St. James's Place plc (STJ) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining today's Q&A. Look, it's a shame we can't get together, but hopefully, we'll be able to do so at the next set of results. I'm also conscious that a reasonably large number of you will need to join the AXA call at 10 a.m. So we will sort of call an end to the Q&A then. Clearly, you know where we are, if you have any other questions. Now one advantage of doing a virtual Q&A is that we have the whole of the executive team on the call, which provides me with some great optionality for all those difficult questions. So let's go right now to the first question, please, Ruby.

Absolutely. Our first question is from David McCann of Numis.

Yes, I'll have a few, I'll ask 3, if that's okay. Just to kick off. Firstly, in terms of the new guidance around the cost growth, I mean, can you give us some specific -- articulate some specific actions you're actually taking to reduce the cost base, the cost growth to that new low level? Just to be -- I'll get some comfort, so if you could give material change from the prior term? That's question one. Question two, related to that, what confidence do you have that this isn't going to be negatively impact in some way on provider partner servicing, obviously, not to grow cost as much? And then finally, third question on new targets you articulated for Rowan Dartington and Asia? I mean, can you say kind of what, from the management growth, you'd require to get to those kind of breakeven targets? So how much is predicated on continuing to grow these businesses quite strongly? And how much is the other factors? And also, I guess, a follow-up part of that. So I guess, this might be 4 questions really. So to get to those breakevens you're talking about in 2024, '25, is that kind of -- should we assume that's going to be linear through the life from where we are now? Or is it kind of back-end loaded to get to that breakeven point?

Okay. I'll state the RD and Asia question in a moment, but perhaps hand over to Craig to talk about the costs and how we're going to achieve the 5%.

So David, what you're describing is what we're calling the financial envelope that we're going to be working within over the next 5 years as we pursue that plan. As with all plans, there is a need for a kickstart, and the kickstart is happening in the form of a review that we're in the process of doing and completing at the moment. And you'll have seen that there are a number of roles that we've put at risk. And we've really been through the process of looking at existing roles within the business as a whole, and reaching a view on the role that those roles will play in the future, in our future plans, because they've obviously had an important role in the past, but we're thinking of ways in which we will adapt the business and grow the business and take a very different approach to the use of resources. So step one in that is the review that we're doing at the moment, which has put a couple of hundred roles at risk within the organization. I don't want to say too much about that because I have to respect the fact that we're still in consultation. But the output of that is going to enable us to keep the establishment expenses that you're familiar with flat. And then the amount that we would typically grow establishment expenses by will be redeployed into other areas of growth, and that's principally investment in technology and smarter processes. The question of how we'll go about doing it, I think we've got a reasonable track record of saying what we're going to do and then doing it. I think my answer is that over the next 5 years, the Executive Board, as a whole, has set itself this financial envelope to work within. And therefore, that's what we will do. I know there's a follow-up to this question. Andrew, I don't know who you wanted to cover?

Yes. So this is the confidence that we won't impact partners. And that's -- it's a very good question, David, and absolutely key that we have to continue with servicing, if that's the right word, partners and clients, and we're very confident that we can do that within the financial envelope. To answer your RD and Asia question, and there's a couple of bits in there. So firstly, for your modeling, I would just be linear. I can't -- the numbers will obviously end up being slightly different than that, but I think linear will be fine for your model. I also said in my presentation, which I'm sure you watched this morning, that we will do a Capital Markets Day later in May, and that we will cover RD and Asia in a bit more detail. There's clearly 2 levers to that improving result, one is the income and the other is expenses. And we would expect the income to grow faster than the group, 10%. We're not factoring in any massively heroic assumptions there. And I think the other important point on Asia, in particular, David, is that about half of the funds under management are in the 6-year gestation period, so those we will naturally start generating income in future years. And that's why we can see the trajectory to the sort of cash profit 2025.

Our next question is from Jon Hocking of Morgan Stanley.

I've got 2 questions, please. Firstly, can you comment about what your assumptions are in terms of adviser growth going forward? Historically, we've had this on a 7% to 8% trajectory. I guess, COVID has interrupted that somewhat. So what are you assuming after 2025 in terms of the growth in advisers? And then secondly, just in terms of the admin cost burden, I wonder in the scope of these plans, are you planning on pushing back any of the admin burden to the partners? So is there something [indiscernible] those efficiencies on that front?

