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

So welcome again. You're all going to hear about Impax's interim results that were released this morning. We're delighted to be joined again by Ian Simm, who is the founder and the CEO; and also by Karen Cockburn, who is the CFO. A little bit of admin, you need not worry about taking pictures of these slides because there is a deck available on the Impax Investor Relations page already. This webinar is being recorded. So if you miss any [indiscernible] bits and want to review them, it will shortly afterwards be published on both the Impax and the Equity Development websites. And lastly, for those of you not familiar with Zoom, Ian and Karen will be dealing with questions after the formal presentation, and all you have to do is write them on the Q&A button that will be at the bottom of your screen. So without further ado, I shall pass over to Ian to commence proceedings.

Thank you, and hello, everybody. So I'll take you through the deck for the half year to the 31st of March 2023, in the usual fashion. So just to give a summary for those of you who are not familiar with Impax, we are a firm that I started back in 1998, and we have a particularly distinctive investment philosophy, which is that we believe that the transition to a more sustainable economy is likely to lead to high rates of investment performance, which should be good for investors who are seeking to beat the market, so to speak. We have one of the world's largest investment team specialized in this area with very low staff turnover. And we have a truly global client base with more than 80% of our assets under management sourced from outside the U.K. And as you'll hear, we have very deliberately built a scalable investment model aiming to double today's funds under management over the next few years. So on the next slide, this is just a summary of what we mean by the transition to a more sustainable economy. This essentially is a capitalist idea of industrial revolution, sectoral transformations, if you like, in energy, in transportation, materials, infrastructure, but also in areas such as financials and health care in favor of greater efficiency, better environmental protection and exploiting developments in new technology, for example, battery-driven drivetrains in electric vehicles or heat pumps in the renewable heat space. So the drivers of this transition are not just technology but also policy change, including the Inflation Reduction Act in the United States and changing consumer sentiment. So the combination of the sectoral transformations is giving high rates of growth and a prevalence for mispricing and misunderstood companies listed on the market, which we're able to pick up when they're below -- trading below their intrinsic Value. So this is an opportunity, which has been building over the last quarter of a century and shows no signs of slowing down. So on the next slide, we've got a summary of the results for the year -- sorry, for the half year. So we've reported net inflows of GBP 1.1 billion and a larger increase in assets under management over 6 months as markets have been supportive. Investment performance has been solid in spite of challenging macroeconomic conditions, and we've had some notable steps forward in areas such as Asia where we've opened a client service office in Japan. On the next slide, the summary of the P&L and balance sheet changes. So Karen will go into more detail a little bit later. But just in summary, on the left, you can see that revenues for the period, we're just reporting on in the dark blue bar, which is consistent color throughout the deck, so let's focus on the dark blue bar compared to previous periods. Revenue was up slightly. Operating profit slightly down as we've added slightly to headcounts and strengthened operational resilience ahead of further growth down the road. And on the bottom, you can see that our run rate margin has been very slightly depressed. That's essentially saying that in spite of the increase in headcount, but our operating margin on a sort of a flash point at the end of the period is not much lower than it was at the start of the period. And then the dividend for the interim, we are planning a 4.7p per share interim dividend, which is exactly the same as last year, giving us scope for a higher final dividend in line with our 55% to 80% payout level compared to distributable profits. The breakdown in asset under management increased over 2 successive half year periods, as shown here. So starting with the position a year ago at the end of March '22 and then the first half of the bottom half of the slide illustrates what happened in the second half of the previous financial year and then the reporting period is the top half of the slide. So you can see the positive market movements, positive inflows greater than in outflows. And at the end of April, we were slightly down on assets under management, GBP 39.4 billion, which was a combination of slightly weaker markets in April and very small outflows. So the conditions or backdrop for the firm are summarized as follows. So it has been a challenging period for investors with uncertainty about the trajectory of inflation and also about Central Bank policy to combat inflation. So we still haven't landed in a stable environment there, as I'm sure everybody is aware. Having said that, equity market sentiment has been broadly positive. So markets have crept up in calendar '23 so far. But then flows generally have been weak, and most investment managers are reporting negative flows. So in that sense, Impax is a standout performer. That's really underpinned by the positive trends around the transition to more sustainable economy. I've already mentioned the Inflation Reduction Act. We've seen similar positive policy in European Union and in Asia in favor of the clean energy revolution. There's been further experience with regulations affecting disclosures around funds in the sustainability space, the so-called SFDR regulations in the European Union have caused a lot of additional costs for managers seeking to demonstrate Article 8 or Article 9 compliance, which are to sort of relatively high levels of [ alignment ] with sustainable economy objectives and Impax has emerged very nicely and very well out of that situation because our funds have been positioned to be sort of fully in the sustainable economy space from the outset. So in that context, we continue to be well positioned. We have a set of scalable investment strategies. We've got a large and loyal team that owns 20% of the business. And we've got distribution architecture and distribution people in most parts of the investing world who are able to promote our services. A look now at the asset under