Record plc (REC) Earnings Call Transcript & Summary

Good morning, and welcome to the Record plc Investor Presentation. [Operator Instructions] I'd now like to hand you over to Dr. Jan Hendrik Witte, CEO. Good morning to you, sir.

Thank you. Hello, everyone, and thank you for joining us today. I'm Jan Witte, CEO of Record. And with me this morning is Richard Heading, our CFO. We released our half year results last Friday, which we will take you through. But before I do that, I'd like to start with an overview of Record and 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 Peddington, 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 are 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. That 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 3 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 from the Record Infrastructure Equity Fund, a $120 million investment in Pattern 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 the 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 is committed for a minimum of 15 years. In October, we announced the appointment of Dr Othman Boukrami to the Record Currency Management Limited executive team. Othman is well known to us having served as a non-executive 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 Daenzer. Othman 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 world trade by volume, there are over a hundred 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 trading volumes. Within Frontier currencies our market share is around 1% and has been rising rapidly over the last years; we can play a large role here. We continue to progress towards launching the world's first Sharia-compliant Deep Tier Supply Finance Fund with an initial target of $1 billion assets invested. As previously described, we are well advanced with the structuring of the fund and the sourcing of the underlying loans. The financing to support core Potash also continues to progress, and we are working on other similar projects in private credit and real estate. It's also private assets that are creating opportunity for our solutions for asset managers business, where 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 in the risk management and absolute return space, which equips us well to expand into new areas, where we are confident that we can win. It's in our private market products that we are seeing the most momentum. It's here where we are building an impressive track record and where we see a transformational opportunity. As the charts on this page show, AUM in private markets accounts for less than 1% of total AUM, but it already contributes 16% of total revenue before performance fees. If we have solutions for asset managers, where 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 private markets. In FY '22, we launched the Emerging Market Sustainable Finance Fund, offering investors higher 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 to 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 offering. We launched the Infrastructure Equity Fund last year with EUR 1.1 billion in commitments. And as I said on the previous slide, deployment of that capital is well underway. And we have announced large new projects in supply chain finance and project finance. We are also increasing our revenue from distribution of third-party private markets funds, which include 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 in 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 AUM today and where we still generate the majority of our revenue. Risk management comprises our long-established passive and dynamic hedging products and our newer and fast-growing offerings of solutions to asset managers. Passive hedging includes 2 offerings, typically to large corporate and government pension schemes with domestic liabilities and overseas assets. Pure passive hedging is a highly cost-effective way to eliminate currency exposure from clients' portfolios. Enhanced passive hedging, sometimes also known as tenor management, adds value 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. AUM 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 credit. Previously, we described this offering as hedging for asset managers, and it began by offering tailored FX hedging strategies to clients which typically have lower liquidity and require a 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 to offer complementary services, including interest rate hedging, bank account opening and fund finance. We are 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 where 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, as we anticipated, and 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. Customer opportunities comprises a range of bespoke strategies, including our protected equities funds. And with that, I'll hand over to Richard to review the financials.