Yes, I might take the second question first. I think you're saying, are we passing some admin costs to the partner? And I think partners, and the answer there quite simply is no. That model is not changing. And in terms on the assumptions around adviser growth, I want to just come back to that. This is -- what we're trying to do is grow the business by 10% per annum. And there's a whole host of levers we can operate within that. There's the experienced recruitment, which, as you know, was on hold last year, and we've now restarted. There's graduations from the academy. They're supporting our partners to grow their business. That's making it easier to do business with. So I don't want to give a specific breakdown of the 10%, but it will be using each of those levers. And then we're very confident that we can do that. Ian, I don't know whether you want to add anything?

No, no. I think you're right. The range of levers and strategies we have within the group means that we're confident of the 10%, and that ranges from recruiting experienced advisers, as Andy says, developing our own academy, increasing the efficiency and productivity of our existing advisers. And we've taken -- we're increasing our spend on learning and development and the impact there, particularly on partners in their first 5 years. So it's a range of strategies, and we're confident of achieving the 10%.

So unchanged from the past?

No. We will continue to do exactly what we've done in the past. And some years, we might have higher adviser growth than other years, but it is a whole host of pulling different levers. I'm not sure whether we've totally answered your admin question or not. So I might just see if Craig wants to...

It is more whether there's -- whether you're transferring any responsibilities to the advisers given that they can do some more things through self-service or encourage their clients, so things through self-service rather than actually be recharging and overhead?

I think, Jon. the way -- Craig here, by the way. So I think the way to think about this is that if we can have better systems and smarter processes, it benefits everyone. So what the 2025 plan involves is finding different and better ways of doing things. Now you mentioned Bluedoor. And over the next planning period, we see Bluedoor as quite a significant enabler because it enables us to build those smarter processes and IT-supported systems around it. So it's certainly not the case of transferring activity back and forth, but it's changing the way in which that activity is carried out. And if that can benefit SJP as a business and it benefits the partner business, that's a win-win situation. And that's really what we're pitching for over the next period of time.

That is from Andrew Sinclair of Bank of America.

Three for me, if that's okay. Firstly is just on -- you've talked about the gross inflows. But St. James's is now a much more mature business coming up from 30 years old. How do you think about retention rates over your planned period as customers' age, take retirement? And how do you think of changes in retention rates in your GBP 200 billion, GBP 250 billion AUM targets? Secondly is, you talked about moderate growth over the early weeks of Q1. Just wondering if you could give us a bit more color about how we should think about that? Is that actual growth in gross flows year-on-year, I guess, that's a pretty tough Q1 comp last year? Or is that just leading indicators? And thirdly, was -- I realize this is perhaps looking a long time out. But as you look beyond 2025, if the business mix stays as it is and as the business matures, thinking about the IFS profit element as well and retained earnings, do you think you still stay at 70%? Do you think that can increase again? Or how should we think about payout beyond 2025?

Okay. Thank you, Andrew. I'll let Craig answer question 3 in a moment, and I'll perhaps try and deal with the first 2. So moderate growth. Well, I think, firstly, it's important to remember that the comparative is a pre-pandemic comparator. So we're comparing pre-pandemic with still being in lockdown. And moderate, it's obviously greater than 0, and I would probably say less than 10, and perhaps back to something in the middle there, something along those lines. But -- that's what I would do in your models at this particular point in time. In terms of retention, we're not expecting any real change in those retention statistics when we look across the entire population of our clients. What we are seeing, and have been for a while, is people actually reducing their regular income withdrawals. Some of that will be because of lockdown, and there's a lot more planning around intergenerational planning as well. So some of the pension funds with us, for instance, will probably pass-through people's estates and stay with us for another 50 years. So we're not expecting to see any change in the retention rates. And then I'll hand over to Craig on the IFRS point.

