Utmost Group PLC (QLT) Earnings Call Transcript & Summary

Hello, and welcome to the Quilter plc Conference Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Paul Feeney. Please begin your meeting.

Good morning all. Many thanks for joining us at short notice today. At our full year results, we promised that we would get back to you on the strategic review of our International business. And as this morning's announcement makes clear, we've now concluded that process. So let me give you the high-level context, Mark will then walk you through the financial implications and expected time line to completion, and then I'll talk to what it means for our strategy. We'll then take questions. Right, let's dive in. Starting with Slide 3. I'm delighted to announce that we have agreed terms to sell our International business to Utmost for approximately GBP 483 million in cash. It was the best bid which emerged from a competitive process involving a number of bidders. And the terms of the transaction provide very little residual risk to us. And it's a good deal for all stakeholders. Our shareholders get a great price, the customers of our International business get a new owner who will view this business as core and it will also provide a range of career opportunities for the employees in our International business today. Now back at the full year results, I said that International had been a good business for us, and all options were on the table. So why are we announcing a sale today? Essentially, there were 2 reasons, one strategic and one financial. First, strategic. While International delivered a solid contribution to our profits and cash generation, it is less aligned to our core U.K. business. And the level of integrated flow is fairly modest. So we concluded that it makes more sense to double down on the area where our opportunity is most compelling: the U.K. wealth market. As you know, this market is large and structurally growing, so focusing here is more sensible than allocating valuable resources to try and deliver a similar rate of growth from the International business. Without International, Quilter will be a nimbler, simpler, faster-growing business. That's why we are also restating our target for NCCF growth to at least 6% today. The second reason is financial. As you know, the revenue line in the International business has been going backwards for the last few years. We've managed to offset that through strong cost reductions to support profitability. But there is only so much you can do to drive profits by reducing costs, if revenues are not growing. So while the team have done a great job of maintaining profitability over the last few years, the impact of the back book runoff cannot be avoided forever. We would have to make considerable investment, both in terms of P&L cost and capital, to drive the International business forward from here. As a result, we have concluded that the disposal delivers the greatest value for shareholders. Now moving to Slide 4. As you all know, capital discipline is a key focus for us. When we sold our single strategy asset management business, we used the proceeds to repay a GBP 300 million bank loan, which we took out to fund a pre-IPO distribution to our shareholder, and we followed it with another GBP 220 million special dividend post listing. When we sold Quilter Life Assurance, we announced we would return the entire net sale proceeds to shareholders through a share buyback, and we're making good progress here. And we are saying today that we are minded to return the majority of the proceeds from this sale to shareholders after allowing for costs, a contribution to 2021 dividend and some investment in the business. What do I mean by minded? Essentially, if we had the money in our hands today, we would be happy returning that majority of the net sale proceeds to shareholders. But we don't expect this transaction to complete until later this year or early 2022. And as we've learned over the last year, the world can change fast. So while we plan to make a meaningful distribution, the Board will take stock of the financial and business conditions prevailing at completion as well as the opportunities to invest and accelerate growth before deciding the amount and means of a distribution. And it goes without saying that this is something that we'll continue to consult with our shareholders about as well. Right. Let me hand over to Mark to talk through the financials. Mark?

