now to Page 6. The COVID banking crisis, of course, has been a challenge for everybody around the world. We have been very successful, I think, in extending our business continuity processes to think of as a whole firm. So 170 people working from home. We have paid particular attention to staff welfare and have stepped up quite significantly the frequency of communication at different levels around the company. We've also, of course, been reaching out to clients quite proactively and reassuring clients the money has been safely managed and that the investment performance has been robust. And the result of that is including strong positive net inflows during the period, including during the month of March. And we've also been able to launch new mandates with one of our existing clients, NEI, which is based in Toronto in Canada, so that's the second mandate. The new mandate being a balanced fund mandate, which brings together the equity investment capabilities that have impact London and the fixed income management capabilities out of Impax in New Hampshire. I think from a outlook perspective, then the transition to a more sustainable economy continues to resonate with asset owners around the world, and we continue to see strong interest in Impax's funds and accounts and service offerings and our view of the prospects that have been in the loan service, it continues to be very strong. Breakdown of our asset under management at the end of March on Page 7. So the detail to follow. And just jumping on to Page 8, this is the change in the AUM, break it down by client domicile with the dark blue bars being the most recent compared to 6 months previously in the light blue. So inevitably, given that the funds under management did drop during the first half till the end of March, we've seen some of these areas post a decrease. But the U.K. does stand out, its posting an increase in that time period. And that was particularly due to strong flows, so from the St James’s Place mandate and also across the Impax environmental markets platforms. More detail with regard to the breakdown by investment strategy. So you can see the largest fund specialists leaders, and water all retreated slightly during the time period, but global opportunities or unconstrained global equities was a very strong performer, and that's inclusive of St James’s Place mandate, but also some account mandates overseas. On Page 10, the integration of the Pax World Management business, now renamed Impax. New Hampshire Impax Asset Management LLC continues to be positive, and pave the way for a even more successful future for us in North America. So that business has reported positive net inflows in every month in the period. That's been encouraging. The integration of the operations team is progressing well, and we've just announced a -- internally a -- the intention to form Impax North America, which will bring together our 3 offices and under one management structure. So the details of that are being worked out, but that's underway. Staff engagement continues to be very strong, and we have got a very robust and loyal sales force and team across the firm, which is underpinning, I think, it's a very strong staff morale. I think the other point to note is that with regard to contingent consideration, which is due at the end of financial -- of calendar 2020 for payments in January, the threshold there is GBP 5 billion of assets under management. And we are -- we know it's not expecting to pay out anything under that contingent consideration formula, but we'll be providing more details and probably a final conclusion of that at the point at which we really sign the results towards the end of the year. Page 11 is a breakdown of the AUM going to the 2 geographic poles of the business, if you like. So Impax London on the left and Impax New Hampshire, Pax World Funds, on the right. So the top part of the page is the period in question with the light colors and the bottom half reflecting the previous half year. So -- and this is just another way of sort of unpacking the change in the AUM. So you can see here a very significant negative market movement in both cases, which offset positive flows into 2 halves of the company. On Page 12, then our private equity infrastructure business continues to advance. So we are well on the way to being invested for NEF III, New Energy Fund III, which had a first close in 2016 and a fund close in 2017. So as indicated there, we've invested in 8 companies and projects in 5 countries. And then that shows those individual countries with very strong pipeline underpinning a accelerated outreach to banks, coinvestors. And we're fully expecting to be complete on the investment period for this fund sometime during calendar 2021. Charlie, over to you. You may be on mute, Charlie.

