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

So in terms of the big picture, the first thing to say is that we are really, really pleased with the performance of the business. Last year, in the full year, we posted our best growth since we listed, and we talked about a sense of growing and gathering momentum. We've carried that forward into this half year. And actually, it's got better still. And this half 14% growth, of which almost all is organic, is another new record. Like other businesses, we do face cost pressures in a higher inflationary environment. But despite that, it's still very profitable growth. And you can see adjusted diluted EPS is up 18% versus the prior period. So really, really strong performance in the business. So what's driving this? Well, fundamentally, it's delivery against our strategy. We've invested in our services for a number of years now across the range of everything that our clients need as the market evolves and the world is volatile around them. And so that's put us in a really good place to serve them well and activity levels across the board on our clients have been very, very high. It's also a validation really of our business model. We've always talked about being noncyclical. Clients need has come rain or shine in terms of what's going on in the wider economy, and we've seen that again here. And of course, we are generally able to pass on, in some way, inflation through to our clients in terms of what we charge them. It is really important, though, that there's a bit of a lag in that effect. And the real story of the growth in this half has been really good quality services and high demand for those services in high-value add areas in what we do. So what else is going on? Well, we've been delivering on our M&A strategy. And of course, we announced the Penfida acquisition recently, and we are very, very pleased about that. We will say a little bit about that again in a minute. And we're also doing things very much in the right way. We are carbon neutral again across our entire value chain. We've invested in UN-approved high-quality carbon offsets that cover our scope 1, 2 and 3 emissions, which is a little bit beyond what I think most firms in our industry do. And of course, rightly, we know that isn't ultimately the long-term answer, we are also directly reducing our carbon footprint and have been really pleased to be able to do that this year. And of course, we've announced a healthy increase in our dividend this year, which is probably a good place to end on this slide. We're one of the probably relatively few businesses able to do that at the moment, but that really does reflect the ongoing confidence in what we're delivering. So how are we doing it? Well, underpinning this is a sort of strategic objective, if you like, to be the best firm in our market, both for our clients and the best firm for our people, the best place in our industry to work. And you can never really objectively measure whether you are those things, you can strive to beat them. But of course, there is evidence to check in on how you're getting on. But first of all, in September, we won all of the main industry awards at the U.K. Pension Awards. We're the first firm ever to do that. And I said the 3 main awards such Administrator of the Year, Investment Consulting Firm of the Year and Actuarial Consulting Firm of the Year, which, of course, are the 3 sort of main pillars of our pensions business. So to be the firm of the year in all of them simultaneously was a fantastic boost for us, and we are the first firm in the 25 years of those awards to win that hat-trick. And that is brilliant, it validates our brand position in the market. It's, of course, good for morale. It's good for recruitment, and it's very good for new business opportunities as well. I should also mention that our SIPP business in the same week, won best SIPP provider in their industry awards as well. So it really was a very good week for us on that front. And on people where we strive to be the best firm to work, the news there is very good as well. Every year, we do an annual survey of our staff. And question number one is arguably the most important is, do you think XPS is a good company to work for. In recent years, we've had good scores, last year is as high as 95%. And we've just this last couple of weeks, received the first cut of the results this year. And amazingly, that result has gone from 95% even to 98%. And we think that fundamentally is what is driving our business performance is that we have a very strong culture and engaged, happy, motivated employees at the heart of that, and we're very proud of that result.

Thanks, Paul. So in terms of the financial highlights. And today, we reported the highest year-on-year organic revenue growth since listing in 2017, out of 13%. Overall growth, as Paul mentioned, was 14%. Strong demand for our services and inflation increases in our rates at contract anniversary dates throughout the period meant that Q2 within that half year period was the strongest ever at 17% increase. Increasing client demand due to recent financial market volatility was largely in October, and therefore, is not in these numbers. Adjusted EBITDA in the half year has grown ahead of revenues at 15%. Adjusted diluted EPS was 5.3p, up 18% year-on-year. The net debt at 30th September is up 32% year-on-year, mainly due to the acquisition of MJF and Penfida as well as significant CapEx investment in our administration platform. If you exclude these one-off impacts, the like-for-like net debt is down 8% year-on-year, and I'll take you through that in a bit more detail later on. The Board has declared an interim dividend of 2.7p, which is up 13% year-on-year. This underscores our continued confidence in the business model and growth prospects. In terms of the income statement, there's a lot of detail, and let me just give you the highlights here. Advisory, which comprises actuarial and investment consulting delivered 15% growth in revenues. Within that, pension consulting revenues were up 14%, benefiting from inflation increases and charge-out rates as well as increased volume in work, such as risk transfer and GMP equalization. Pension Investment Consulting revenues were up 19%, driven by strong client demand, particularly in the face of financial market volatility, impact of net new wins from last year and inflationary fee increases. Pensions administration division passed the 1 million members under administration mark just after the period end, but the revenue growth in the half of 11% came from increases in core activities as well as project revenues. The SIPP business grew revenues by 57%, 21% of that organically and the remainder from the MJF acquisition. The division also benefited from high levels of SIPP and SaaS sales as well as the increase in the bank base rate. NPT revenues were flat year-on-year impacted by significant reduction in asset prices as well as some fee pressure within the client base. Net finance costs are up significantly on last year due to a combination of a higher net debt, which is as a result of M&A and the higher CapEx plus the impact of the increase in bank base rates. Despite this, adjusted profit after tax has grown 17% year-on-year, ahead of revenue growth of 14%, evidence that operating gearing is coming through. In terms of the cost base, total operating costs are up 14%, in line with revenues despite inflationary pressures in our cost base. Additionally, all costs as a percentage of revenue have remained broadly similar to last year. Just couple of things to highlight in there, staff costs are up 14%, in line with revenue growth as we've continued to invest for future growth. Of the 14%, 9% is driven by higher headcount and the remainder 5% due to annual and promotional pay raises. Now as you all know, cost of living has increased significantly and recognizing the impact on our people, we have implemented a midyear pay rise for all our colleagues below partner. This is the right thing to do, and it will add about GBP 1.5 million of cost in the second half of this year. Now the first half of the year is cash outflow heavy with the payment of the final dividend as well as annual bonuses. And we've also had a number of one-offs such as M&A and investing in developing our proprietary administration platform. So what I thought would be helpful is to understand the LTM movements in the net debt since September 21, and that's what I've tried to show here. So in that LTM, we generated an operating cash flow inflow of GBP 34.4 million, and that equates to a 95% OCF conversion. Conversion in the first half is traditionally lower. And you can see in the appendix that is 65%. But over the LTM, it is as high as we've reported at the year-end. And our full year guidance still remains between 90% to 95% of OCF conversion. After the payments of lease liabilities, interest, tax, underlying CapEx, dividends and other BAU expenditure, you can see that the underlying of the like-for-like net debt is 50.9%. That's a reduction of 8% year-on-year. So to the right of the chart, you can see that the one-off CapEx in the administration platform of GBP 6.5 billion. This is building our proprietary platform, which was part to deliver operational improvements from FY '24 as per our previous guidance. We've also spent about GBP 13.4 million on bolt-on M&A, MJF and Penfida, including the deferred consideration. We've also incurred about GBP 2 million of exceptional costs in that 12-month period, mainly relating to corporate M&A. Taking these into account, the net debt at the end of September is GBP 72.9 million or a covenant leverage of 2.09x. With that, I'll just hand over to Paul.