Thanks, Paul, and good morning all. All right. So I'm starting with Slide 5. As you know, the International Life businesses tend to be valued at a discounts to own funds rather than a multiple of earnings, given their complexity and capital intensity. We think we've achieved a very good valuation at 84% of 2020 own funds, particularly given the nature of the Quilter International back book. The total consideration is made up of a base consideration of GBP 460 million and a ticker, which is interest income on that figure from the 1st of January this year until completion. So if we complete on 31 December 2021, that is worth GBP 23 million, hence, the GBP 483 million. Costs are expected to absorb around GBP 33 million, leaving net proceeds of GBP 450 million. Given the size of the transaction, it will require shareholder approval at a general meeting, and we will be issuing a cost on circular to support the approval process. It also requires regulatory approval in each of the 5 main jurisdictions in which our International business operates, and there is an EU antitrust approval requirement, too. So we need 3 main things to complete on the transaction: our shareholders' approval, regulatory approvals and the antitrust approval. In terms of use of the GBP 450 million proceeds, first, we expect to allocate a portion to cover Quilter International share of the overall Quilter 2021 dividend on a pro rata basis to this year's earnings. Next, as Paul has said, we are currently minded to return the majority of the proceeds to shareholders following the disposal, and we will update you on that at completion. Finally, we also intend to reinvest a portion of the proceeds into our core business to fund selected revenue growth plans and to help optimize the cost base. We will update you on our detailed plans at a Capital Markets Day that we are planning in Q4 this year. Let me now turn to the impact of the sale on our financials and what we expect from here on Slide 6. Our International business made an IFRS profit of GBP 57 million in 2020. You will recall that at the full year results announcement, I referenced the group benefiting from a total of some GBP 42 million of tactical cost savings. Quilter International contributed some GBP 8 million of that through lower variable compensation, reduced travel and lower change in marketing spend. Without that benefit, the profit contribution from International in 2020 would have been around the same level as that of the prior year, and our expectation is that if we retain the business, its profit trajectory would trend downward from here without meaningful restructuring actions and investments in the business. Turning now to the operating margin. As you know, Quilter achieved an operating margin of 25% for 2020. Quilter International has a high-margin legacy runoff book, which gives you the higher operating margin than the group average. Excluding International, the ongoing Quilter business delivered an operating margin of around 20% last year. Now you have heard us say on a number of occasions that we believe our business should have an operating margin that starts with the 3, and we believe that is what our U.K. business should be achieving. Based on our current plans for the continuing business, excluding Quilter International, and assuming broadly stable market conditions with some normalized equity market growth, we expect to get to an operating margin of at least 25% by 2023 and at least 30% by 2025. Flipping to Slide 7, let me now say a few words on capital. I know one of the first questions I'm going to get is whether there is scope for a change in our capital regime? This is something we intend to discuss with our regulators. It's important to caution that we do expect to remain group Solvency II-regulated for the time being because all the pension assets on our U.K. platform are held through a life company. So on technical grounds, we remain a group Solvency II-regulated group regardless of whether Quilter International is part of the group or not. By swapping the value in force both in the International business for cash, we expect the capital and cash positions will be proved to be materially enhanced immediately after the transaction before considering the return and redeployment of the sale proceeds. As I said earlier, the International business will contribute its share to the Quilter full year dividend on a pro rata basis to earnings. In effect, this means a partial distribution of the net sale proceeds in the form of the full year dividend. That is also what we did in 2019 when we sold Quilter Life Assurance using a similar lock-to-box mechanism. So you can regard the 2021 Quilter full year dividend as effectively based on the same corporate perimeter as the 2020 dividend. And our dividend payout policy remains unchanged. We've also announced today that we will restart the share buyback shortly to continue returning the Quilter Life Assurance sale proceeds, and we're aiming to accelerate the program by removing the 50-50 LSE-JSE split that was in place last year. Turning now to the timetable on Slide 8. The main points to note here are that, as I said earlier, the transaction will require shareholder and regulatory approval. We expect the Class 1 circular to be published in around 6 weeks and for the general shareholder meeting to follow some 5 to 6 weeks after that. And that's a slightly extended timetable than you might typically expect due to our need to mail out documents in South Africa. If all goes to plan on the shareholder and regulatory fronts, we expect that the transaction should complete by late this year or early in 2022. Just before I hand back to Paul, let me show you Slide 9, which you will recognize as a summary of our financial guidance. The key changes that I would highlight are: our revised expectation of growth in NCCF from 5% to 6%, which is just the mathematical adjustment from excluding the slower-growing Quilter International from the ongoing business. Our new targets for our operating margin, a higher overall group tax charge once released the benefit of low tax earnings from the Isle of Man-based business. Finally, you'll note that the revenue margin for the International business in 2020 was broadly in line with the group average. So the disposal will not have much of an impact on the short-term margin, but we think a future drag is removed, which should lead to increasing stability over time. And with that, let me hand back to Paul.

