XPS Pensions Group plc (406.F) Earnings Call Transcript & Summary

Hello, everyone, and welcome to our full year results presentation. I'm Ben Bramhall, and I'm joined by my Co-CEO, Paul Cuff, and our CFO, Snehal Shah. So here's a summary of what we'll be covering today. But as Rachel says, we'll make sure we leave plenty of time for questions at the end. So turning straight to the highlights. Overall, we had a good year. And of course, at the start of the year, we were just coming out of the third lockdown with various restrictions still in place. So against that backdrop, revenue growth of 8%, which was almost all organic, is a great demonstration of our resilience. And within that, we saw good revenue growth across all of our business lines. We managed costs well. Adjusted EBITDA grew by 7%. And as Snehal will talk about later, we saw some underlying efficiencies starting to come through. Our cash conversion also remained very strong. Now in terms of our market more broadly, this performance reflects strong demand for our services driven by a lot of regulatory change and more focus on pension scheme derisking, which we expect to continue. On the new business side, we continue to see opportunities to win new logo clients of all sizes. And winning the major industry awards again gives us a great story to tell, and this all led to some fantastic wins during the year. We also started to see our Market Force initiative, where we are specifically targeting mid to large pension scheme clients of the big 3 start to pay off during the year. Now on the other side, client retention levels remained very high, reflecting the quality of service we provide, and this was also validated in our recent client feedback exercise, where 99% of our clients said they find as collaborative and enjoy working with us. So alongside growing our client base, we also see good opportunities to expand the services we provide to clients. And that's both increasing the penetration of our existing service and also developing new ways of helping them. Finally, we made a lot of progress on sustainability, which Snehal will cover a bit later. However, it's worth mentioning here that the market for people and talent in our industry is very competitive at the moment, and showing we're a responsible firm with a strong, employee-centric culture is really important to enable us to keep hiring the great people we need to fuel our future growth.

So as we review the year and importantly look ahead, it is worth just pausing for a moment, I think, and reflecting on where we've come from because that tells you a lot about the trajectory of the firm for the future. And that's essentially I think it validates a story of a huge amount of hard work over recent years and investment in the firm really paying off, and we're seeing that in real time right now. It's also a bit of a milestone year for us, of course, because it is 5 years since the business listed in 2017. Now in 2017, we listed, of course, as a firm called Xafinity. We were a very solid business. We had about 400-or-so staff and generated revenues of around GBP 50 million. And we had a really good client base. But as you can see from the chart in front of you, in our market, we were not really a top-tier firm. We were a little bit a way down the league table. When we listed, we had a real ambition, and that was to become the preeminent mid-tier firm in our market. We knew that we would need to grow both organically and inorganically in order to achieve that. But along the way, our stated ambition was to be absolutely the best place for clients in our market and the best place for staff. We knew M&A opportunities existed, and we knew that we'd have to go and pursue them. We also talked a lot about being noncyclical, that we would grow come rain or shine. Now of course, quite a lot has happened to test that hypothesis in the intervening period. But if we fast forward to where we are today, let's just have a look at what's happened. And I think fundamentally, we believe we've achieved an awful lot of what we wanted to do. We have grown both organically and through acquisition, of course most notably through the acquisition of Punter Southall pension businesses, which we did a year or so after listing. And that's what created XPS, the firm that we are today. Now XPS is a great place for clients. We've been investing in the services that we provide, from being more of a compliance-based firm to delivering all sorts of additional value-add services. And our client feedback is brilliant, as Ben touched on, on the prior slide. We've worked really, really hard on our culture. We've won awards along the way, and our staff survey results this year are fantastic. There is a statistic on the opening slide that 95% of our staff think we're a great company to work for, and we'll say a little bit more about that in a minute. So I think we've come a very long way on being best for clients and best for people, and we have moved a long way up that league table of firms in our market. And all of that leads to strong organic growth, the growth that you can see coming through today, and the ability to ultimately win anywhere. We'll talk a bit more about it, but wins that we got this year like on BT with the biggest pension scheme in the private sector, like John Lewis, well, another big employer with very large pension liabilities, wins like this were frankly unthinkable when we were Xafinity a few years ago, and we've come a very, very long way. We're now over 1,500 people. Our revenues are almost GBP 140 million. So it's been quite a journey so far. But the journey is nowhere near over. I think we really feel now is the time to capitalize on all the hard work to get us to where we are. Well, we did say we've been noncyclical, so just to check in on that. I guess none of us could foresee a pandemic, but we have Brexit as well, we've got a war in Ukraine, all sorts of things going on. And actually, we have grown throughout, and we've already proven, I think, that we are independent of all of those challenges. There's great growth coming through, huge demand for our services that are just independent of the wider economic cycle.

