Rathbones Group Plc (RAT) Earnings Call Transcript & Summary

Good evening, everybody. Thank you very much for taking the time to listen to us this afternoon. It is afternoon still, 5:30 p.m., and we're still in lockdown. So it's very exciting times. You have Paul Stockton and Jennifer Mathias here from Rathbone, as many of you, I hope, will recognize the voices. Hopefully, you've had a chance to scramble with your screens. I do apologize, it's a sort of later on the day announcement. I know you're all morning people, but we have an important announcement, obviously, to make in terms of the acquisition of Saunderson House today. You will have access to the presentation, I hope. So what we'll do this afternoon is just briefly flick through some of the slides, so that we've got an opportunity to give you some Q&A at the end. A usual protocol, I think, in terms of Q&A. You'll be asked for all of the details relevant, and we're very happy to answer questions. So look, very exciting times. As you know, as part of Rathbones' strategy, what's been extremely important to us is that we have a balanced choice of optionality to our clients, not only in the investment management part of the world, but as many of you will know, we've been growing our financial planning capability over the years as well. Our current financial planning capability is an in-house team of 25 financial planners across the U.K., Rathbone financial planning, a subscale business today. But you may imagine that after the acquisition of Saunderson House today, there's going to be less subscale. We also have a vision, which is a self-employed adviser network, which we run independently and have some very strong links with Rathbones that will continue under its current guys. And equally, of course, from our investment management side of the world, we have an opportunity to deal directly with advisers who were giving financial advice and we did the investment. So why Saunderson House? Firstly, we're looking always at Rathbones for like-minded business and client quality outcomes. We say culture is first, we mean it, and we found a partner in Saunderson House that, from a culture perspective, is very like-minded with us, focused on client outcomes. As I said, the acquisition of Saunderson House will very much strengthen our current financial planning capability. It is a business, as we'll see in a second, based in the Southeast and will certainly enhance the wealth proposition that we provide to high net worth and ultra high net worth clients. Together, we will form a financial planning force -- employed financial planning force of 80 in-house financial planners, which balances the overall Rathbone footprint a little more with our investment capability. Saunderson House, as you'll see in a moment, is an opportunity to provide meaningful growth in a sector that is growing and in a wealth sector that's much earlier in the wealth creation cycle than Rathbones is currently positioned. It also gives us a strong industry positioning in terms of size with pro forma funds under management of GBP 61 billion. In value terms, this is an acquisition where we are confident that with a mixture of revenue and cost synergies, we can achieve EPS accretion of 10% and a return on capital of around 12% in the third year following completion. Looking the other way, Saunderson House is looking at Rathbones. It's changed owners a number of times over the last year or 2. The synergy value with Rathbones, the proximity of proposition and the complementary position of what Rathbones does versus what Saunderson House does makes us a long-term and stable home for Saunderson House to grow over the longer term, something they've not had for some years. And that's important in terms of how the management of Saunderson House and, indeed, the management of Rathbones have seen the advantage of this transaction. The other advantage is Rathbones' investment propositions, whether single-strategy funds, multi-asset funds, LED-managed portfolios with -- that we work with advisers to deliver, or indeed full-blown DFM or discretionary. It is all open to this adviser network now, which significantly deepens their proposition, adding a quality advice proposition with a quality investment proposition. Now as I said earlier, we'll very much expand their footprint in the Southeast. Page 4 of the presentation merely says one thing is that this will take our strategy forward, to broaden our proposition, search for growth opportunities, bringing people of a common culture and equally allow us with scale economies achieve greater efficiency. So let me talk a little bit on Slide 5 about the highly attractive market segment that we're talking about here. At the moment, Saunderson House has a good proportion of its funds -- the majority of its funds in advisory solution. Some of you will know how we've worked with Speirs & Jeffrey to convert that more to a discretionary. There is a similar opportunity without the repricing challenges that we had in Speirs & Jeffrey to do the same with Saunderson House. This is not something that we are imposing on Saunderson House. They had already begun to do this. We can accelerate it. And equally, if you look at the median age of Saunderson House clients, then you can see what I was talking about earlier in the graph. So that's capability, advice depth, together with investment management depth, both award-winning companies that has quality very high on both of our lists. So in terms of the financial metrics, the value creation will very much be an aligned service proposition with that of Rathbones. As I say, we have an opportunity to combine those and build revenue synergies from that. So leveraging the strength of Rathbones' brand, Saunderson House see the brand of Rathbones as very powerful and more far reaching than the brand of Saunderson House. And I talked a little bit about advisory to discretionary and other synergies, which Jenny can maybe talk to. Jenny, what I might do is ask you, if you don't mind, to just go through some of the drivers behind the EPS accretion and the 12% return on investment and, indeed, give everybody a feel for how we've used our capital in this transaction?

