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

Good morning, everyone. Hopefully you've had an opportunity to digest our results and watch the results presentation. I'm here this morning with the whole of the executive team to take questions. So Alex, if we could have the first question please?

Our first question for today comes from Andrew Sinclair of Bank of America.

Three from me, please. Firstly is on the academy and really like the update on graduate productivity today, but just thinking about how many more to come? I think you said there's over 350 in the academy at year end, but it was already 358 at the end of June and do you still think you'll get that to around 400 in 2023? And looking back I think this number was over 450 pre-COVID, so how quickly can you ramp that back up to those sorts of levels? And secondly was on the partner loans portfolio. I saw you sold GBP262.5 million of partner loans. What drove that? Can you just tell us a little bit more about terms and what it means for cash? And thirdly on new business, sorry to ask short term sort of question, but just on the guidance that you reiterated the January messaging, but in January you we're saying if economic indicators continue the sustained recovery should lead to improved activity. I think those activity and those indicators probably have generally been pretty positive since January. Has that actually led through to improving flows yet or is it still this expectations of potential flows to come?

I'll take the flows outlook first and then Craig, perhaps you can do the loans and I'm going to repeat on the academy. I think, firstly, it's difficult to extrapolate January and February because they're always the quieter months of the year. I mean, if you look at the first quarter, March in itself is always at least 40% of the first quarter numbers and we've got a budget on the 15th of March, and of course we've got the all important tax year end. It's also worth remembering if you're looking at comparisons to last year is the January and February last year where the months pre the invasion of Ukraine and the first quarter last year was the highest quarter of the year. But as you said, Andrew, it's encouraging to see those economic indicators recovering. It looks as if inflation has peaked in the UK and probably most developed economies that could make sort of towards the top of the interest rate cycle and markets are performing well at the beginning of the year. And as that continues, consumer confidence will increase and indeed last week, we saw the UK consumer confidence has hit its highest-level since April 2022 and all that will feed into flows, but March is the critical month for the first quarter. And Craig do the part for loans?

Yes, hi, Andy. So the loans that were sold sat broadly within the securitization vehicle that we set up a number of years ago. And you might remember, at that point we -- the accounting rules for that type of securitization was such that we didn't pass any de recognition test, so we kept them within the consolidated balance sheet, but we shaped them as non-recourse. So essentially what's happened is that those loans sitting within the securitization have been sold out of the securitization vehicle into a third party, which means that they are both non-recourse and off-balance sheets now. So the impacts of that transaction was fairly minimal on cash and where we did see a positive if you like for cash was that we were a junior noteholder in the securitization, simply as parts of the structure, so that came back to us. You also asked about terms, the terms for the partners with those loans are unchanged. So if you are in receipt of one of those loans that happens to be in the securitization and has moved, other than saying a paper exercise, there's no change. It's just really another point on our whole journey of finding different ways of future funding.

And on the academy, if I just say one thing and then hand over to Pete, obviously, the number of people in the academy, any point in time, some people graduate and more people join the academy. So it's obviously not the same number each reporting period. But Pete, would you like to pick-up that?

Andrew's point is exactly right, the number of people moving through the academy any one time is a flexible number based on the graduation of individuals. The way we enhanced the academy post-COVID is that we don't have full location sensors anymore. People train through our 21 regional offices and indeed in partner practices. The vast majority of that training is done at the pace that suits the individual. Therefore, the graduations will come across the whole year rather than a specific points in time. In terms of our confidence to return the numbers to where they were and yes, we are very confident that the academy will continue to grow to the needs that we established for the growth within the partnership. So absolutely no concerns whatsoever about the growth of the academy or indeed the graduations from the academy, which as I've said previously our point that the individual is ready, rather than a set period in time.

Our next question comes from David McCann of Numis.

First of all, can you provide some specifics of any changes you are making or need to make in the near future coming in later this year? The first one. And secondly, given the strength of the tonnage mix returning around 30% cash profits in the event and 70% payout ratio and arguably with the share price being below fair-value. Why isn't James's today not had a formal share buyback program and indeed is up to the Board might consider or reconsider in the future? And finally, given the rise in interest rates seen over recent periods, how much stress is putting on the partner loan service cost for those partners and indeed perhaps the appetite of new apartments to actually want to take-out new lenses to finance more business purchases, especially if valuations remain basically unchanged for those businesses?