Thanks, Paul. So I'll just take you through the financial highlights for the year. So really pleasing to deliver a third consecutive year of meeting expectations and slightly ahead on a couple of metrics here. So we've seen strong demand for our services with existing and new clients, and that has helped us deliver a good organic revenue growth of almost 8%. All divisions have delivered year-on-year growth in revenues, as Ben said. And I said at the half year that we've continued to recruit to meet the high levels of demand. But at the same time, we have started to deliver operational efficiencies. Staff cost growth is lower, lower than the revenue growth, and I will cover the costs in more detail later on. Now the gap between revenue growth and EBITDA growth has narrowed considerably, which meant delivering the highest level of organic growth in adjusted EBITDA since listing. It's up 7% year-on-year. And we've delivered the drop-through of 8% revenue growth to shareholders by growing the full year dividend by 7.5% to 7.2p. Within that, the final dividend is 4.8p, which is up 9% year-on-year. Now this underscores the confidence we have in our business model and the outlook. Adjusted diluted EPS is 10.2p, up 4% year-on-year, whilst adjusted basic EPS is 10.7%, up 7%, benefiting from the EBITDA growth as well as the regular buyback of shares through the EBT. Operating cash conversion is strong at 96%, and I'll go into more detail with leverage and cash flow later in the slide, but let me first take you through the income statement detail. Now there's a lot here. I won't go through all of it, but let me give you the divisional highlights. Advisory, which comprises actuarial and investment consulting, delivered 7% year-on-year growth in revenues. This business has grown revenues by 5%, 6% and 7% consecutively in the last 3 years. Advisory -- within Advisory, pension consulting revenues have grown 5% year-on-year, benefiting from inflationary increases and charge-out rates as well as an increase in volume of work, such as GMP equalization, plus the corporate appointments that Paul mentioned, BT, John Lewis, et cetera. But this was partially offset by a small decrease in client hours year-on-year as more holidays were taken following a buildup during the pandemic years. Pension Investment Consulting revenues were up 18%, driven by strong client demand and the impact of net new wins from last year as well as this year. Administration passed the 950,000-member mark as we embedded the strong net new wins. Revenue growth of 9% also came from increase in core activities but also -- as well as project revenues. Now within administration, we've been winning business on all fronts: private and public sector as well as first-time outsourcing appointments, where there remains a significant opportunity for growth. The SIP business grew 9%, 3% organically and the remainder from the acquisition of the MJF book, which completed on the 1st of February this year. The organic business saw a 10% increase in -- year-on-year in SIP sales. And following the acquisition, the business now has scale to continue to gain share in a competitive market. NPT assets under management are now under -- over GBP 1.3 billion, which helped to deliver a 34% increase in revenues. And very quickly in terms of exceptional nontrading items, exceptionals is a credit of GBP 0.6 million, which is an unwind of the exceptional holiday provision last year, partially offset by corporate transaction costs of GBP 300,000. Now let me say a bit about the outlook. Now we expect to grow group revenues by at least high single-digit percentage and costs to grow just below the revenue. Now this -- the costs include the impact of the additional national insurance, which is worth about GBP 1 million or 0.5 percentage of the EBITDA margin. D&A will be slightly higher following the higher CapEx this year, and I'll cover that shortly. Interest charge will also be slightly higher given the recent rate increases and the impact of slightly higher net debt that we carry into the next year. Tax rate for this financial year is 19%, but a reminder that it goes up to 25% in FY '24. In terms of costs, the headline here is that total operating costs are in line -- broadly in line with revenue growth. Additionally, all costs as a percentage of revenue have remained the same as prior year. Within that, staff costs were up 7% compared with revenue growth of 8%, which means we are achieving operational efficiencies. The 7% increase in staff cost is driven entirely by a higher headcount and the equivalent increases in salary costs, as well including the promotional pay rises. Turning now to cash flow and debt. Adjusted operating cash inflow of GBP 32.8 million equates to a 96% OCF conversion. And this is the third consecutive year of over 95% conversion, and it underscores the highly cash certain nature of our business. Following the slowdown in CapEx investment during the pandemic years, we have invested in our product, IT capabilities and platforms, particularly the administration system platform, which has meant we have spent just under GBP 8 million on investing in the business. We've continued to buy back shares through the EBT, and these shares will be used to satisfy future vesting of PSPs and, therefore, protect shareholders against dilutive impact. When you take there the -- when you take all of these numbers into account, our net debt is 8% higher, leading to a covenant leverage of 1.74x, which is flat year-on-year. Clearly, there are a number of one-offs within this: the acquisition of Michael J Field and the one-off CapEx as well as the GBP 1 million loan arrangement fees. Ignoring these and, therefore, on a like-for-like basis, net debt is reduced to GBP 45.8 million and giving us a leverage of 1.5x, very much in line with our stated ambition of deleveraging in the medium term. In terms of the outlook, we expect CapEx to be about GBP 5 million per annum. And excluding M&A, we will continue to reduce our debt towards the 1.5x and lower.