Thank you, Paul. Good evening, everybody. As you see on Slide 6, and there's further detail on Slide 11, which I'll come on to the structure. But attractive synergies -- revenue synergies earned from the proposition that Paul just described. We have similar clients pricing. So that unlike the Speirs & Jeffrey acquisition, there's no repricing exercise here. This is about accelerating and migrating a wider proposition to this client base and leveraging our in-house multi-asset portfolios and other range of products where we take the full manufacturer's margin. So this will further strengthen Rathbones' brand and platform to drive further origination in the specialist segment. And as Paul mentioned, we will continue to accelerate the conversion from advisory to discretionary, while offering a wider suite of options to this client base and adviser base. Cost synergies will principally be earned from operational processes and bringing together of IT or moving on to our platform, the Saunderson House are on the same version platform for financial planning as we are. And then in the functional areas of finance, risk, HR, no need for extra net, et cetera. Delivery synergies will be phased over time, while we maintain operational stability and work through this client base. And as we program with Speirs & Jeffrey, we don't rush at this and forced an agenda. So we will focus on quality of service and that client outcome throughout. So underlying EPS accretive in the first full year following the acquisition and approximately 10% in 2024 third year following the completion. Underlying return on investment is driven by those revenue synergies in the main, as I talked about and the cost synergies. And the EPS driven very much by the way we've paid for this transaction in terms of capital, which it might help you to flip forward to Page 11, where it's detailed out in slightly more digestible way. So the initial consideration being made up of GBP 80 million of our internal cash resources. Most you would all be aware, at the year-end, we reported a capital surplus of GBP 132 million pre-final dividend. After paying this GBP 80 million, we'll be left with about GBP 60 million capital surplus, which allows us enough buffer for any small niche opportunities that come along, given the activity in the market at this time. So GBP 80 million cash and GBP 50 million placing and GBP 4.9 million of shares to management and employees going forward. There's a deferred consideration element of GBP 14.9 million payable on the first anniversary following completion, majority payable in cash, circa GBP 10 million (sic) [ GBP 10.9 million ] in cash and GBP 4.9 million (sic) [ GBP 4 million ] in shares, which will vest over time. Further to that and not similar to what we've done on the Speirs & Jeffrey transaction, there's an employee incentive plan that will encompass a wide group of the employees coming over. And they will be eligible upon achieving growth and operational targets aligned to value creation out to 2024 up to a ratcheted maximum of GBP 7.5 million. So bearing a return on investment of circa 12% after 3 years and EPS accretion of 10%.

Jenny, thank you. Just to flip back to Page 7, an overview of Saunderson House's current financials. Just an important couple of points there, I think, to make. The first is that the average client size in Saunderson House is that portfolio sizes of GBP 2.2 million. Rathbones, as many of you know, is closer to GBP 600,000. So it's a client base that is in the right demographic and wage bracket versus Rathbones and complements Rathbones very nicely. Secondly, here, you can see the -- some of the numbers on Saunderson House itself. The point to raise there, I think, more than anything else is that this is the advice revenue. If there's any revenue coming from investment products that are chosen by the advisers of Saunderson House in the future, they will flow through other parts of Rathbones. So just to have that in mind. So GBP 4.7 billion of funds under management, an advice 2,200 clients, and you can see the spread of advisory to discretionary. I'm not going to spend too much time on Page 8 because many of you will be very familiar with the importance of financial advice. This is an opportunity -- a rare opportunity. And I stress that there are not many businesses of this size and this quality, with this quality time base in the market. So for us, it is about strengthening the delivery of our wealth proposition. And you can see on Page 9 some of the highlights, again, of certainly some of the services that we'll be bringing in-house and actually embellishing and polishing and improving from our own capability as well as increasing our financial adviser footprint. Page 10 is a bit of maths in terms of what this would bring in terms of our overall size. As you know, we have a very big difference in approach to our size. We want to obviously grow funds under management as fast as possible, to appear small and tailored to our clients. Jenny has been through Page 11. So I think in summary, if I may, it is very rare to find an opportunity here to add a business that is of the right scale, the right mindset, the right compliance culture, the right remuneration culture, the right market sector for growth, and indeed the right opportunities to sit alongside Rathbones' products and services. That is Saunderson House, and that's why we are very pleased to announce the acquisition today. Now that completes our presentation. I would more than welcome questions from you. If we could start the Q&A process, please.

[Operator Instructions] And we do have a question from the line of Paul McGinnis.

Just a couple -- just dusting down some of my old IFG notes just to sort of confirm very well.

Is that all right?

Just struck me just in terms of the metrics that you've given on Saunderson House. It didn't look like it's grown very much in the last couple of years.

Yes.

And indeed, in terms of profit margins, they looked a bit down on where I sort of last remembered them because I think they were in sort of low to mid-20s. So it was one the case of how the business could extend for the stagnated during its ownership and private equity? And do you expect that now to reverse under your ownership? It was the first question. I don't know whether you're willing to actually give a slip on the synergies between how much you're expecting from revenue and how much from cost. Because when I just hope sort of their operating profit number there of GBP 6 million, if I was to sort of pack that at 20% and GBP 150 million would only imply a return -- a post-tax return of about 3%, 3.5%, which is obviously a long way from 12%. So it suggests the synergies would have to be very, very large. I was just wondering what the split is between revenue and costs. And then sorry, if I can really -- if you can just take one final one. Just the fact that you're now going to be significantly boosting the in-house financial planning resource. As you say, something that's not subscale, but actually quite substantial now. I just wonder whether that might have an impact on your relationship with third-party advisers, if they now see you as a bit more of a competitor for their clients?