Yes. I don't see any change as we are at the moment. When we last put together a 5-year plan, going back to sort of 2015, this was something that didn't need to be featured in the plans that we made because of the way in which the balances were made up because of stocks of profits in different places. It's come on to the scene for the next 5 years. And what we're doing here is rather than do an emergency stop anywhere, we're sort of anticipating how this is likely to evolve in the future. And it's really important to have in mind, the core assumption here is growth, and it's growth that drives that behavior within a deferred income balance, because you're constantly moving more into the future than you're gathering up from the past. So it is just a timing difference. But the 70% sees us very, very safely through the planning horizon that we have at the moment. And I can't, at this stage, anticipate anything that would significantly change that once we get to the end of that planning horizon. But it is all dependent on the scale of growth. And again, just to emphasize, it's one of those odd balances that grows, where growth is sharper. But certainly, what we're putting forward now is a 5-year, at least, sustainable approach to group distributions.

Yes. Sustainable, uncertain.

Our next question is from Ashik Musaddi of JPMorgan.

Just a couple of questions. So first of all, now you have the new growth outlook of 10% going forward. I mean, what is giving you enough confidence on this 10% growth outlook? Is it like a mix of partnership and productivity? Or is it like any better outlook for macro? And would you say that it could still be 15%, just because the visibility is low, that's why you are -- you have gone to a 10% outlook rather than 15% to 20% that you had in the past? So that's the first one. Or has something structurally changed in the business to go to 10% versus 15% to 20%? The second one would be around the payout ratio. Again, I mean, you mentioned -- I mean, clearly, again, going back to the previous question is that it's something to do with IFRS deferral, et cetera, versus the cash profit. So that would still mean that you will be accumulating cash over next 5 years because you don't need more than that because if there is no back-office infrastructure cost, then there's not much of leakage between underlying and net cash results? So what do you plan to do with this extra cash? You might not be able to pay it out or you just want to preserve it because of IFRS distributable profit? But what are your other plans for that remaining 30%?

Yes. Okay. Thank you, Ashik. I'm probably going to go straight to Craig to answer the second question because it sort of continues from Andrew's question just now. So Craig.

So Ashik, you're absolutely right. The impacts of having these IFRS deferrals is that you accumulate cash in an entity. And the one thing you can't do with that cash is distribute it because it has to wait in the queue for distribution as it were. Now the fact is that this is cash that, over time, will accumulate in the life company. And therefore, you have to think quite carefully about what you can and what you can't do with it. The way we use this -- the sort of data that we've used in our planning assumptions, we've taken a pretty cautious approach. So we haven't made any bold assumptions about what we will or what we won't be able to do with that cash. But the reality is, over time, as it becomes a more meaningful figure, there probably will be things that we can do with it that puts it to good use within the group. But what I would say is that if, for whatever reason, and I can't think of the reason, but if for whatever reason we couldn't put it to good use, that would not, in any way, affect the payout ratio that we've calculated. But it's one of those things that, over time, we'll be working on. And one of our priorities will be to, as I say, put it to good use.

Thank you, Craig. And just coming back to your first question, Ashik. The 10% growth on the size of the flows that we're doing now is still really, really attractive growth. So it is just a sheer scale point. We remain confident that we can do that for those levers that we talked about just now, recruitment of experienced advisers, academy graduations, helping partners and supporting partners grow their businesses. And underlying all of that, as I said in the presentation this morning, are those market dynamics of a growing market, growing need for advice, intergenerational transfer of wealth, low interest rates not going anywhere. So yes, we're confident about the 10%. And it's not going to be 10% every year. Some years, it might be higher than that, other years it might be lower than that. But over a 5-year time horizon, that feels definitely achievable.

[Operator Instructions] Our next question is from Colm Kelly of UBS.

First, on the expense growth I'll focus on, so very good guidance on that today. You indicate that there will be GBP 9 million of restructuring costs for this year. I suppose as we look forward and lowering the growth in the operating expense base, is it likely that it's really going to take further restructuring costs over a couple of years? As you say, it's technology-driven, and I know you continue to invest in technology and automation side of the business in order to drive cost efficiencies, so is it sensible to assume there will be maybe some restructuring costs there beyond 2021 in relation to this? The second question is in relation to the timeliness factor between cash and distributable profit. So again, a very sensible guidance here. I suppose, even based on a 70% payout ratio on the dividend, there's likely to be some years where the dividend will be higher than the IFRS process and may require dipping into the distributable reserves. So I assume within your plan, you've allowed for that? You're happy to dip into the stock of distributable reserves where needed to support that payout ratio? Or is there any ambition to keep distributable reserves anyway stable? And then just lastly related to that, again, related to a similar question earlier. I mean, based on your modeling, is there a time frame at which the IFRS profit is expected to catch up with the cash results? I appreciate it may not be in the next 5-year plan, but based on your modeling, do you have a rough time frame from what you think this issue goes away?