I will take the consumer duty question and then Craig, perhaps pass over to you on the partner loan points and share buybacks. The consumer duty is a big project for the whole industry, obviously us included. We have a plan to be ready and we are on track with that plan. I would expect all businesses will need to make changes, indeed it's what the FCA expects. And I'm not going to go into detail, David, but if I just give you sort of one example to put some flavor on it. We clearly believe that we provide good client outcomes and we evidence those client outcomes, but consumer duty is what we require us to provide even greater evidence that we're providing good client outcomes. And we will be able to use Bluedoor and Salesforce to help us with any gaps that we identify. So that gives you just one particular flavor. I might just ask Mark Sutton, our CRO, if he just wants to add anything on consumer duty, Mark?

So I think as Andrew said, our implementations for direct progressing as planned and -- but we are very mindful of recent industry communications from the FCA and including to the recent fair CEO letters and speeches from Therese Chambers and Sheldon mills, which have been helpful in terms of highlighting some of the areas that they expect firms to focus on. So you can imagine, we are looking at those carefully. As Andrew said split from the FCA that they are expecting to see some changes across the industry. So they're off [Technical Difficulty] around direct point engagement and making sure that we have the evidence around [Technical Difficulty].

And then Craig, do you want to pick up the part on loan one and share buyback as well?

Yes, I'll do the share buyback first. Hi, David. So when we formulated the 2025 plan, one of the components of that plan was both the method, distribution to shareholders and the pattern and concept. And when we considered all of the alternatives which is what you do when you're horizon planning, we thought of it in terms of the stock of distributable profit that we had, the likely rhythm of newly emerging distributable profits and have in mind the profit and mergers in some cases in regulated manufacturing companies, liquidity within those companies and free liquidity within unregulated companies. So the level of distribution and also the style of distribution in terms of the growth or is it packed, somehow to cash emergence and results. And one of the things that we were very, very keen to have is a sustainable approach. So something that shareholders would understand and be able to if you like calculate for themselves based on market conditions and other factors. What that left us with was if we're going to distribute 70%, 30% to use for ongoing investments in the business, but also importantly to grow the capacity of some of the regulated companies that have capital profiles that are consistent with scale. So it's quite a long answer. I think my general point would be, once you set that and you're distributing up 70%, you're not leaving an awful lot of space for share buybacks in a meaningful way. And if we were to contemplate that something else would likely have to give. Now, what I've just described, the approach that we laid out a couple of years ago for 2025 plan, I'm not going to prejudge what the 2030 plan but like, but they have the thing you have to balance and we do get odd questions -- the odd question on share buybacks, but I would say and something I preview and correct here, I think many of our shareholders are quite keen on the idea of that continuing consistent and so it's easy to calculate dividend. That's the share buyback. With some partner lending, I mean rates obviously have an impact on anyone taking out a loan and therefore anyone providing a loan, but the data that I think I would point you to and apologies for the 80 page plus plan this morning, but on page 32 of our release, we put some disclosures which we do annually around loan to valuation, that will give some indication of the level of security done in these loans. And it's important to remember that the security is not in the form of fixed assets, security itself is revenue earning, it's income generating and it's that income that we use in order to affect the repayments due to us. But by the same token, what is telling you is that there is income outside of the income that bodes to us that flows into the business, that's taken out payment, these are businesses taking out commercial loan arrangements with another business. Is anyone holding a loan happy that interest rates have gone up? Probably not, so though it will depend on their other circumstances. But I think many people holding these loans or many businesses holding these loans will view today's interest rates as something actually that and I think it's more normal to sort of rates that they've seen in the past. So the idea that where we are at the -- from the interest rate curve is making this in some way a less compelling proposition is not one we would agree with. So...

Our next question comes from Andrew Baker of Citi.

