Record plc (REC) Earnings Call Transcript & Summary

Good afternoon, and welcome to the results for the first half of FY '26, I'd like to review our strategic progress. Record is a specialist currency and asset manager focused on delivering best-in-class solutions for large institutional investors. We have over $110 billion in assets under management for clients based around the world with a particular strength in Switzerland and the United States. And we employ over 100 people, primarily at our new head office in Paddington but also in Hamburg, Frankfurt, Zurich and New York. Over the last 40 years, we have established ourselves as the leading provider of currency derivative solutions to large institutional investors with a reputation for exceptional client focus and operational excellence. Those qualities remain at the core of our value proposition, and we're building on that robust foundation to expand our offering into new areas, where we can add higher-margin products and lock in long-term recurring revenues that will deliver sustained growth and increased value. The transition is well underway. And in the following slides, I'll cover some more detail about the progress we're making and how we intend to capture the full opportunity. Last year, we restructured the business into three distinct pillars: risk management, absolute return and private markets. The risk management and absolute return pillars deliver the bulk of our revenues and profits today, but it is in private markets where we see the greatest momentum and opportunity in winning new business. This quarter, we completed the first deployment of capital on the record infrastructure equity funds, a $120 million investment in patent Energy the largest privately held clean energy infrastructure company in the U.S. We have also signed terms on a second EUR 150 million investment in a major European electricity transmission system operator. This means we are on track to deploy the EUR 1.1 billion of capital commitments within 3 years of launch. And although the AUM is small, compared to the more than $110 billion of derivative exposure that we manage. This deployed capital will deliver recurring management fees at a substantially higher rate than we typically earn on our traditional business and it is committed for a minimum of 15 years. In October, we announced the appointment of Dr. Othman Boukrami to the Record Currency Management Executive Team. Othman is well known to us. having served as a nonexecutive director since July 2024. Previously, CIO and Deputy CEO at the Currency Exchange Fund, TCX. Othman will add considerable strength to our leadership team, alongside our recently appointed group CIO, Andreas Danzer is one of the world's leading experts on emerging and frontier market currencies. And under his leadership, we will aim to expand and grow our offering. While the developed market currencies dominate the world by volume, there are over 100 regularly traded EM and frontier currencies. Record's annual trading volume in the top 5 developed market currencies is close to $1 trillion annually, making up around 0.01% of global volumes. Within Frontier currencies, our market share is around 1% and has been rising rapidly over the last year. We can play a major role. We continue to progress towards launching the world's first Sharia-compliant Deep Tier supply chain finance fund with an initial target of $1 billion of assets invested. As previously described, we are well advanced with the structuring of the funds and the sourcing of the underlying loans. The financing to support core potash also continues to progress and we're working on other similar projects in private credit and real estate. It's also private assets that are creating opportunity for solutions for asset managers business. While I'm especially excited about the progress we're making, and we'll cover that shortly. Our success in delivering new offerings for clients is built on our technical knowledge and operational expertise developed over 40 years of the risk management and absolute return space, which equips us well to expand into new areas and where we are confident we can win. It's in our private market products that we are seeing the most momentum, where we are building an impressive track record and where we see a transformational opportunity. As the chart on the page show, AUM in private markets accounts for less than 1% of total AR, but it already contributed 16% of total revenue before performance fees. If we add solutions for asset managers, were underlying assets are almost all private, the proportion of AUM is 17%, but the share of revenue rises to 27%, showing the value of the opportunity underpinned by the growth in the private market space. In FY '22, we launched an emerging market sustainable finance fund. Offering investors highly yield, carry and return opportunities relative to traditional EM debt. In addition to financial returns, the fund also seeks to have a positive impact by mobilizing capital for the development of emerging market economies. From inception through September 2025, the fund achieved a cumulative return of approximately 23%, exceeding benchmark performance by around 17% across both local and hard currency sovereign debt. With the appointment of Othman Boukrami to the record leadership team, we see good opportunities to expand our emerging market and Frontier currency offerings. We launched the infrastructure equity fund last year with a EUR 1.1 billion in initial commitments. And as I said on the previous slide, deployment of that capital is well underway. And we have announced large new projects and supply chain finance and project finance. We are also increasing our revenue from distribution of third-party private market funds, which includes distributions to our existing client base. Each of these projects is a demonstration of our ability to structure large-scale bespoke solutions, and we have a further pipeline of projects and private credit and real estate, and we will