Yes. Thank you, Colm. I'm going to pass both those questions over to Craig.

Okay. So on the expense growth, yes. I mentioned this morning a restructuring charge that we'll see in the cash result. As I say it, any business will always be contemplating change in the way it delivers, what it delivers and the way it uses its resources. But am I at this stage contemplating a further restructuring cost of this size? I think the answer is no, but there will be a constant level of activity within the business as we always reassess what it is we need for the future and what we need to change from the past. But I think I used the expression in an earlier question, kickstart. I think what this restructuring charge will represent is a kickstart to a new plan going forward for the next 5 years. So my anticipation, at this stage, will be that to the extent we have additional costs coming through on change, that will just be absorbed into the operational cost base. On the payout ratio, it's always complicated, Colm, as you know, because you're looking at distributable profits at the statutory entity level. And there are 1 or 2 of those statutory entities that are quite complicated because of the IFRS accounting rules. But the modeling that we've done anticipates that this payout ratio will be sustainable through the emergence of cash-backed profits over the next 5 years. So that's very much the basis on which it's being done. You talk about convergence, you probably already see some convergence because one of the things that people will pick up on is the fact that we tend to focus very heavily on underlying cash for all the right reasons, but we have also had the Bluedoor costs going through below the line. And of course, IFRS is agnostic as to whether it's below or above any line. It just goes through as an IFRS cost. So you will already see operating cost convergence as a result of the completion of that program. Other than that, it's actually quite difficult, other than through complex reconciliation, to see the relationship between IFRS and the cash result because of so many other things that represent accounting changes rather than changes you expect as a result of commercial activity. But I think you will probably see more congruence in the future than you've seen in the past.

Our next question is from Andrew Crean of Autonomous.

Three questions, if I can. Firstly, can you talk about the investment performance last year relative to benchmark on a weighted basis? Secondly, and I suppose this one's really for Paul Manduca. Are you thinking of changing the executive remuneration structure? Because it's still very heavily guided to the embedded value, whereas every single question on this call is based on the cash earnings, which is clearly more important to the market. Thirdly, it's not -- if you grow your funds under management 10% and your expenses 5%, obviously, there's a bit of an issue about funds coming in and going out of gestation. What's the implication for that in terms of the underlying cash earnings growth as you see it? And one thing just for the May Investor Day, I'd be really interested -- not now, but I'd be really interested then to see what the profile of productivity is on academy recruits versus experienced IFAs? Because clearly, that's going to have an issue on how the timing picks up -- or how net flows pick up as you swing between those 2.

Okay. I'm just going to pick up the second one on the executive remuneration on behalf of, I guess, Paul and the Remuneration Committee for a moment. Look, we had our remuneration structure approved by shareholders at the AGM last year. We are clearly hearing the feedback about having a little bit more around cash and stuff in the remuneration. So that will be factored into the future remuneration structure that comes back to shareholders for approval next time. On the investment performance, we've got Rob Gardner on the call. So I'm going to pass that to Rob. So over to you, Rob.

Yes. Andrew -- Both Andrews, can you hear me okay?

Yes, we can hear you.

Yes.

Yes. Look. So Andrew, I don't have the kind of blended bit, but I can kind of give you our portfolios, which, as you know, 70% of our sort of flows go into our portfolio. So our most popular portfolio, and this is probably the best representative, was 5.03% net of all fees. And that was the 2020 total performance. Our other popular portfolio, Strategic Growth, actually did 9% and our Adventurous did 7.6%. And a lot of that was because we restructured our RMA with our kind of 3 global funds, the kind of Global Quality, Global Growth and Global Value. And all of those 3 changes actually fared very well in 2020. So 5% is probably a good start for the plan.

And what's the benchmark?