management breakdown. So in the top left, you can see the breakdown by fund type according to environmental markets, which is our thematic equity range. And secondly, sustainability lens, which is the more broadly-based global equities products. Again, the comparison is that the current period in dark blue compared to the previous period in light blue. And the right-hand top donut shape is some more detail around those breakdowns. So the blue colors are the individual strategies within the environmental markets range and the orange colors are the sustainability lens strategies. Breakdown by AUM and revenue according to different channels there. And the thing to draw attention to is the bottom right area that shows BNP Paribas, BNPP AM, asset management mutual funds, where the percentage of our revenues associated with our largest shareholder and distribution partner has been declining, which is a deliberate strategy on our part to improve our gross margins by going through more direct channels. On the next page, a simple schematic showing where our clients are based. Firstly, on the left-hand side with half of our assets under management coming from the European Union, 20% from U.K. clients and then the Asia Pacific portion has been growing quite nicely as well. And then we're still 95%, 96% of assets under management arising from listed equities. On the next page, you can see breakdown in the movements of funds. So net inflows in 3 columns. So the left-hand column on the slide is the U.K. with St. James' Place nicely positive, and the Irish UCITS platform being slightly negative as some of our U.K. pension fund clients were trying to cope with the LDI crisis a few months ago. In the middle, you can see a nice improvement in the performance of the BNP Paribas channel, but also the other distributors' channels around Europe, particularly with ABN AMRO and [ Lombard ADA ]. Top right, the North American channel were somewhat weak. I think that's just a general expression of market sentiment being weak rather than losing any clients, so we didn't have any loss of business, but rather just trickling out of flows in the context of relatively weak markets. And then the standout performer in Asia Pacific being our new mandates in Japan. The next 2 slides show the investment performance, firstly, by sustainability lens strategies and more broadly-based global and regional equity products and fixed income. So here, you can see the dark blue investment performance annualized over 1, 3 and 5 years compared to the benchmark in mid-blue. And so generally speaking, very strong performance, certainly in the equities range and the 1-year track record now looking pretty solid, pretty compelling, particularly in global opportunities and U.S. small cap. And then the second set of performance data on the next slide is the more thematic environmental markets range. So again, a similar representation, 1-year, 3-year and 5-year numbers and quite a nice improvement on where we were 6 months ago. So this is a good -- very good foundation on which to be pitching for new business. The strategies that we're running at the moment are packaged in around 100 individual funds and accounts around the world. We are planning to scale our business by bringing in more money into those 100 funds where appropriate, but also to find new wrappers, new distribution vehicles, for example, the ABN AMRO and [ Lombard ADA ] wrappers that I mentioned earlier. We do have quite significant capacity headroom for those existing strategies. And so that's the core of the business plan. In addition, we are preparing and launching new products. So we launched a sustainable infrastructure product in September last year on our Irish platform, and we are developing a social markets product, which will be ready for launch in the next 6 to 9 months. And then in private markets and fixed income, we continue to look for opportunities to build capability, hiring additional staff and also to look around for small acquisitions or teams that we can bring on to our platform. And meanwhile, in private markets, we're continuing to develop our fundraising for the fourth fund, which is progressing nicely, albeit it's in quite tricky fundraising conditions. On the next slide, the work we're doing around the edge to strengthen our communication with clients is an important part of our brand and potential for attracting new clients. So there's 5 areas here, 3 of which are shown on this slide. Firstly, policy and advocacy, where we're using our 4-person policy team to improve policy insights for the [ investment work ], but also in an advocacy context, helping to shape the policy landscape for new markets, sometimes by ourselves with government and sometimes in consultation and partnership with other investor groups. On the right-hand side, you can see a reference to our thought leadership and research work. So we've recently, for example, produced a paper with Imperial College London on biodiversity and our partnership and networks work around the world, particularly with groups interested in climate change is sort of helping to move the needle around policy supporting this transition to a more sustainable economy. And then fourthly, on the next slide on the left, our engagement in stewardship work and on the right, our impact reporting continue to be differentiators for our conversations with sophisticated clients. So we're continuing to invest in our capabilities in both of those areas. Just a few words on costs before I hand over to Karen. So over the last 12 to 18 months, we have been increasing our headcount in order to create a full service or fully operational client service model and expanding our risk and compliance teams in order to be fully resilient as new money comes in the door. So that has led to a 6% increase in the headcount over the 6-month period with hires coming into all major offices and the new office with 2 people in Tokyo is shown there. So employee retention and employee engagement score, both remain very attractive, and we are performing pretty well against our ED&I metrics, particularly around the gender balance of the team. And then on systems and infrastructure, I've already mentioned compliance and risk. We are really wanting to make sure that clients and prospective clients don't have any reason to be cautious about hiring us because they have questions or doubts about our abilities in these areas. So really fully staffed there now for the current scale of business. And in IT, we have been implementing salesforce recently to improve efficiency around our client service and client relationship management, but also looking at more sophisticated data mapping so that we can make the most of scale potentials and efficiencies using IT.