First, just on the controllable cost guidance, the 8%. Can you just give a little bit more granularity on what sort of where the increase the coming year-on the year versus 2022 and then also how you plan on bringing it back down to 5% going forward? And then just circling back on the consumer duty, should we be penciling in any implementation cost for this in 2023 or does this run through the controllable cost base? And then finally on the 70% payout ratio that you just mentioned, obviously, 2023 you're going to have a larger part your underlying cash result driven by shareholder interest, which could reverse overtime just given where interest rates are and where they go. So does that have any impact on the way you view that 70% going forward? And in the event that you were to see a decline in underlying cash results at any point, is that still a consideration of having in a growing dividend or is it purely just that payout ratio approach?

I'll just take the consumer duty one and then hand over to Craig on the controllable costs and the payout ratio. Just on the consumer duty, all costs that we expect for getting ready for consumer duty this year are included in our 8% growth in controllable expenses. And on that subject of 8% controllable expenses, Craig?

Yes, so, hi. The -- obviously inflation impacts on many cost lines, I made the point this time last year that in many regards, we had contracted a hedge which is quite normal in a business like ours. And therefore, even things like some of our energy costs were contracted some way ahead. But all of these things face inflation catching up with them. So there is a general picture of inflation becoming a factor in some of the contracts that we're renewing. But I think the key when I put forward is around half of our controllable overheads relate to staff costs. So one of the key drivers within that 8% is the annual pay review that we've been going through over the last couple of months. And in terms of how we would see that coming back? If I take an optimistic view and I take the view that inflation will come under control and go down to the extent some people think it could during the course of perhaps the second half, it may well be that we find ourselves in a very different inflationary environment for 2024. And if that's the case, we will take all steps to get back on plan and it's worth me just putting some context behind this. When we put the 2025 plan forward, inflation was running at a level below 2% and we were going for 5%, which gave us real growth in our cost base of about three. Right here right now inflations sort of roughly 10%, 11%, we're putting forward 8% which is actually eating in by 3%. So there is 6%, 5% to 6% delta there on what it is we've done to control costs and in a challenging period. And I think that kind of approach will roll into any future approaches which is that we are acutely conscious of the importance of controlling the controllables, if you like. The second question you asked was quite broad and apologies if I misunderstood it. I don't see the emergence of income from shareholder interest changing the dividend pattern in anyway because of course this bakes into a cash result that delivers an underlying cash result on which the dividend is based. So to the extent it emerges as a benefit so too does the dividends grow. You're right, rates go up and rates go down. I think the way I describe it at the moment is that we've always carefully managed our working capital within our Life companies. It just so happens that we're now being rewarded for that, because base rates are up from where they've been over the last few years. You're also right and as much as when rates go up they can go down. What I would say though and perhaps I'm being optimistic here is that when rates go down, it means things have settled, it means inflation is under control and it could well be one of those drivers of longer-term confidence that Andrew was talking around at the moment. So things will go up and things will go down that are market-related in our cash results, but I see this as quite a helpful tailwind in a year where the rate of corporation tax is going up and there are various other things that perhaps go in the other direction, so it's a good benefit for the share at least.

Our next question comes from Ben Bathurst from RBC.

I've also got three if I may. Starting on the new business margin within the cash result, I can clarify, is the message for that line for 2023 that we should expect the margin on inflows in basis-point terms to move up even if gross flows stay remain flat year-on year? Just getting presumably that there's going to be lower 2022 allowances and could that mean that the level in basis point then return to maybe the '21 level? Secondly, on deploying cash. What are your clients earning on the GBP5.7 billion of investments they have in cash? Has there been anything you've been able to do with those returns with rates being higher? And then finally on SJP Asia and the DFM business. Just maybe starting to think beyond '24 and '25 once they reach cash breakeven, should we be expecting these businesses to post incremental annual growth in profits or you think they might hang around the breakeven mark for a few years?

I'll pass the new business to Craig in a moment and perhaps you can pick up DFM and then Iain Rayner can pick up the Asia question. Just on the client cash, I will do that honest and it's really, really important to remember here that this is -- we are different to say a platform. So the cash that you're seeing is cash held within the funds. And so it's the working capital within the funds, the asset allocation that the individual fund managers made. So this is not cash sitting in a client bank account where we're taking sort of net interest margin or anything, so hopefully that actually explained? Craig, do you want to pick up the new business, new business margin?