Thanks, Mark. I'm now on Slide 10. Since we listed back in 2018, we've had 2 main objectives: to simplify our structure and to deliver on the growth potential of our business. 2021 has seen us make 2 key strides here. Selling Quilter International delivers a major simplification, and it leaves us with a faster-growing core business. And completing the migration onto our new U.K. platform sets us up to deliver a meaningful acceleration in growth. This slide shows the new Quilter on a page. We cover all 3 parts of the wealth value chain: financial advice, platform and wrappers and a full range of investment solutions. That covers the full spectrum from bespoke offerings for high networth clients to unitized and managed portfolios for the affluent and mass affluent market. What also sets us apart from our peers is our 2 strong distribution channels: our own advisers and the third-party open market IFAs that we serve. And as I alluded to earlier, we think the revised perimeter of the business should be capable of delivering NCCF in excess of 6% of AuMA through the cycle with the U.K. platform running ahead of that level. So we will now be targeting that as a minimum over the medium term from 2022 onwards. So in summary, on Slide 11, we are delighted to be announcing this transaction today. With the sale of Quilter International and the completion of PTP earlier this year, the heavy lifting to transform Quilter is now behind us. The foundations are in place to deliver on our next phase of our journey. Our focus is now on driving growth and efficiency. And under new ownership, our international business will be free to invest in its core franchise and to deliver for its customers, employees and new shareholders. And I wish them well for the future. Now let me open up for questions.

[Operator Instructions] Our first question comes from the line of Andy Sinclair from Bank of America.

Well done on this disposal. Three from me as usual, if that's okay. Firstly, as you talked about material capital return, but also said about funding selected growth initiatives. You also just said that the heavy lifting to transform Quilter is now behind us. So should we think about those growth initiatives as just adding some more financial advisers, or maybe capabilities for Quilter investors rather than anything transformational in terms of M&A? That's question one. And secondly, just when we're looking at the new operating margin targets, how much of that should we think was just the original part effectively adjusted for the QI disposal? How much is new expense opportunities? And how much is deployment into those new growth initiatives? And thirdly, perhaps a slightly tricky question. Look, we're now at 1st of April, I just wondered if you could give us any color on Q1 trading and how do you feel just about the 5% target for 2021?

Thank you, Andy. It's Paul. So I will have a go at number one and number three and hand over to Mark for number two on operating margin targets. In terms of material capital return, as we said, if we had the money in our hands today, we'd be making that very meaningful capital return to shareholders now. Of course, this is -- we are -- we have positioned Quilter front and center in one of the U.K.'s, if not the U.K.'s fastest secular growth market in financial services, the U.K. wealth market, particularly the retirement-driven U.K. wealth market. And that's where Quilter is now positioned. So clearly, there are opportunities there. We are not saying -- we're certainly not saying that we want to retain everything for a major transformational move. But clearly, there are opportunities to accelerate our growth still further. So we'll consider those. And obviously, we'll update, and I will update back at the Capital Markets Day in the fourth quarter. In terms of Q1 trading, we -- I think our update is on the 21st of April. I have said already that I'm pleased with what I'm seeing in the first couple of months of the year, given our new platform is in, and it's -- that's being driven by our new platform. So that's nice to see. Obviously, it's early days, but so far, so good. Put it this way, I take what I'm seeing at the moment. But we'll update you on the 21st of April. And in terms of op margin targets, how much new expense opportunities...

So Andy, look, when we set up optimization Phase 1 a couple of years ago, I spoke then about what was in perimeter and what is outside of the sort of the broad perimeter that we were looking at as a Phase 1, and I spoke about a Phase 2 to come. So clearly, this builds upon Phase 2 because there's now -- it's quite a different business construct, with the opportunity there. So there is a -- within what we do, and it's a combination of what we previously planned to do but then more because we also got a substantial change to the business perimeter to actually work through on that. So a large chunk of it is coming through on the expense side. But there are also additional revenue-enhancing initiatives that we are considering, and we'll update you on that later on this year, as Paul has mentioned, but it's a combination of the 2.

And the next question comes from the line of Gurjit Kambo from JPMorgan.

Well done on getting the deals done quickly. So just 2 questions from my side. Firstly, just in terms of the -- I think Paul you said even though if you had the cash today, you would give a majority of that back. I guess just thinking about like the M&A environment, the reason you'd give it all back is it because you don't see many gaps in the Quilter offering? Or if there was any M&A out there, maybe valuations are too high? So just the landscape currently, if you were -- if you did have that GBP 450 million in your pocket today, why you would give it back rather than maybe doing something else with that? That's the first question. And then the second, just in terms of sort of stranded cost, if we think about adjusting our models to ex out Quilter International, obviously, we take the revenues out, how should we think about taking the cost out? Do they all come out? Or will there be some which stick around for a couple of years?