Thanks, Jan. So starting with the summary of the results. Assets under management were $110.3 billion at the end of September, 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 2 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 that 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% against 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. Salary costs are broadly flat, while bonus costs are lower than last year, reflecting the lower profits. Our cost structure allows us to manage costs in line with revenue generation and so operating costs are down in the period. The operating margin was down from 27%, driven by that combination of lower management fees and lower 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 more than offset the interest on our surplus cash balances. Those surplus cash balances are held to meet regulatory capital and liquidity requirements, and to cover bonus and dividend payments and 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, 1.93p against the prior year figure of 2.58p. Assets under management ended the period at $110.3 billion, having increased 9% in the last 6 months. As I said before, that's 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, but 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. Total management fees decreased by 8%, 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 last year. Management fees in risk management remained broadly flat overall. Passive and dynamic hedging both decreased, mostly due to that large mandate loss, which offset by strong growth by solutions for asset managers. Revenue of GBP 0.9 million from absolute return products was down by almost 50% due in part to that same client loss in addition to the wind down of an FX Alpha program towards the end of the previous financial year. 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 earned a closing fee on that first deployment and we'll earn ongoing management fees on the deployed capital. We'll also earn a closing fee on each subsequent deployment. Performance fees for our risk management product have dropped from 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 for the period. This is from the increase in distribution fees and the first closing fee following that first 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 the lower staff costs, which excluding bonus 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 teams continue 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. 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 surplus of net assets over our minimum regulatory capital requirement has decreased, but cash remains high and 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 million, following which the business will retain cash and money market instruments on the balance sheet, which sufficiently cover financial resource requirements required for operations and regulatory purposes. The outlook for the current financial year is highly dependent on completing certain projects. But as Jan has 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 1.93p per share reflects our confidence in that 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 with that, 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 manager. The shorter-term outlook for the business depends on the timing of delivery of these new projects, but the transformation is gathering momentum, and I'm very excited about the progress that we're 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 of 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. And now we're happy to take questions.

That's great. Well, thank you very much for your presentation. [Operator Instructions] As you can see, we have received questions throughout today's presentation. What I'll do is I'll hand back to you now to run through the questions, and I'll pick up from you both at the end.

Thank you. Thanks, Alessandro. So the first question we got here, what's the time line for deploying the remaining infrastructure fund commitments? And how should we think about the fee ramp-up? You want to talk about.

Yes.

So the expectation for the infrastructure fund is that the EUR 1 billion -- the EUR 1.1 billion of commitments are deployed over 3 years. So we've deployed EUR 250 million so far. And so we'd expect to deploy the rest within that 3-year period. In terms of the way the fees work, we have an upfront sort of closing fee on each deployment. We're expecting about 10 deployments. So the deployment typically of around EUR 100 million each. And you can see in the other income line within revenue that we've got quite an uptick there, which is primarily that first deployment fee. So it's a few hundred thousand euros that we'll get on each deployment, and then we get management fees over at least 15 years being the time horizon. We said last -- in our last results announcement that we don't give precise the management fee numbers, but around 15, 20 basis points average per year over the life of that 15-year horizon is what we would expect. So a little at the high end of what we would earn on our -- on any of our traditional currency products. The next question is, I know your comment about the increase in AUM during the period is explained by the devaluation of the U.S. dollar against Swiss franc. Why they have minimum impact on sterling revenues given the Swiss -- the sterling weakened? Yes. So I guess the overall FX impact on revenues was basically neutral. It's true that the Swiss franc strengthened against sterling in the 6-month period. So that saw some benefit to our sterling revenues. On the flip side, the dollar significantly weakened against sterling. So the net impact of FX on revenue from changes in the underlying values of AUM was close to 0. You said outlook. The next question is you said outlook dependent on timing of closing certain projects in the last 2 updates. Is this perhaps obvious? And does it come from solely negative cash flows in terms of sentiment cash expectations?

Yes, I'm happy to comment on that. I mean, I think it's true that just in the light of the transition which we're in, which we now see taking shape. We've -- so in the past commented on the specific projects we're working on. The one project that we talked a lot about was the EM local debt fund, which then was launched at a size of $1 billion. And then we did talk following that a lot about the work that went into the infrastructure equity fund, which we then launched last year. I think we're, at this point, still offering a good amount of color on the projects we're working on. And so for that reason, since these are the large projects where when we complete them, they do have a big effect on the business. We feel it's important to highlight that. But at the same time, I agree with the comment that as we complete this transition of the business into sort of a fully-fledged provider across the pillars, risk management, private markets and absolute return. The specific projects that we refer to should move to the background and all of these things will become part of the business-as-usual reporting that we do. So it's something we do today, but I agree with the sentiment that it's almost obvious by virtue of the type of projects that we pursue that, that statement is put out that way.