continue to build on this track record. Coming back to our core currency business and our risk management and absolute return products. This is where we have the majority of our and where we still generate the majority of our revenue. Risk management comprises our long-established passive and dynamic hedging products and our newer fast-growing offerings of solutions to asset managers. Asset hedging includes two offers, typically to large corporate and government pension schemes with domestic liabilities and overseas assets. Fuel Passive Hedging is a highly cost-effective way to eliminate currency exposure from client portfolios. Enhanced Passive Hedging, which is also sometimes known as Tenor Management as valued by taking advantage of structural inefficiencies and behavioral changes in FX markets in a structured and risk-managed way. Dynamic hedging is an attractive alternative to passive which seeks to reduce currency risk, while generating value by benefiting from foreign currency strength and protecting against currency weakness. AM increased across all risk management products. In passive hedging, that was driven by favorable FX movements with underlying assets remaining broadly stable. In Dynamic Hedging, underlying assets are more heavily weighted to U.S. dollars. So FX effects are smaller. And the increase in AUM reflects positive net flows and increased underlying asset values. Solutions for asset managers has been developed to meet the specific needs of asset managers in private equity and private currencies. Previously, we described this as hedging for asset matters and is again by offering tailored FX hedging strategies to clients which typically have lower liquidity and require more bespoke hedging solution. However, we are rapidly broadening our offering in response to client demand. And we're now going beyond solely FX hedging growth of complementary services, including interest rate hedging, bank account opening and fund finance. We're seeing rapid growth in this area with AUM up 40% in the period to $17.2 billion, and we expect this to be the primary driver of growth in risk management in the years ahead. Moving on to look at Absolute Return. Absolute Return products aim to provide clients with attractive returns while maintaining low correlation with traditional asset classes. This is our smallest pillar by revenue and can be more volatile than others, being more discretionary from a client perspective and by clients change asset allocations more frequently. As noted, when we reported our full year results in June, AUM and FX Alpha decreased at the end of last year and in the first quarter of this year. And as we anticipated, that has resulted in a corresponding decrease in revenue. However, we saw positive inflows back into FX Alpha in the second quarter of this year, and it remains an important part of our offering. So customer opportunities comprises a range of bespoke strategies including our protected equity funds. And with that, I'll hand over to Richard to review the financials.

Thanks, Jan. Good morning, everybody. Thanks for joining the call. Assets under management were $110.3 billion at the end of September, which is the highest number we've ever reported as the chart shows, that's an impressive and consistent track record of growth over the last 5 years. The termination of two client mandates last year has impacted revenue and management fees ended the first half of the year down 8%, which combined with lower performance fees after a very strong first half last year, resulted in total revenue down 9%. We're pleased with the progress we've made to manage costs, which were down 4% year-on-year. The net result is the EPS decreased to 1.93 per share, down from 2.58p per share last year. Our balance sheet remains strong. And as Jan has outlined, we're confident in the medium-term trajectory for the business, and therefore, we've maintained the interim dividend at 2.15p per share. Looking at the income statement in a bit more detail. Total revenue decreased 9% since the previous half year, a combination of lower management fees and lower performance fees, the detail of which I'll cover shortly. We've continued to maintain tight control of operating costs while maintaining important investments for the future. Star costs are broadly flat, while bonus costs are lower than last year, reflecting lower profits. Our cost structure allowed us to manage costs in line with revenue generation and operating costs are down 4% in the period. The operating margin was down from 27% driven by the combination of lower management and performance fees, resulting in operating profit for the year, down 20%. We incurred a small net finance cost compared to income in the previous period. This is due to the accounting for lease interest expense on our new office, which has more than offset the interest on our surplus cash balances. The surplus cash balances are held to meet regulatory cash and regulatory capital and liquidity requirements and to cover bonus and dividend payments managed by our investment team and held primarily in money market funds. Profit after tax was GBP 3.3 million, down from GBP 4.2 million last year. Notwithstanding the positive progress and steadily increasing revenue in record asset management, our German subsidiary, it remains loss-making. And after adding back the share of losses attributable to the other shareholders Profit after tax attributable to record shareholders is GBP 3.7 million, down 25%. Earnings per share is 1.93 against the prior year figure of 2.58. Assets under management increased 9% in the last 6 months, GBP 210.3 billion, which as I said before, is the highest number we've ever reported. The increase is mainly due to movements in FX rates, in particular, the weakening of the U.S. dollar against the Swiss franc, which took place in the first quarter. As a reminder, we present our assets under management in U.S. dollars that the underlying assets are denominated in multiple currencies, and we earn