Thanks, Gurjit. Well, I'll take the first question and then hand over to Mark for the second one. It's actually nothing to do with that. We see the opportunities in this market, which we see as significant as a completely separate decision to the fact that we're going to have a chunk of money. So the fact that we have announced today the sale of International, GBP 483 million, just because we'll have that money, it doesn't mean to say we shouldn't make -- we should make -- if we felt there was good opportunities for significant investment, we talk to our shareholders anyway. So I think the 2 are separate, yes? We always take a decision for us of what is the right strategic thing to do. This has been the right strategic thing to do. Commercially, we got a great deal, which makes it even better. Now separately, we look at the market, and we do see growth opportunities. We see opportunities to accelerate growth. But at the same time, we're very, very aware, this is our shareholders' money. We've always been very capital conscious. And so we intend to make a meaningful return of that capital. But it's basically we see the 2 separately. So if you're asking me do I see opportunity to accelerate growth? The answer is yes. But at the same time, it's our shareholders' money, and we're very well aware of that. So it's nothing to do with the share price. It's nothing to do with the fact that we've got cash or we've got cash in hand, it's to do with 2 separate decisions. And we're going to update that to say at the Capital Markets Day on that. Mark?

On the stranded costs, we've got about GBP 8 million of stranded costs immediately after completion, there's obviously work that we'll be doing between now and then in order to minimize the impact of that. Probably around about half of that is kind of the more -- you'd remember on the sale of QLA, we spoke about stubborn stranded costs, but half of that is at the most of the stubborn end of the spectrum. But that's all fully incorporated in the '23 and '25 guidance that we provided to you. And that will obviously also form part of the overall next phase of the optimization initiatives that have been considered.

And the next question comes from the line of David McCann from Numis.

And 2 questions from me. The first one has partly been addressed already, but I'm maybe asking a slightly different way, and just related to the new operating margin targets for the group. I mean clearly, you can get to 25% medium-term investment and longer-term from kind of base of 20% where you are, I guess, today, that is quite an uplift in where you've been talking about before. I appreciate you say you're going to give some details in the Capital Markets Day, but I guess, could you give just a little bit more color on the main drivers of this short term? I mean is this it's more cost reduction in a more significant sense? Is it a combination of higher growth, the top line kicking in? Is it something else? Just a bit more color just so we can get a bit more comfortable because that is quite a big uplift, you're now talking about over that time? But that is question one. And the second question is on the balance sheet. I appreciate there's a little bit of detail on the slide in terms of the solvency capital ratio themselves. And maybe could you just walk us through some of the matters to what this actually does to your own funds and the regulatory capital requirement component of that rather than just the kind of overall percentages? And how -- I'd like to understand those moving parts if that's okay.

Okay. Thank you, David. And it's Paul. I'm going to hand to Mark for both of these, but just very quickly on the first one, it's the 2 goals that I've said we've now got: growth and efficiency. So one, of course, speaks to growth in assets, growth in revenues, growth in flows. And the other speaks to efficiency and costs. So Mark, do you want to add some on the operating margin?

Paul, that's entirely right. I mean, David, there's a meaningful contribution from costs. And that's -- some of that's been planned anyway. That's I've provided in previous guidance, when I've spoken about optimization Phase 2. But as I've referenced already, this sort of changes the perimeter of the in-scope items on that relatively significantly. And then there are also revenue growth opportunities, too. So it's both. It's not either all, and it's probably in sort of relatively similar measures across that margin. On the solvency capital, so you've got the own funds number in there, the capital requirements for the international business of GBP 300-odd million so it reduces that part of the SCR, it effectively moves the SCR from approaching GBP 900 million to just under GBP 600 million is the rounded numbers, the impact that has on capital requirements. And on a Solvency II basis, it still keeps us at a very healthy Solvency II margin, if you consider it after a post distribution event, too. As I've said numerous times before, the Solvency II ratio itself is not a constraining factor for the group from a capital perspective. It's liquidity and liquidity stress tests and ensuring that we've got sufficient liquidity in a stress event that is a constraining factor when it comes to I guess, further capital returns, which you haven't said it, but I'm assuming that that's sort of underpin part of the question that you have around it. So even in a post-capital return environment, I'd still expect a Solvency II ratio that's going to be in the high 100. So it will be -- I don't expect to be over 200%, but it will be round about, I don't know, 180-odd percent. Obviously, that's going to change at time, but that's more or less we had expected to be.