Thanks, Snehal. So looking forward, in simple terms, our strategy in the core plan is to continue growing revenues, as we have been doing successfully over the last 5 years. So that's through supporting clients through market and regulatory change, broadening the range of services we provide to clients, using our market position to win new logo clients and using the platform we've created to accelerate growth through M&A. And to achieve this, we need to keep focusing on being a brilliant place to work and investing in technology. And under this, there's lots of other things going on, and we'll come on to talk about the operational side of things very shortly. So moving to regulatory and market change. And if you're a trustee of an occupational pension scheme, there's a huge amount going on at the moment. Schemes are now starting to work through the various GMP exercises, which flow through from the court case in 2018 and changes at HMRC. This year, we had new powers for the pensions regulator coming into effect and other regulations as well. There's more coming down the line. We've got a new Single Code of Practice due. A new funding code is also due. And all of this is just ramping up what trustees need to be doing around things like governance, risk management and funding. You've also got the CEO of the pensions regulator in his recent keynote speech talking about that their corporate view is firmly on the side of action. And all of this means there's lots we can do to help our clients. So as we look forward, we'll keep helping them through the GMP exercises, and this will continue for years. Less than 1/3 of our clients have completed the first phase, and less than 5% of clients have completed all 3 phases. We'll also be helping clients with all of the new changes as they come in. And for schemes who decide that they effectively want to outsource the governance to professionally run umbrella arrangement, we're launching a new master trust with abrdn to help them. Now all of this regulatory change gives us some really good opportunities to expand what we're doing with clients and develop new services. And we've been really busy during the year. So for example, we've increased the support we provide around governance and formalized this into a new trustee governance services solution, which we're now rolling out to more and more clients. We've grown our risk transfer team with a new head of the team joining us from Aon as we prepare to help more clients look at insurance-type transactions. And we've also been developing our services to help clients with the new TCFD requirements and disclosures. And whilst at the moment these only cover the largest schemes, in due course they will cover more and more. Now it's worth mentioning that it's not just to find benefit schemes that are impacted by all these changes. Defined contribution schemes are also seeing increased governance requirements and pressure to ensure they offer value for money. And so we're growing our DC consulting business to support them. Now more broadly, the growing DC market also provides us with other opportunities in our SIP and NPT businesses. So first, the SIPP and SSAS business. which had a really good year. It was great to see them also winning awards for service quality and making good progress on deploying technology with more members now accessing information online. Revenues were up 9% against a slight headwind of reduced interest on cash balances but driven by strong sales and client retention over the year. Revenue was also helped by an acquisition which Paul will talk about shortly. On NPT, which is, of course, our master trust solution for schemes who feel the governance requirements of running on their own are too onerous and want to consolidate into a high-quality umbrella, during the year we won 12 new clients, which took the number of members within NPT over the 50,000 mark, and it also took the assets to around GBP 1.35 billion. As you'll recall, fees in this part of the business are calculated as a basis point charge, and so revenues were up 34% driven by the increases in assets and the impact of asset transfers towards the end of the prior year. Looking ahead, the pipeline continues to be strong, and we're keeping investing to make NPT a compelling solution for a broader spectrum of clients.