Thank you. Good morning, everyone. Just now to describe how Impax has performed in the face of the market backdrop over the last few months. Just one reminder, we've talk to adjusted measures, which are explained in the back of the slide deck in Slides 22 and 24. So Page 14 first sets out revenue. And on the left, we have Impax London; right, Impax New Hampshire, which we have continued to do at this point. At some point, we're probably going to combine these together. But at this stage, we're still showing them separately. And we can see here that the -- on the left, that the London business has benefited strongly from the positive flows and performance of listed equity business that Ian just run through, offset by reductions in the private equity business, which reflects the successful Funds II, which is now coming towards the end of its life and therefore, the fees are now falling away. On the right, it's pleasing to see that the New Hampshire business has seen positive flows. And that, in spite of the market falls, has led to slight uptick in revenues. And when you look at those 2 together, there's now a run rate at the end of March of GBP 77 million, noting that the markets are up quite a bit since the end of March. Turning to Slide 15, we looked at the operating expenses. And we've always been careful on costs. Clearly, in this environment, cost control is particularly important. So that has been very much to the front of our minds during the second half of this period, and that continues into the second half. On the left, Impax London, we can see the non-staff costs very much maintained as per the previous period. And staff costs have gone up, and that does reflect the investment we've made in building our capability in people to service the significant interest in our products that we've seen through the inflows over the past couple of years, in particular, this record inflows over the past 6 months. Variable remuneration, just as a reminder, that is determined as 45% of the operating earnings, excluding the variable remuneration. So that's like formulaic. And that's edged up with increased profitability. And again, a reminder that, that cost covers all things variable in terms of staff remuneration. So that's cash bonuses, equity awards and national insurance thereon. So that's all contained within that cost. On the right, we can see Impax New Hampshire and the non-staff costs have gone downwards. And the reason for that is that some of those costs include items that in Europe we'd be expecting a fund to pay, so things like administrative costs, et cetera. And for many of the funds, those are paid by the manager. And the good news is that the charging basis for those is, in many cases, on an AUM basis. So on the way -- when the market falls, we've seen over the last few months, then the charge has gone down, which has provided that slight cushion. Staff costs, on the other hand, are stable. So putting those 2 together, the operating profit for the period was GBP 10.5 million, which was similar to H2 from last year, and that's in spite of the market falls. The operating margin of 25%. I'm pleased with it and is robust. You have to remember that operational gearing works both ways. So as of the end of March, the market falls means that the operating margin is 23%. But the flip side to that is that at higher market levels, higher M levels, that can rebound quickly. And depending upon how the market goes for the second half of the year, then we would expect that to be heading back up as at the current market levels into sort of higher 20% type levels. So that's the sort of cost and profitability. Just moving to Slide 16. This is designed to show the short-term cost development. And shows that whilst head count has come up, the overall cost per employee has gone down, demonstrating that where we are hiring, it tends to be at the mid and the junior levels. One slight health warning on here, it looks on the top left, as though the headcount has risen very dramatically in the period. In fact, it's a slight -- and quite a timing. The hires that came in the second half of last year were towards the back end of the period whereas the hires in this half year have come towards the start of the period, ahead of the crisis, and that's why the averages worked out in the way they have. I think that's everything on that slide. So moving on now to earnings and dividends, which is Slide 17. On the left, we can see EPS, which is quite straightforward this time. The production of 1p per share reflects revaluation effects in the prior year that are not repeated. So the main recurring effect is the uptick in operating profit, contributing 0.2p to EPS. In terms of dividend, at the year-end, we announced a new policy to pay an annual dividend within the range of 55% to 80% adjusted profit after tax under normal circumstances. And we still very much intend to stand by that policy. Noting that this is just the interim stage, we -- the Board, has been cautious in the light of the COVID and market uncertainty. But as Ian mentioned earlier on, the strong performance of the business and prospects mean that we are still able to declare an increase of 20% to 1.8p. At 3.7x covered, that provides plenty of buffers and scope for flexibility when we get to the final dividend later in the year depending upon how the rest of the year turns out. Moving on to the balance sheet. The balance sheet for Impax is quite straightforward. It basically comprises cash seed investments of GBP 5 million, there's detail of those on Page 25, and nil debt. March represents our cyclical low point of the year, which is post year-end accrual payments and final dividends. So you can see on the left, the progression, primarily showing the strong cash generation from the operating business at the bottom, offset by then the payment of year-end creditors and dividends. The acquisition of own shares, just a reminder, we have an ongoing policy to make market purchases into an employee benefit trust to seek to mitigate the effect of staff share schemes. But during the period, 1 million shares were bought at a cost of GBP 3.2 million. And then finally, you can see the investments being made into our third private equity fund, where we are co-investors along with our clients, and that is part of what we characterize as our seeding pool that I've described before. In terms of characterizing that GBP 19.9 million, on the right, we show that if we deduct a risk buffer that we're required to do for prudent capital management purposes, we have GBP 9.4 million of available cash. The interim dividend we've now declared means that after that, we'll have GBP 7.2 million, which is then available for other business initiatives. So for example, ongoing share purchases, further seed investments, other performance of business development and is a comfortable amount at this stage of our development. And finally, moving on to Slide 19, it looks at the register. And this provides some transparency to quite how the numbers work with the denominator of calculations as to quite how many shares we have in issue. So put simply, there's 130 million in issue. The purchase into the EBT net-to-date represent 5.6 million. And offsetting that, we have the unexercised staff equity awards of 8 million. We showed that at this point, there's a 2.4 million shortfall of purchases versus awards, meaning that if those were immediately satisfied by new issuance, which, by the way, would not be necessary because many of these not vested. But if they were to -- if that were to happen, then there'd be 132.8 million shares in issue. And on the right, we see how those break down in terms of BNP Paribas holding employee ownership and free float. Back to you, Ian.