Paul, thank you. And as always, some good questions. So what I'm going to do is I'll take your first and your third, and I'll let Jenny take the second, if that's all right?

Okay.

The -- you're absolutely right. And the answer to your first question is largely yes. I think the business has -- it's not quite stagnated because, of course, we've had a bit of a market corrections come back a little bit. Remember, you're looking at sort of 2020 numbers here. So you did have a fair bit of the market correction in that, which is broadly offset by growth. But I think it was a little bit like under IFG ownership. Quite difficult to grow without a symbiotic partner. One of the reasons I think over the last -- particularly the last 1.5 years has been its investment performance, which has lacked a little bit. And that's in a way the opportunity that we see. And if you're an adviser at Saunderson House looking at the investment returns of Rathbones over the last 1.5 years, you're going to be much more excited than the investment returns that were achieved for clients of Saunderson House over the last 2 years. So that's one of the reasons why the growth has been a little bit muted over the last 2 years. So yes, in answer to your question in terms of, yes, it's been a little bit treading water. But yes, we do see as an opportunity to revive that proposition and certainly take it forward. On the -- in terms of the other IFAs, it's a big market, Paul. And I think even our market share with 80 financial -- internal financial planners and indeed the 125 that are envisioned still has -- is a drop in the ocean in terms of the overall IFA community. So we have a proposition that's still very much geared to working business-to-business with financial advisers, and we welcome that. This is not about necessarily stealing other distribution from other places. It is about growing market share in our own right. So we see that there may well be 1 or 2 conflicts, but we think they're extremely small because the market is very large and diverse in this space. You've only got to look at some of the size -- the relative size of financial planning capability to investment capability of some of our competitors to say that even now, although much more material post Saunderson House, it doesn't quite compare. So we think there's still plenty of room. We think there's plenty of opportunity. And don't forget, of course, this is a business that's very focused on a specialist sector which was very much in line with our strategy to try and build specialist propositions. So again, that reduces the market share conflict that you refer to. Paul, I hope that answered your questions. I'll go to Jennifer now on the revenue and cost synergies.

Paul, at this time, no, I'm not giving the split on the revenue and cost, but I can point to, the lion's share is on the revenue side. So as I touched on, this is about accelerating and continuing that conversion from advisory to discretionary and on to full margin from -- for manufacturing margin from Rathbone solutions. There's also the opportunity here come back to the capacity. This moves our London-based financial planners from 14 to 69. And that's our large high net worth client base in Rathbone. So we get further capacity opportunity there to grow in financial planning. So yes, it's been a concentrated process. But in due course, I'm sure we'll firm that up. But at the moment, the cost synergies, there are some in the results that you're looking back in your notes that they would have been part of the wider James Hay Group. They're probably not carrying all of their costs. And as Paul said, they've had some muted performance over the last couple of years. So their costs are probably light in terms of remuneration.

And Paul, just to give you an idea. This is a business that has had an in-house investment solution. Now it's got the option of that in-house being a slightly bigger house with a hell of a lot more in it in terms of capability. So it's not a business like a self-employed network. There is fiendishly following whole of market, other solutions. It is used to providing solutions in-house as recommended by investment advisers in-house, which is why we're very confident that we can provide the product set and service set to these advisers, which is a more compelling proposition to their clients than they've got today.

Okay. And just to confirm, the 12% return on investment, is that a pre-tax number?

It's a post-tax number.

Yes.

It's a post-tax, okay.

[Operator Instructions] And we do have another question from the line of Bjorn Zietsman.

Just moving back to culture. I know this has been quite a significant box for you guys to tick. Relative to considering ESG and the approach to ESG, would you say that there's a strong cultural fit? Or would you say that Rathbones potentially bring a much stronger sort of ESG approach to the investment style that Saunderson House has been offering?

Yes. Look, I think there is an ESG mindset in Saunderson House, so I can very much confirm that. Their solution at the moment is quite limited. Our answer is largely by a sustainability fund or green fund or whatever. We obviously got much greater capability within Rathbones, from tailored Greenbank type solutions to newly launched ESG multi-asset fund, which is a very compelling proposition. So I think it will suit very well with the mindset of advisers and importantly who are trying to do the best thing for their clients. So at the end of the day, we know that ESG is very firmly in the mindset of clients. That's why we've launched the product set that we have. And we know that we can work with the advisers of Saunderson House to present that so that they can present that to their clients in a compelling way. So that is yes, you're absolutely right, an important part of investment culture, which we think we can add a lot too.

[Operator Instructions] And there appears to be no further questions on the phone lines at this time.

Lovely. Well, listen, thank you very much, everybody. Appreciate it. It's the wrong end of the day, but I'm very grateful for you spending the time on the call. Obviously, usual rules apply. If anybody's got any questions, yes, I'm sure you will not be backward and coming forward in contacting Shelly or Jennifer directly or indeed myself. Have a good evening, everybody, and thanks again for taking the call.