Now in terms of growing market share, we kept building our brand and our networks across our industry. We got a really nice boost in the year when we won Actuarial Consulting Firm of the Year and Investment Consulting Firm of the Year at the annual professional pensions awards, which is a really important recognition that helps a great deal in talking to prospects and in pitching for new business. We continued with our Market Force initiative. And as a reminder, this is man marking the largest schemes and sponsors in our markets and getting to know them and building strong relationships. And that played a part in our pipeline returning to pre-pandemic levels. Our conversion of our pipeline was strong, as you can see, with GBP 3.2 million of annuity wins added to our underlying book, and we won some really good, big projects as well. And winning big projects outside of our client book, particularly on things like GMP, can be a terrific door opener to potentially building bigger, long-term relationships. Now wins came across all of our business lines. In Advisory, we mentioned BT, John Lewis, Wood group, another highlight as well, and many more. In administration, we won new clients such as HSBC, Mitchells & Butlers, BAA's pension scheme. And in the public sector, Surrey , Sussex Police signed up as clients as well. So really great that we won some fantastic, new clients across all of our core divisions. And looking to the future, it's fundamentally more of the same. The XPS brand is only strengthening in the market with those wins and awards and so on and Market Force paying off. But there is continued investment. We're upgrading our website, and we'll launch a brand-new one during the summer, and that will be the first significant upgrade since XPS was launched. And we're also investing in our CRM system to better map our relationships and track the effectiveness of our campaigns. But in general, more of the same, and we hope to continue winning some really exciting, new clients. In terms of consolidation through M&A, the fourth pillar of our strategy, well, we completed the Michael J Field acquisition this year. And as a reminder, that was a small SIPP business, but a big boost to our SIPP business in adding more scale and getting real critical mass. It was a business that could be looked at as a little bit of a closed book of business that we've acquired. But there are some synergies in running that. It creates critical mass in Manchester, where we already had a small team but now have a larger one. And there are definitely opportunities across the book to build on the success that Michael J field has had over many years as an owner-managed business in the past. Now the focus for the year ahead for us is to be openly seeking more bolt-on acquisitions like that one. We do think that there are likely to be some great bolt-ons that might be available to add to what we do and be part of our growth into the future. It's possible that a larger deal could be present. We're often asked about whether we think that we would do a bigger deal with another sort of mid-tier firm in the market. Possibly, over the next 5 years as we look forward, it's quite possible that might happen because, as we always say, we don't think there will be as many firms in the mid-tier in a few years' time as there are today. Consolidation looks like it will happen. And so, of course, as XPS, we will be monitoring that as we go. But it would absolutely have to be right for shareholders, right for clients and right for staff alike if we were to do something.

So on to the operational side. And over the last 5 years, a huge amount of energy has gone into developing our services, building our brand, growing our revenues. And whilst this will all continue, looking ahead, we'll be increasing our focus on looking at how we're doing things and whether we're doing things in the best possible way. Now probably the biggest area of focus here is within the administration business, where we currently license a number of different platforms as a result of our corporate history. Now -- and there's a great opportunity here to move to one platform which we can invest in to really improve the member experience and the level of self-service. So during the year, we bought an instance of the main system we use alongside some other software, which is the start of our journey to achieve this. Now on the Advisory side, our focus is on ensuring we're getting paid properly for the work that we're doing by really focusing on client profitability and recovery. Now on the people side, following the success of hybrid working, we recently launched the My XPS My Choice framework to provide employees with more flexibility around where they work. And this has prompted a review of our property needs. And the strategy here is not to reduce the number of locations we have as we want access to great people across the U.K. but rather to look at the amount of space we have given we'll have less people coming into an office on any given day.