So just on Page 20 to conclude. And clearly, the COVID banking crisis has been a enormous shock to the economy and, to a significant degree, to financial markets. But with the strong bounce back in sentiment in April and May, then -- and given that the revenue that we're booking is crystallized at the end of each month, we've actually been able to weather the really nasty part of this period, which is typically to not run over the month end -- month ends. So the financial results we posted are -- really do not demonstrate a significant weakness in that period, and actually April and May have also been strong months for markets. So we feel we're in a very fortunate position of being financially very robust with no debt and strong balance sheet. We've got a very loyal client base, which has continued to expand during the period, a very stable and committed workforce who have worked very effectively during the period. And it is fair to say that clients' interest and asset owner interest in sustainable developments continue to expand and grow during the period as investors are once again reminded of the need to find resilience in the portfolios. So we are cautiously optimistic that as the world finds a way of coping with and hopefully, getting rid of COVID-19,, that the economy and the financial market system that we're left with will have even more interest in the transition to a sustainable economy and therefore, more appetite to hear about Impax's offerings. So on that basis, given that we have a highly scalable business model, we are optimistic of more success over the medium to long term. On that basis, we're going to pause and in the usual fashion, hand back to the moderator who will coordinate any questions that you may have.

[Operator Instructions] The first question comes from the line of Paul Bryant calling from Equity Development.

Charlie, 2 from my side. Could you give us a feeling for how big a deal the entry of environmental markets to the FTSE 250 is, sort of in terms of maybe index funds or just additional publicity there? And the second one, if I could, how the sort of cross-selling mechanisms are panning out in the U.S. You've mentioned a few wins over there and in Canada. You mentioned the equity strength in London, fixed income in the U.S. But if you could give us a bit more on exactly how that's working.

Thank you, Paul. So on the first point, the entry of Impax Environmental Markets plc and FTSE 250 has been a noteworthy event as you indicate, index funds do you need to buy-in, and that's provided an immediate boost to demand and then there's sort of ongoing demand from such funds as with the company remaining in that index. So short-term, very positive effect; longer-term, ongoing positive support. And I think the publicity side is quite important as well. So overall, that's a positive development, and we've been very pleased with the collapse and the discounts of Impax Environmental Markets over the last 5 or 6 years and the ability recently to be issuing new shares from treasury, that has been trading at a premium. On the second point, then, yes, the cross-selling is progressing. So the NEI mandate for the Balance Fund is an important win for us, bringing together those 2 investment capabilities that I mentioned. Our North American sales team is now integrated with the -- historical North American sales teams is now integrated with the New Hampshire sales team under one leader. And that's ensuring even deeper coordination and into the presentation of a combined set of products rather than thinking about sort of the 2 different buckets or poles of products. So I think now that we're able to offer a wide range of systematic and generic equity products and some fixed income products as well, means that the the client base in North America does have quite a lot to choose from and to examine. And -- but at the same time, we just feel that -- we feel we just scratched the surface of the potential over there. So we're planning to invest more in that area. The final thing to mention actually is that we've now got a 1-year track record of the Gender Fund that we seeded back in -- the general strategy we seeded back in June of 2019, which builds off the smart beta gender product that the PAX loyalty have been running since 2014, I think. And that's got a strong track record. So we are cautiously talking to clients and consultants around that strategy, and that's quite a nice prospect for the medium to long-term business development area.

The next question comes from the line of [ Nick Lisec ] calling from FinCap.

Congrats on the record flows. I just wanted to know what your thoughts on those were, whether that's a function of the current crisis making investors sort of more aware of the attraction of sustainable funds or whether it's actually more to do with investors wanting to sort of get back into markets from these depressed levels?

So the flows that we're reporting, the GBP 1.8 billion landed in the 6 months ending 31st of March. So the crisis really only was prevalent for the last month or so of that period. And therefore, the vast majority of that GBP 1.8 billion is sort of precrisis decisions. It is very broadly spread across our client base. So it's not as if we had small or enormous client that was a significant percentage of that with. We're seeing money coming in a large number of different channels. The fact that we posted very slightly positive flows in March and actually flows in April were also positive, about GBP 300 million of net flows, those numbers probably reflect of the -- a little bit more of sort of buying on the dip. Having said that, I think the pipeline that we had been reporting on 6 months ago, a lot of that is still to come. And we're hopeful that it won't get derailed or delayed by COVID-19, and maybe even accelerated if investors feel that current market levels are even more attractive than they were.

[Operator Instructions] The next question comes from the line of Stuart Duncan calling from Peel Hunt.

Can I just go back to North America for a second. You mentioned the NEI mandate in Canada. Would it be possible just to get a bit more background on what that is, how big it is? And actually which period did that come in the first half? Or is that something that came in after the end of the period?