So good afternoon and this is the first time, I'm the new CFO here at Impax joining in October of last year. I just want to take you through the next few pages, just to give you a little bit more of a flavor and the detail in the financials, starting with revenue. So thanks to the inflows, which for you that follow sort of the asset management industry just know, I think, we're a bit of an outlier and actually [ have been ] seeing positive flows in the period. The GBP 1.1 billion that Ian talked about has translated into a small but positive income growth of over GBP 1 million. Earlier on the chart where we explained AUM, you would have seen a significant increase in the AUM due to the market performance. However, in the analysis that we have here, there was an offsetting sort of downturn in the market that we saw in half 2 last year, which just balance each other out, but in the range, the income growing and broadly stable on where it was a year ago. I do like to look at run rates. So we have a figure here for GBP 182.5 million. That gives you a sense of where the business is just now. That's March AUM of [ GBP 40 billion times 12 ]. And just stating the obvious, that as markets increase, we'll see that revenue figure -- forecasting increase. And if the markets decrease, it's vice versa. What's important to call out is that the stable revenue is supported also by a stable margin, which has just dropped 1 basis points. We do talk that we expect our margin to probably fall slowly over time. But over the short to medium term to see that in the mid-40s is where we expect to be. And that very marginal decline in the period was caused more by mix than any price reductions. And we're not seeing price pressure in the market at this point. On the next slide, just -- I think I'd also like to sort of point out that the strength underpinning that revenue is our continued focus on the diversification of our asset base, whether it is by strategy, by region or client type. So we are beginning to see traction in our strategy to drive our revenue into the -- you see it in orange, into the sustainability lens funds. That is beginning to show signs of success with it now making up 22% of our overall revenue mix compared to 18% where it was a year ago. And likewise, our focus on building our own distribution is seeing the contribution made by our single biggest asset holder BNP, and that has reduced from 31% down to 29%, and we expect to see that dilution and diversification of -- by the introduction of other clients continue. And then lastly, on this slide, just to reiterate, I think, what Ian has said, is that we can see Asia Pacific begin to feature now in how we look at our revenues. That begins to feature, now we have opened the office there and expect that to grow over time. And I always like to draw attention to the fact that we have a global footprint with only 17% of our revenue being dependent upon the U.K. Now on the next slide -- so that's revenue. On the next slide, I want to talk about costs. And what I want to start now, I would say is, look, our costs have increased, but I want to assure you that they are not out of control. So let me tell you what is going on. We're a growing business and we continue to invest to support our growth, albeit at a much slower rate than the last 6 months than you would have seen coming through last year. Now the bulk of the cost increase is, as Ian has mentioned, in -- is in headcount. And you can see looking out to the right-hand side of the chart, if I take you to the last sort of set of data points that the headcount has grown by 51, over 20% since this time last year from 238 up to 289. But 34 of those heads, 2/3 were -- that was headcount that we had taken on board in 2022, and we have slowed the level of hiring considerably with only 17 joining in the last 6 months. Now of the 51 heads that we have added has really been principally for 2 things. One has been to build that distribution architecture across the globe where we are now -- so that was probably 20 of those heads where they have been placed. And what that has done is that that's placed us very well for a recovery in the market sentiment to scale the business with no further investment or significant further investment required in that space. So really, we have built ahead of the revenue in that space, and that was a strategic choice. The other heads that we've added over the period have been into sort of central areas, into the resilience, into risk compliance of the business, really closing our gaps have been built up as the business experienced very strong growth over the years '20 and '21. And that has resulted in -- when I said the costs have caught up, we have closed out those gaps, and we have now reached a fairly steady state in the headcount for the current market conditions. All towards that headcount, plus we have managed wage inflation to low single digits. Coupled with our bonus where we retain the policy where we pay out between 40% to 45% of adjusted profit after tax has resulted in the lion's share of that cost increase to GBP 4.6 million. And -- but that has been carefully managed selected hires that we have