Yes. So, the -- I think if I've understood your question correctly, if inflows for 2023 are flat compared to 2022, I think the general message is so too will be that margin. And the reason for that is that you end up with a year where allowances are set, looking very similar so the year in which new business is written. Where we find variation is where you get a year like 2022, where we had extraordinary core performance in '21, which drove higher business allowances followed by a year where gross inflows were lower. So put simply, if 2023 gross inflows go up, the margin will improve, if they stay flat it will stay broadly flat and if they go down, the margin will reduce. Now there are other things that make this an imperfect linear margin, but what I've said hopefully gives you a good feel for what you might expect.

Okay. And then DFM cash-positive 2024 and then we would expect it to continue to grow its cash result.

Yes, I would expect it to grow cash results. The breakeven target is a point in time. At that point in time, the DFM will have completed the back office restructuring and the DFM business will begin to see the benefits of the investment that's been made over the last few years.

And look a similar thing on Asia cash positive by 2025 thereafter we would expect it to start earning incremental returns, but Iain do want to add anything to that?

Yes, that's exactly right. So, very confident about the fresh breakeven variants 2025 target and yes exactly as you said, we expect that curve to trend upwards from that point.

Yes, and look, we have a good little business in Asia, a very exciting part of the world for growth going forward.

Our next question comes from Rhea Shah of Deutsche Bank.

I have three questions as well. So, just going back to this margin on new business, I mean, how variable are the partner expenses and allowances within this? And then the second question, going back to advisers. Away from the academy and what are your expectations for growth in the experienced advisor cohorts? And then the third question is around flows, a bit more long-term than maybe and is very, very short-term question, but for the entirety of 2023, are you comfortable with consensus growth of 4% in growth inflows?

I'd obviously come to the new business margin back to Craig and go to Pete on the academy. Look, I think on flows, as you say the consensus is 4% or 5% for 2023. I think if we weren't comfortable with that number we would have been saying something this morning, yes. So, Craig, do you want to just pick-up on the new business?

Yes, I'll pick up on new business margin. So the new business margin, it's worth me just, just picking up on that last point, what we are very likely to see though is quite a bit of variation and comparatives in the earlier. And it's worth having that in mind, last -- the first quarter of last year was our second highest ever quarter and then for reasons everyone will understand the whole operating environments in the markets turned quite markedly in Q2. And then Q3 and Q4 are in recent memory. So for that reason, we are going to see some pretty tough comparatives in the first quarter, but then obviously the picture changes as the year progresses and it is important to remember that shape. On the margin on new business, it's not so much variability between partners. I would really think of it in terms of volume, it's business volume related. So where you see a non-linear pattern within the margin, it's simply because you get some years where volumes are very high and other years where they are less high, but the cost element that goes into the margin is a year out of -- out of sync and that's what really drives that variability.

Pete, so the experienced advisor marketplace?

The quick lengths of experienced advisers has always been a cornerstone to growth partnership [indiscernible] place. And historically, we have selected people to join the partnership based on a number of criteria. One of the things to remember about people joining the partnership you are prudently active in face-to-face advice in UK is they come with legacy. So the quality there has always been quite high to gain acceptance to be offered to membership and the partnership. I think this will remain strong moving forward. I think the important decision we made some years ago to introduce the academy and grow it over a period either time has allowed us to balance not to have to make decisions that we wouldn't ultimately want to with new joiners to the partnership. So I have absolute confidence that we will continue to attract the right number, the right people who got the desire, ambition and importantly the time in front of them to grow a sustainable business at St James's Place. Just one important factor here is established recruits tend to be in excess of a decade older than graduates from the academy and that balance is something we factor into our manpower growth to give us the longevity of production and productivity growth over the extended period.

[Operator Instructions] Our next question come from Nasib Ahmed from UBS.