There's a couple of questions here saying AUM were up, why fees down. There's a few questions along that theme. And there's a few -- I suppose there's a few moving factors in that. I think one of the -- as we said, quite a bit of the increase in AUM, we've got quite a big increase in AUM from FX. So just simply that the currency that they're presented in is U.S. dollars and a lot of that FX movement was coming from Swiss francs. And notwithstanding there's some strengthening of the Swiss franc, that didn't offset -- that didn't fully offset that change in the dollar presentation of those assets because the strengthening against sterling was not anything like as big as the strengthening against U.S. dollar. So that's one factor. I think the other factor to bear in mind is we obviously present AUM at points in time, we earn fees continuously on AUM. So our AUM consistently has been trending up for a long time now at each -- at the balance sheet dates when we report, you can see our AUM. But clearly, during the period, AUM can move around a little bit. So -- but it's primarily the -- and then there's -- that's really the key reasons for why we see that what looks like a disconnect between AUM and management fees. And when you look at total revenue, we obviously also have performance fees in there, and those are down year-on-year. Last year, particularly the first quarter was particularly strong.

I take [indiscernible] particularly one question on the timing, so -- which was bit there. So in terms of the timing, the uncertainty is the time of completion. This is not uncertainty around the project, as such, but it's just by virtue of -- and again, the infrastructure equity fund is a nice example where we custom-built a product for institutional investors in a way where the product is delivered to them such that they're comfortable in a commingled structure. And it is a product which they were not able to find elsewhere in exactly this form. But in the practicality of delivering that, especially when starting on day 1 with a high commitment a lot of the work that in other cases, people experience when they launch a small fund and then over the years, they raise it to size, where we're active here is really we build something that matches the investor requirements exactly and then we receive a large commitment almost immediately. So a lot of the work that for other asset managers out there happens over time, we have to do before we're able to launch. And yes, in the case of the infrastructure equity fund, just imagining the different service providers at times the number of key investors, just organizing due diligences, legal framework, legal review just creates a workload. If every participant is completely committed, there's still an uncertainty on the timing that we can't control in time. So everything that we can control on these projects always moves as fast as we can make it move. But just the timing in terms of -- just by virtue of working with large institutions always presents a bit of a challenge in terms of what we can say when everything will be ready. But there's no indication meant that there's okay uncertainty around the projects themselves. Crypto demand. It's an interesting question. Is crypto demand from clients? As of today, no. If anything, that has decreased the interest from institutional investors to invest in crypto. What we do see a lot of attention being paid to is the world or the infrastructure, the market infrastructure that's now being built around stablecoins. And so there, I think it's important to differentiate between crypto as an asset class or cryptocurrencies more specifically and the world that is now being trade around stablecoins, which is much more potential future replacement trading infrastructure for the world and ultimately a form of replacement of protocols such as Swift. And so we're following those developments very closely. And we believe that also in that world, there's a role to be played for stablecoins in the context of the different currencies that we manage. But that's not something which we would align with or which we would call crypto demand from clients. It's rather something which we believe will now happen and people will expect in a number of years to just trade with each other globally in new protocols that are different from today that are more efficient. And a lot of these new protocols will be blockchain-based. And for that reason, it's important that we are at the forefront of certainly following that.

Interesting one on emerging market currencies, the high made government backed. Government backed, so TCX, the reference, which is the fund Othman Boukrami's previous employer. I'm not sure what the question implies in terms of government backed, but certainly on the side of Frontier currencies. So if we differentiate between Emerging Market and Frontier currencies, the Frontier currency world is one where in our products today, the way we offer them, we have sizable allocations to Frontier currencies. But by virtue of our client base, there is always an important requirement for liquidity that limits the amount of Frontier currencies that we can hold in a wider portfolio. The fund that we refer to, which Othman built up as CIO and Deputy CEO has funding from large development banks, which are very patient and long-term capital, and which have strong government links. But that means that from an impact perspective, he has been able to trade currencies that very, very few people around the world are otherwise able to trade or certainly where very few other people around the world are able to hold these currencies for longer periods of time. And that makes him as an individual. I would say, the #1 authority in the world when it comes to the pricing, the models that lead to pricing and the trading of Frontier currencies. Swiss franc is the main -- the question is Swiss franc is the main currency business. Is that true of your client base? What's your client geographical base? And yes, that's true fundamentally, right?