Yes, so the NEI is a Toronto-based sort of wholesale brand, and it has a strong profile in the the east of the country, particularly, with connections elsewhere, but [ seek us ] sort of Ontario base. They've been a client of ours with the leader strategy for, I think it's about 4 years now or so. And on the base of that, they asked whether we could consider taking over their internally run balanced mandate, combining fixed income with global equities. So what we've ended up doing is assuming management of that internal fund or internally managed fund rather, which is funded by external very external clients, so it's being actively sold in their network. And as I mentioned, it's been run by our 2 teams. And I think the mandate size is about GBP 60 million. And it launched on the 1st of May, so its actually and therefore, won't actually appear until our May numbers, which we're planning to report on our website at the start of next week.

The next question comes from the line of [ Paul McInnis ] calling from Shore Capital.

Two questions, please. One was just on the more general market in terms of sustainable investing and the level of competition, obviously. Most of the active asset managers have been announcing ESG strategies or enhanced ESG strategies of some kind over the last 12 months. So obviously, you guys have got the track record and the credentials in that area, but I just wondered whether you thought that increased competition going forward may have some impact on pricing and indeed, whether increased levels of passive ESG might do the same? Was question one. And then the second one, just on the deferred consideration, you've indicated that you don't think that any of that will become payable. It's quite notable as to quite how far below the level at which it would have triggered the AUM actually is. I'm just wondering -- I mean, has it come in sort of well below in terms of its overall performance versus you'd originally hoped for? Or is it more a case if it was just protecting yourself in terms of making sure that you paid the appropriate amount based on how it dipped?

Sure. Let me take the first of those, and maybe Charlie can pick up on the second. So yes, you're absolutely right. There's a lot more product in the space and a lot more launches. That's so clients have more choice. We are generally doing very well in terms of attracting new business because of our track record and authenticity. The pricing is -- I would say, pricing remains keen, but for those that have got a good track record, then likely so -- then we are not seeing any significant downward pressure on existing mandates, and we've reported on that quite a few times in the past. For new mandates, I would say, it depends where you are in the world. So in Northern Europe, then there's definitely sort of increasing attention to fee levels and new mandates are being offered at a lower levels than we've seen, say 2, 3 years ago. So we're, generally speaking, comfortable to take those, but keeping on what's rely on them. Having said that, in North America, it's -- that's not the case and new mandates are coming out at a quite attractive levels because we've got differentiated sort of global distribution structure, then we're able to focus our search on areas with with good fee resilience and good sort of depth and potential. So hence the continued strong interest in North America. And on passives. On passive, you say?

Yes. Just the ESG passive, just whether that in itself is becoming a bit of a keen area?

Yes. No, I would sort of roll passive into the same point, in other words that, yes, there are definitely more smart beta or passive type products, so it's a [ pre-defined ] benchmark that we are quoting our performance against anyways. So for example, the FTSE, Russell, Environmental Markets indices. And we've been able to beat those over most time periods with most funds for a good 10 years or so. Those sort of sector-specific passive funds aren't always at rock bottom prices. And so they necessarily provide a significant financial cost advantage to clients. And also, investors generally are selecting to go passive or active at an early stage in their decision-making before they start looking for managers. So we're quite often not seeing a direct competition from passive, it's more seeing competition from active managers once the clients selected to go down the active rate.

And Paul, in terms of the contingent consideration, so a few points there. Firstly, the U.S. mutual fund market has been through a very sort of choppy period in terms of flows, and 2018 was pretty horrible for the whole market. I think December, in particular, was a record outflow for the market. And in that sense, the PAX World funds, which comprised majority of New Hampshire assets, played their part in those outflows. And to be honest, that was also coupled with mix performance at that point. Now we were very much aware of that, clearly when we priced the transaction. And so we believe there was scope for significant growth from those products, but the current momentum was not strong. And so we were hoping for positive flows. In fact, there were negative flows, not sort of particularly alarming amount, but definitely negative and positive does make quite a difference at the margin. In terms of the actual structure of the deal, we priced it such that if the contingent consideration did become payable, and we were expecting that to be at the probably lower end of the amount that was potentially payable, then that was completely affordable within the projections. And if we were presently surprised and the assets grew to such an extent that the full amount was payable, well, actually, that was a good news story because the cost of the additional assets was actually cheaper than the original cost. So the deal was put together quite consciously, such that if the payment was not made, there was no problem with that. But if it was made, then that was upside above and beyond. And then the final thing to note is that the -- in March, clearly, is the current market drop as well, which compounds all of that. Final thing -- final, final thing, is that as we said a couple of times, the flows have now turned positive. And the performance is significantly better now than at the time of the acquisition. So I think we've turned a corner there.

That concludes the question-and-answer session. So I'll now hand the call back over to your host for any concluding remarks.

Okay. Thank you. Thanks again, everyone, for joining. We'll remain at your disposal for any offline questions or comments. Appreciate the interest and look forward to staying in touch. So thanks again. Bye.

Thank you for joining today's call. You may now disconnect your lines. Host, please stay connected.