very well under control. The non-staff costs in the business have also grown but at a lesser rate. And that really is as a result of the underlying growth in the business. We have some placing agent fees as we continue to grow and win new mandates. And in there as well is just a variable cost associated with the headcount growth and our careful expansion of the office footprint is also adding a little extra cost in there but at a very, very low rate. So all told, I would look at these numbers and see that inflation was also very well managed. And again, I'd like to just pause and look at that run rate again, that is March month end times 12 of GBP 124.5 million for the year. And I do expect that to grow but at a much slower rate into the second half of the year. Lastly, on this slide, we have built a model that we can scale. And one of the key measures that we focus on is our AUM per investment staff member. So we believe we can nearly double the size of assets we have today with broadly the level of investment staff that we have today with existing strategies. And that's a figure that's improving, and I expect to improve further as market sentiment improves. On the next slide, we then look at sort of the overall operating performance. So with a good performance on revenue, but with those investments that we've made in the business, that the operating profit for the period has dropped to GBP 27.3 million compared to the previous 2 periods, which were in the mid-30s. In turn, the operating margin of the business has reduced to 31.1%. But we do keep focus very much on the operational gearing that we have built into the business. And looking at the graph on the bottom left-hand side, that you can sort of see over time, that trend is broadly upwards as the business grows. And I expect -- the target for me of where our operating margin should be is in the mid-30s. And I expect to return into that area as the markets improve and with the controlled investments and improved -- and the cost control that we will have. Evidencing to the cost control that we have in place, the run rate operating margin, which really is -- at the end of September was 32.6%, has declined only marginally into the first half of this year to 31.8%. And again, I expect, in time as markets improve, for that to head back towards the mid-30%. Moving on just to look at the balance sheet. And we'll just start with dividends, first of all, is reflecting that reduction in operating margin and the uncertainty just in the market sentiment, markets in general, that we have held the dividend flat at 4.7p. But also just to call out, we do -- our dividend policy is to pay out between 55% and 80% of the adjusted profit after tax. In terms of cash, we have a very strong cash position, GBP 61.8 million of cash on the balance sheet at the end of the period. But I want to focus just quickly on the cyclicality of that. At the end of the year or at the end of last year, we had GBP 107 million, and that's the peak of our cash position across the year. In the first half of the year, we pay bonus and we pay out dividends, which are very significant uses of our cash. That takes us to the lower point -- the lowest point in the year, which is actually this half year point at March. I, therefore, expect the business to be cash-generative in the second half of the year that will take the -- bring us back to sort of the peak on cash holdings for the end of the year. The capital position remains strong, and we retain a healthy capital buffer. And we seek to maintain that going forward in order to help support the growth of the business in seed capital as we invest in new strategies. We will continue to use cash flow of the business to purchase, to avoid dilution and acquire our own shares into our EBT in order to fulfill stock awards. And lastly, we do want to keep a bit of a war chest for the acquisitions potentially in the fixed income, private equity parts of the business. And as we look, I remind you, our strategy remains one of our organic growth, but we do seek to [indiscernible] in that buffer to be able to react as and when the right opportunity comes our way. I want to finish off just very quickly by looking on the next slide at our share register. This really is just there to show that we seek to avoid dilution of shares to meet share awards by actually purchasing our shares in the market. This year, we have been fairly active in the first 6 months buying 1.4 million of shares, which has resulted -- when you look at the chart on the left-hand side, that we can see there's now 3.6 million shares in the EBT used to satisfy the outstanding options and RSS awards of 4.8 million. So a net position of [ 1.2 million ], the key point being it's [ 1.2 million ], it's not a significantly large number, less than 1%. And then just to finish off with just looking at the current ownership has changed very little, if at all, in the last 6 months with BNP being our largest shareholder with 14%. And importantly, with employee ownership, which is key to the future of the organization, remaining at 20%. And to allow some time to ask questions, I'm now going to hand back to Ian to wrap up.