Yes. In terms of AUM, that's true. So about 55% of our client base is in terms of AUM, Swiss-based. In terms of revenues, it's more diversified. So in terms of revenues, the big areas where we have clients are Continental Europe, but led by Switzerland, the U.S. and then more and more Luxembourg and Ireland because based on the legal entities we face when we service other asset managers, even though we meet these asset managers or engage with them, in many cases, in London, the legal entities that we contract with are their private equity, the private credit funds, which tend to be based in Luxembourg and Ireland. So really the key jurisdictions for us in terms of client base when we look at revenue the U.S., Switzerland and then Luxembourg and Ireland today. But yes, AUM, as we highlighted earlier, has a slight [indiscernible].

And then there's a question here, how long are you prepared to pay an uncovered dividend? What's specifically the key determining factors for such financial metrics that will guide this decision? I mean I aim to cover it in the presentation, which is that we're paying an uncovered dividend this half because we're very confident of the outlook for the business. But the guiding factors will be, as they always have been that we have a priority around regulatory capital and around the strength of the balance sheet and the -- our view of the future expectations for the business. We know that there are expectations from shareholders around the dividend, and we'll aim to balance those with ensuring we've got the right financial strength on the balance sheet and the capital for future growth. Do you want to comment on the [indiscernible]. There is one on the highest, I think the top one.

You take [indiscernible] question there. What are the reasons for the 2 significant client losses? What did you do to try and retain them? So in these cases, these were -- as we said in the presentation earlier, these were absolute return mandates. And in these cases, we were part of a larger portfolio of FX managers. And in both cases, the whole portfolio has been terminated. So did we absolutely do our best to retain these clients? Yes, but it wasn't us as Record that lost the mandate in that case. It was the asset class that was terminated by these clients. And so competitors of ours lost these mandates at the same time. And so in that sense, there's a small comfort in there that we were -- we would say, performing as well or better than our competitors, but it affected everyone.

And then a question here around the shareholder base, what's the shareholder base like institutional retail staff? So Neil Record, whose name is on the door remains our biggest shareholder. And if you take his shareholding and past employee -- past and current employees, that gets you to about 50% of the shareholding. And then the remainder is probably split about 50-50 between institutional and retail. And I think...

Well, Jan, Richard, just thanks very much for answering those questions from investors. Of course, the company can review all the questions submitted today, and we'll publish the responses out on the Investor Meet Company platform. But just before redirecting investors to provide you their feedback, which is particularly important to you both. Jan, can I just ask you for a few closing comments?

Thanks, Alessandro, for guiding us through the presentation today. But yes, thanks, everyone, for joining. Thanks, everyone, for the questions. And as we said earlier, so we're very excited to now see the transformation of the business, which we've been working on for a number of years now to see that take place. We expect to spend the next few years delivering this transformation, but we now see really signs across the business of what we had hoped would develop now panning out the way we anticipated that. And so in that sense, we'll continue to talk to the market about what we're doing. We will continue to give updates on where we are with the different things that we're pursuing. But at the end of the day, it's a phenomenally exciting business where we now use our USP, which we see in being able to solve large complex issues for large investors at large scale, which is something that we've learned to do very much in the risk management space, but which we're now rolling out to other areas of the end market. So it's really that USP, which we're now deploying in the best possible way with -- in an effort to maximize fees and quality of fees. And so in that sense, we're excited about where they will take the business. And we're excited about the potential of the business. Thank you very much.

That's great.

Thanks, everyone.

Well, thank you once again for updating investors today. Can I please ask investors not to close this session as you now be automatically redirected to provide your feedback and the management team can better understand your views and expectations of management team Record plc. We'd like to thank you for attending today's presentation, and good afternoon to you.