And the next question comes from the line of Greg Simpson from Exane BNP Paribas.

Congrats on the transaction. And just a few -- a couple on my side. The first is, could you remind us of the overlaps with the international business in the rest of Quilter? And in particular, I'm wondering if any of the GBP 23 billion of Quilter investors AUM is sourced from Quilter International clients? And if so, will you expect to retain it with a new owner? And then the second question, I think you mentioned earlier that you thought the right margin for the U.K. business should begin with a 3, I think, you said. So just to confirm, you're seeing the 30% target as kind of like a minimum you want to be at? And in an ideal world, assuming all goes well with markets and flow, you'd hope to be above 30% by 2025?

Okay. I'll bring Mark in as well, but there's relatively little overlap between Quilter International and the rest of Quilter. I mean there is about 600 managed within portfolio bond wrappers by Quilter Cheviot and about 970 managed within those wrappers with Quilter investors. And yes, we do expect to retain all of that. Certainly, the vast majority of that as a result of the deal we've done. So we don't see any real attrition or leakage from that. But of our total overall AuMA, it's relatively modest. And we've said at least 30% -- we said -- at least of 30%-plus. So we haven't given you an actual number in the 30s, but we've said at least. So I think that's fairly clear. Yes, and again, we'll update, Greg, as well at the Capital Markets Day in Q4.

[Operator Instructions] We have one more question from the line of [ Paul Allen ] from BMO.

So just a question on Solvency II. You mentioned earlier that you'll still have to report under Solvency II, but that you will have some discussions with the regulator around that. You said would be for the time being potentially, so just interested what your options are? You mentioned, obviously, the U.K. Life business at the moment, that means you have to report into Solvency II. But what's your options going forward for potentially transitioning out of that regime?

So Paul, the -- it's really a discussion we're having with the regulators around this. As I've said, on technical fundamentals, we remain group Solvency II-regulated. But we're a unit-linked business, we're not a traditional Life business. So sort of on a more practical basis, when you stand back and look at it, we don't have the same sort of -- carry the same sort of balance sheet risks that a lot of other group Solvency II-regulated businesses would be carrying that operates in the life industry. But I mean, if we were group Solvency II-regulated, we'd be CRD4 group-regulated. We already have a component of that group regulation, but that doesn't apply to the whole group as things currently stand. But that's really sort of a discussion to have to have with the PRA. I mean ultimately, it's for the regulators to opine on that.

Yes. But potentially, that is an option that you could -- as a way of, I don't know, not using the U.K. Life business or somehow -- I was just interested, how you might -- why you wouldn't be constrained by Solvency II?

No, no. So I'm not saying that we won't be constrained by Solvency II. I still expect the life and pensions business on the platform will absolutely be Solvency II-regulated on a solo basis. And we have no plans to change any of that. This is more purely at a group supervision level in terms of where the ultimate group supervision from a capital perspective sits.

And as there are no further questions, I'll hand it back for closing remarks.

Well, I just want to say thank you to everybody. Thank you for your support. I'm delighted, as I said, Mark and I are both delighted with the outcome of our strategic review. We do think it is absolutely the right decision for our shareholders and for our employees and for our customers. And it does give us now complete focus on the fast-growing secular growth U.K. wealth market. And we have got all 3 parts of the value chain. They're increasingly fully integrated. We've got 2 hugely strong distribution channels in the open market, IFA market, and our own control distribution with Quilter financial planning. And as a result of our new platform now in safely, securely and quite frankly, working really well. We're hugely optimistic. And where we envisage we would be. We have now completed the transformation of Quilter. And it's now up to us to focus on our 2 core objectives of growth and efficiency. Thank you very much, everybody.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.