So it's been a tricky period for investment managers. I think most midsized groups and even larger groups have seen net outflows for quite a long period of time. Impax is actually quite different. And our focus -- exclusive focus on the transition to a more sustainable economy is proving very popular amongst current and prospective new clients. So the net result of our client outreach is that we've been able to sustain positive net flows. Investment performance has improved further, and that does give us a high degree of confidence that over the medium term, we can continue to attract new business. And with 80% of our assets under management already coming from outside the U.K. and the distribution arrangements, which have been put in place over more than 20 years, reaching the far flung corners of the globe, either directly or through partners, we do feel that we are very well placed to be in front of clients when they're ready to sign checks. So our pipeline remains very healthy. The rate of conversion of that pipeline is going to depend on the short-term market sentiment. But as Karen explained, we do have a very ruthless focus on efficiency and cost management, while at the same time, wanting to put in place the architecture or the building blocks so that we can continue to build the business over the next few years. So I'm going to stop there and back to Andy for some Q&A, if that's okay.

Yes. Thank you, both of you, that was very clear. So I'd remind everybody, we have a number of questions already, but you can input through the Q&A button. Rounding a couple of questions together. Acquisitions, you have said that the group is primarily focused on organic growth, yet, at the same time, you have a huge 96% weighting towards equities. In the light of that, how are you going to move the dial for private markets and fixed interest to more diversify your AUM?

Well, there's 2 options for growth there. Firstly, organic growth, which I think will be facilitated by further investment capabilities. So we are adding to our fixed income teams right now to increase that organic appeal. And secondly, through the acquiring either of additional teams and/or boutiques with assets under management. So as you're correctly saying, Andy, we've signaled very strongly that our central focus is organic growth. So we're not holding our hats out to say we'll -- or hands out to say we're definitely going to do acquisitions in any particular time frame, but there is a live pipeline of conversations underway and we'll continue to press forward if something attractive comes along.

And good growth internationally. Some diverse questions there. Asia Pacific has gone well for you. What is your ambition or plans regarding the 2 most populated countries on the planet, namely Mainland China and India? Are there opportunities there?

Well, we've had a research team out in Hong Kong since 2007, and we've now got a very well-established and experienced investment group there. They run a strategy for us covering the Asia Pacific region and are making great contributions to our global equities portfolios. So through them, we've got good brand foundation and recognition through the ASEAN region and to some degree into Mainland China. We do have a Chinese client that we've picked up with BNP Paribas and BNP Paribas are continuing to look for opportunities for us on the Mainland. So we're going to be extending our Hong Kong regulatory license to allow us to promote our services directly to Hong Kong-based institutional investors. And with our office now in Japan, the second Asian office opened up, we're increasingly well resourced to provide service in China. India, we've, to date, just seen as a place to invest and one of our first ever fund actually invested in private company is in India and in certain parts of Africa, which we didn't continue after its wind down after 12 years in 2010. But we've continued to invest in Indian stocks, and we just hired an Indian national to be based in Hong Kong to continue that focus. So no plans at the moment to reach out to Indian investors. BNP Paribas does have quite a well-established presence in India. So that could always be a possibility, but there's nothing brewing in the short term.