So we talked about our ambition to be best for people and best for clients. If you look at our employee survey results, we were very pleased with the survey we run every year, and the results were very strong. It comes, I think, from hard work on culture. We've been expanding our employee networks. New networks most recently added are our multicultural network, our menopause network and our disability network, building on the great work of the others you can see on the screen in front of you. And we really use the networks. They're a core part of what we do. They inform policy. They inform our approach to recruitment. They've informed our website design and so on and how we come across to the outside world. So they're hugely valued in what they bring to the firm. We work extremely hard on mental health. We have now 60 mental health allies trained within the business to provide support to colleagues. So along with all the other things that we do, this does then show up in the statistics, and we were delighted to see 95% of employees think XPS is a good place to work, which is really heartening and up even on the 94% that we got the year before. Now a stat that's not on the slide but we're very proud of is that 89% of our staff think XPS are truly committed to diversity and inclusion. And that is a score that has gone up significantly year-on-year each year to that now high level, and we're determined to get it even higher still into the future. Now on clients, we do a survey every 2 years. And we've got some terrific results, as you can see. Strong scores. 99% of our clients say that they enjoy working with us. Probably the score that I am arguably most proud of is the 74%. And to explain what that one is, many of our clients, particularly on trustees, will work with other providers in our market because a professional trustee might have a portfolio of half a dozen or more schemes that they work on. So they will inevitably see our competitor services across all the things that we do as well as working with us. Now they're quite well placed, therefore, to judge how we get on, and that 74% is the percentage of those that were able to comment on that, that said we are a better firm to work with than our competition. That's a brilliant thing, and a mere 1% actively disagreed with that statement. So that's a really, really good stat for us about where we are positioned in the market these days, and I think it underpins the opportunities that we're seeing as well. Attrition in our clients is very, very low. We see almost no turnover at the bottom end of our client base, which is really, really heartening. And as we've described, we've been doing well in gaining clients from elsewhere.

So just as a reminder of our sustainability pillars, the five-pillar strategy. And since launching just over a year ago, we're proud to say that a lot of progress has been achieved on all fronts. Paul has covered all that has been achieved on the employee front, so let me pull out some of the key highlights here. We're naturally a low-carbon emitter. However, we have launched a number of initiatives to permanently reduce our carbon footprint, including influencing our supplier base, therefore putting us on a fair footing in our journey to net zero. And as reported previously, we became carbon neutral across all Scope 1, 2 and 3 emissions late last year through the purchase of high-quality, U.N.-approved carbon credits. We achieved the ISO 2701 (sic) [ 27001 ] and Cyber Essentials Plus certification, highlighting the importance we attach to continuously safeguard our client data. And our investment consulting business, where we have GBP 140 billion of assets under advise, is a signatory to the U.N. Principles -- PRI and the FRC Stewardship Code, which is a high bar to achieve. Now with that, I'll hand over to Paul to summarize.

Thank you, Snehal. So we're very proud of it. It was a great year. We do feel like it was something of a year of fulfillment 5 years after listing, where a lot of the things that we've been working on really coming through. We're delighted with revenue being up 8%, which is pretty much entirely organic, and we're really pleased to announce an increase in the dividend, up 7.5%, which reflects our strong confidence in the model and how the future is looking for us. Fundamentally, we feel our strategy is working. So it's straightforward. We keep going and keep pushing forward. We will continually strive to be the best for staff and the best for clients in our industry. We're really pleased with the feedback that says we've come a long way on all of that. And we won't rest on our laurels; we'll keep going. We're a couple of months into the new year already. We've started very strongly, so I think it's fair to say we're very excited about what the next 5 years might hold.

Well, thanks, everyone, for attending, and we look forward to seeing you again, hopefully in person next time.