management fees in the underlying currency. As shown in the breakdown on this slide of assets under management by underlying currency, the majority of assets are denominated in Swiss francs and U.S. dollars. We also saw strong growth in underlying asset valuations, particularly in the second quarter, that asset growth prompted some clients to rebalance overseas exposures back into domestic currency but that was more than offset by good inflows into solutions for asset managers, where AUM is now up to $17.2 billion and into FX Alpha in the second quarter, which was good to see after successive periods of outflows. Overall, net flows were positive as a result. Looking at revenue by product. The 8% decrease in total management fees was mostly due to the loss last year of a large mandate, which included schemes across passive dynamic and custom opportunities and the wind down of an FX alpha mandate at the end of the year. Management fees and risk management remained broadly flat overall passive and dynamic hedging both decreased mostly due to that large mandate loss, which offset -- which was offset by the strong growth in solutions for asset managers. Revenue of GBP 0.9 million from absolute repair products was down by almost 50% due in part to that same client loss in addition to the wind down of the FX Alpha program. Looking at private markets, in EM local debt, we delivered management fees of GBP 2.3 million, slightly down from the prior year. As Jan described, this period saw the first deployment of capital into the infrastructure equity fund. We had the closing fee on that first deployment and will earn ongoing management fees on the deployed capital. We'll also earn closing fees on each subsequent deployment. Performance fees for our risk management products have dropped compared to a strong first half last year. However, we have seen performance fees from positive returns in our FX Alpha product. Other income shows a significant increase from the period. This is from increased distribution fees and from that first closing fee following the capital deployment from the infrastructure fund. Moving on to operating costs. Overall, operating costs were GBP 14.8 million, down from GBP 15.4 million last period. Average headcount during the period was up from 99 to 104 with continued investment to support the transition to private market products. Bonus costs have decreased as a result of the lower operating profit for the period and that's the main driver of lower staff costs, which, excluding who costs are broadly flat. Although we're capitalizing some internally developed software, we're doing so prudently and capitalization is not a significant driver of lower costs. Technology costs represent the cost of third-party systems, consultants and market data. Our tech leadership team has continued to make good progress on rationalizing and reducing those costs with a reduction of 10% following the elimination of some expensive resources since the prior year. Last year, we incurred additional one-off professional fees, which includes legal fees on the setup of new initiatives in the private market space. particularly through our German subsidiaries. With those setup costs largely complete spending on professional fees this year has reduced accordingly. Occupancy costs remained flat, although we are incurring higher depreciation and amortization relating to the new office with the termination of our Windsor office lease, which is planned for December, occupancy costs are expected to reduce. Turning to the balance sheet. Record is a highly cash generative and capital-light business and maintaining a strong balance sheet is an important priority for us, one which is valued by clients and investors alike. Our first priority is to ensure that our regulatory capital and liquidity requirements are met during the year, the surface of net assets over our minimum regulatory capital requirement has decreased, but cash remains high. It still provides a healthy surplus over our regulatory capital requirement. This strong cash and capital position allows us to continue to pay an attractive ordinary dividend, and we've maintained the interim dividend at 2.15p per share. This will equate to a distribution of approximately GBP 4.2 billion following which the business will retain cash and money market instruments on the business, both on the balance sheet, which sufficiently cover financial resource requirements required for operations and regulatory purposes. The outlook for the current year is highly dependent on completing certain projects. But as Jan described, we're in the middle of an important transition that we believe will deliver sustained growth and increased value. The interim dividend of 2.15p per share relative to EPS of 1.93 per share reflects our confidence in our plan as well as the strength of our financial resources. The Board will continue to balance the expectations of shareholders for dividends with the needs of the business to maintain a healthy balance sheet and preserve capital for future growth. And now I'll hand back to Jan to wrap up.

Thank you, Richard. As I said in my opening remarks, we are transforming record into a higher-margin, higher-growth specialist asset management. The shorter-term outlook for the business depends on the timing of delivery of these new projects, but the transformation is gather incremental, and I'm very excited about the progress we are making. We have harnessed our technical expertise and client-centric approach to develop our emerging market sustainable finance fund and to create the record infrastructure equity fund, which is now deploying capital. and we have an active pipeline for additional private market opportunities. We have demonstrated our ability to manage this change and to attract world-class hires to complement the exceptionally dedicated and talented teams we already have. When needed, we can flex our cost base to ensure we maintain a robust balance sheet and preserve capital for future growth.