One for you, Karen. There was an unrealized ForEx loss of almost GBP 5 million mentioned. Could you elaborate that in a little more detail and then overall comment about how movements between the pound and the dollar might affect the group going forward?

Yes. So this really has to do with the interactions and the financing we have with the U.S. business. So we have a -- the large part of the FX variance, as the pound is strengthened, you'll see the opposite effect that we had in half 2 that -- or in last year's results, where we had a positive movement. And this is owing to the financing of the purchase of our PAX business that we bought back in 2018 with an intercompany loan and structuring that was set up, mostly driven by tax reasons. So there's just a translation of that loan, plus some sort of U.S. dollar balances that we hold. So that is a certain way we can look at the cash balances that we're holding, and maybe see that and reduce some of that going forward. But that's been a feature of the business for the last 5 or 6 years in terms of that loan structure.

And we'll keep [ pinging ] around the world. America, perhaps one for you, Ian. Clearly a great opportunity for Impax there. But at the same time, it's easy to pick up in the broad sheets here that there's been some changes of sentiment politically towards clean investing and to ESG and even some tentative legislation against ESG in certain states. How do you see the environment at the moment?

Well, we're very deliberately not hanging our colors to an ESG flag or mast, but rather positioning ourselves as looking at opportunities arising from the industrial revolutions around clean energy, electrification of the drivetrain, et cetera, which are compelling themes for capitalists in the U.S. and in particular, supported with strong tailwinds from, for example, Inflation Reduction Act. So the underlying investment idea that Impax is pursuing is very much an American story as it is a story anywhere else in the world. So that's attracting investors who are sort of neutral on ethics, morals or labels such as ESG. But you're absolutely correct in pointing out that there is a bit of a fight going on between the anti-woke brigade in places like Florida and Texas and those who are promoting ESG as a label. So we are very much steering around that fight, that debate, keeping our heads down and meanwhile promoting ourselves to the very large [ cohorts ] of capital for which that's a distraction and where the interest in the sort of the real economy, the industrial revolution is much more a priority.

Your direct sales effort where you mentioned during the presentation, that has helped diminish the importance of BNP. Question has come in, are you happy overall with the rate of progress in developing direct distribution?

Yes, we are. Over the last nearly 2 years, I've restructured the sales team and brought in experienced sales leaders in both North America and Europe, who are doing a fabulous job in adding to and sort of adjusting the focus of their respective sales teams. And we've put in place new products, for example, collective investment trust framework in the U.S. and some new UCITS funds in Europe. So that's -- this is all part of the investment we're making to make sure that we're making the most of the opportunity to scale the business. Both those leaders have contributed to our positive flows over the last 18 months. Yes, it would be nice if flows were -- net flows were even stronger. But as I've said a couple of times earlier on, relative to others, I think we're still towards the top of the pack in terms of performance.

A technology question, appropriately after all the talk of industrial revolutions. Specifically on AI, and we have someone interested whether you are contemplating or indeed already using AI to improve your investment processes by means of more efficient screening, research analysis and so on?

Yes, very topical question. So the answer is yes, we are doing that. We're doing it in a careful and controlled fashion with individual analysts being encouraged to sort of articulate whether they're actually using it and if so, how, and putting in place some structures to measure the impact. So we are letting our analysts and investment managers use AI, but trying to do that in a controlled manner just to sort of monitor the impact in a sort of structured scientific fashion.

Client pipeline, we have a question, how much you can disclose about where it might be lying geographically or what sorts of investors are that you are most excited in at the moment?

Yes. The pipeline, as usual, is very broadly spread across the world and across different client types. So we have pension funds in Europe, in Australia. We've got some wholesale clients in Continental Europe, Japan, particularly in the United States, who are sitting there in the pipeline. And the interest is in particularly the listed equity funds. So we have been saying last 24 hours about the pipeline is that it's showing no signs of slowing down relative to historical norms, certainly in the last 6 to 12 months. So although market sentiment remains weak, the pipeline remains just as healthy as it has been over the last 6 to 12 months. And yes, so it's always very tricky to forecast when new business is going to land, but we're certainly seeing high potential for a material new business in the second half.

And you mentioned specifically a very large pension win in -- out of the Tokyo office. Is it -- is business opportunity in Tokyo pension-dominated or again has a very wide range of opportunity?