First one on IFRS profit and the payout ratio and appreciate your previous answer to this, Craig. But when I look at the results today, the IFRS post that result it's pretty close to the underlying cash result of full-year '22 and the GAAP has improved significantly since you set the target -- the payout ratio target of 70%. So keeping this in mind and the fact that you only have two to three years of pre-IDR business left, when can we expect an increase in the payout ratio? Do we just kind of anchor on to the two to three years a pre-IDR business guidance in the pack? Second question on kind of Asia. What flows are you seeing between the geographies? Has there been a move away from Hong Kong towards Singapore? And related to that, which part of the Asian business has performed better than others in 2022? And then finally on your mature your margin guidance of 59 to 61 bps for 2023, is that expected to be lower in 2024 given the tax-rate impact would be bigger in that year?

Two financial questions for Craig here and then I'll ask Iain Rayner again to talk about the Asia flow. So perhaps, Craig. Over to you for the IFRS manager.

The IFRS profit, you're absolutely right, it does bear far more resemblance this year to the cash results than certainly it has done in some years in the past. There are few drivers for that, not least because you would have seen in this year's cash result that we haven't posted anything below the line. So, the underlying cash is equal to the total cash result and therefore the amount on which the dividend is based is probably one step closer towards IFRS. But I wouldn't underestimate other adjustment that happen within IFRS that actually don't really reflect shareholder interest other than the fact that they create timing differences and the ones to watch out for is the tax asymmetry. The way I think I would encourage you to think about it is, if you -- if you're looking at the IFRS result and you have a good feel for the impact that deferring a lot of income and amortizing a lot of the deferred expenses is going to have on the bottom line there, it will give you a pattern of development that is consistent with the cash result because fundamentally that driven by business activity. But what we did when we set the 70% payout ratio is that we took account of any variability between, if you like, the emergence of distributable profits and the emergence of cash. And plotted of course using 70% that enabled us to continue investing in the business and keeping that capital growing where it needs to grow. And so I don't think you're seeing anything in IFRS that all of a sudden opens a window into distributable profit that you won't see emerging within the cash result. So I think in short what I'm saying is that there will certainly be variability between those two, but they will broadly correlate in the same direction.

Iain, difference between Hong Kong and Singapore last year?

Yes, it's been very interesting, there's no doubt that the major factor has been COVID and that's both in the lockdown but also the different timings of opening up of COVID in both those geographies, obviously, Singapore opened up fairly early in 2022 and Hong Kong was much later had an impact, because as these places opened up, clients and partners who've been in those geographies probably for two years in many cases often went abroad to see friends and families for a period of time, so that had an impact. In terms of Hong Kong and Singapore, there has been some evidence of clients and business flows migrating that way, but I wouldn't say that material. Hong Kong stayed remarkably real fast. We're beginning to see migration back into Hong Kong from a client and adviser point of view and I think broadly going forward, we'd see them as fairly equal, so in terms of advisers flows and future opportunities.

Craig was trying to get away without answering the mature funds under management, but I'm not going to let him on your behalf. Craig?

Well, let's say, it's an easy one. So if you if you look at the guidance summary that we put forward for 2023 and then roll into 2024 where you get the whole year effects of the tax changes, you need to take one dip of each end of that margin range which would make 58 to 60.

Our next question comes from Ashik Musaddi from Morgan Stanley.

Just a couple of questions I have, one is I mean if I think about you're reiterating your 2025 guidance now, thanks a lot for that. But just want to get a bit more sense as to how you're thinking about the GBP200 billion of AUM? Now clearly, year-on year, your total AUM is down, flows outlook is a bit different compared to what the outlook you would have had when you had given that guidance or say, at least ambition of GBP200 billion. So what are the moving parts on that? I mean, would you say that there was say some headroom in that guidance which makes it more reasonable now to get it or would you say that, okay, there is some, would be interesting to get some color on what are the moving parts. Why you are still comfortable about that GBP200 billion of AUM? And second question is, now clearly interest rates have gone higher, so are you seeing any change in the asset allocation by the investment managers that you have or would is more or less asset allocation for the customers are still more or less same?

I'll take the guidance, 2025 guidance plan strategy and hand over to Tom Beal on the investment question. So two years ago, we set down four financial targets. One was gross flows, the other was maintaining retention, the third one was controllable expenses and then the fourth one with a small modicum of market growth, the mass takes you to GBP200 billion. So two years into that plan it's -- we're in a good place in terms of flows, our head where we would expect it to be, retention is ahead of where we expect it to be, controllable expenses are on target and funds under management are perhaps a little bit behind target because the markets. But look I mean, we all know don't we -- that the markets couldn't take and the markets couldn't give. And the increase in the market so far this year has already contributed a reasonable amount to the stock of funds under management. And I think we've always said, this was never going to be linear. So I think being where we are two years in, we're really pleased, not much prefer to be there than behind type situation, it won't be linear. This year could be difficult on flows, but as we said, investor sentiment is improving, but it doesn't mean that '24 and '25 wouldn't be good years, So it's not going to be a straight line, Ashik and we remain confident of those targets. Craig, you want to add anything?

No.

No, okay. Cool. In terms of the asset allocation, I'll hand you over to Tom. Now, some of you may not have met Tom. So Tom assumed the role as Investment Director in September, yes, I've got that right, that's good news. So I'll hand over to Tom.

So in terms of cash allocation, it's -- it's been relatively stable and our positioning remains that is slightly underweight equities relative to traditional bond and equity index. And we have a slight skew to value over growth which we adopted early on last year which has benefited performance and we've put a slight increase to allocation in credit as yields have been rising. So we slightly avoid credit underweight, sovereigns and duration. So -- but in terms of the shape of the allocation is broadly, broadly stable compared to what you would have seen previously.

[Operator Instructions] Our next question comes from Larissa Van Deventer from Barclays.

Two questions on customer demand, actually the first local the other one in Asia. In the UK, have you seen any changes in the products that customers are seeking out that may impact the margin? And then in Asia there's been some talk of high net worth individuals specifically from China, but from the broader region migrating to Hong Kong and Singapore and the two cities having a race to secure those funds. Are you seeing that trend and are you seeing the same trend in both markets or are you noticing differences between the two, please?

I'll ask Iain Rayner on the second question. Look, I think on consumer demand, at -- so global level, we're not saying anything that would change guidance anywhere. There would be an awful lot of conversations with clients at the moment around inflation and what inflation is doing to people savings, but no need to change any guidance on the numbers. Iain, on the Asia question and the high-net worth Chinese?

Are we seeing that trends? Yes, is there a certain amount of competitiveness between Hong Kong and Singapore? Yes, anyone spend any time in that part of the world would know that's true, but I wouldn't say that one materially is outperforming the other on that trend. Is it a big focus for us as a business kind of high net worth family office Chinese? No, it's not, that's not really where we're focus at the moment. So it's not something that we're spending a lot of time, but we do see the trend.

We have a follow up question from Andrew Sinclair of Bank of America.

Apologies, that's my [ ADFC ]. Just firstly on the GBP40 million, GBP50 million of interest on cash, is not fully phased for 2023 or is there still some more to come if the rates stay at current levels in 2024? And finally, just on net adviser recruitment, we've got the academy graduates figure, but I just wondered if you could give us the other numbers of experienced hires and departures for the last year?

I'll probably answer the second one on behalf of Pete. We're not going to get into granular numbers here Andrew, right? So, no, I guess is the answer to that one. On the phasing of the interest margin, Craig again.

This is on the shareholder return line. It's worth to be emphasizing something Andrew mentioned earlier and this is cash that is already in working capital. So shareholder, working capital, the balances were always there, but having turned the margin in the past. So, the shape of the balances that we hold are broadly consistent, but they do have a degree of volatility which is what you expect in Life Company working capital where we use the cash to settle live businesses. But the guidance of GBP40 million to GBP50 million is making an assumption that the base rate stays where it is today for the remainder of the year. So it will be the case for as long as that goes on. So if theoretically, putting aside any rounding base rate stay the same for the following year, unless we have something unforeseen that means that those cash balance is reduced, so I can't think of a single plan. I would expect that to be consistent income. Hopefully, that addresses the question, Andy?

Alex, any final questions or we finished?

We currently have no further registered questions.

I think that probably just leaves me to thank you all for your time and questions this morning. I look forward to catching-up soon. Thank you to the executive team and thank you to Alex. Have a good rest of the day.