Thanks, Snehal. So let's just unpack a little bit on some of the themes that we were talking about in the introduction and so on. In terms of our strategy, it's a familiar slide. This is the same slide we've used before. Our strategy is fundamentally the same today. It's 4 pillars here. First of all, as a reminder, we benefit from regulatory change, we benefit from market volatility and so on, in terms of our clients needing a lot of advice and a lot of support to get through such things. That leads into pillar number two of expanding our services. This is about potentially cross-selling work where we might be the actuary and become the administrator as well or vice versa. But of course, it also relates a little bit to number one, that we develop new services in order to meet the new regulatory challenges and so on that our clients face. We enter grow our market share. It's not just about growing activity on our own client base, but winning other people's clients too, winning what we'd refer to as new logo clients that we've done nothing before in the past. And lastly, of course, M&A is a core part of our strategy. we look for bolt-on acquisitions that can help us strategically on our journey to achieve the first 3 pillars of our strategy. All of this is always underpinned by very strong investment in our people, trying to drive a fantastic culture, which I've talked about a little bit already and investing in technology. For example, as Snehal just talked about investing in our administration platform at the moment. I should say also, we are increasingly excited about opportunities in tangential or adjacent markets as well, particularly in the growing insurance market alongside our industry and we develop services and support and so on to help insurance company clients as well as the world is evolving around all of us. And we'll probably say there's a bit more about that in future years. So that's the strategy on a page. How we been getting on in terms of each of those 4 pillars. Well, in terms of regulatory and market change, there's an awful lot going on. We've got new rules on pension scheme funding that they're currently being consulted on, and they will work their way through the system over the next 12 months and into the next calendar year. We're still very busy on GMP, which has been a good source of revenue for us in this half. But overall, as a firm, we're still at the end of the year, we're unlikely to be even 1/4 of the way through the GMP workload that we've got to get through on our own client base. So there's a long way to run with that. But of course, ultimately, the market volatility is what became a really big story. Pension Scheme sitting in the front page of all the business press with rising gilt yields and the many gilts prices following the many budget and so on and so forth. Well, that's driven a huge amount of demand for advice from our investment consulting business, but our wider advisory business as well. And while we saw a tiny bit of that in H1, of course, the many budget was in late September, actually, that's driven a huge amount of demand for our services at the beginning of H2 and is likely to underpin a lot of demand going forward as clients look to fundamentally redefine, redesign their long-term strategies, and they've got an awful lot of work to do in the short term as well to adjust to a little bit of a new world here at higher long-term interest rates and higher inflation. So it's a huge amount to do under this part of our strategy. In terms of expanding services, there's been lots of areas of investment here over the years. particularly a couple of areas to highlight, risk transfer is an area that we've invested. We've had 2 senior hires join the firm and arrive and come online during the half we're reporting on. Senior hires both out of big 3 firms who have really helped to drive a huge amount of growth already in the short time that they've been here, and that's been very, very exciting to see. Another area to highlight is, of course, covenant advisory. So this is advise-to-pension scheme trustees about the strength of the sponsoring employer that looks after their pension scheme. And of course, that's been boosted significantly by the acquisition of Penfida, more than that in just a second. Our focus looking forward is about development of services that clients need against this backdrop of quite significant regulatory and market change. And investing in the tech to do it as well. And as I mentioned, a particular area of tech investment is in administration at the moment, where we're looking to both improve efficiency within our own business, but also improve the member experience, particularly what they experience when they access information online. So lots going on with regard to expanding our services. In terms of market share, we were really pleased that just after the end of H1, we passed a big milestone in the administration business where new clients that we've won over the years have managed to get us past the milestone of 1 million members now being administered in the business, which is fantastic. We continue more generally to see a pretty healthy pipeline. It peaked in the summer, and it's slightly lower than that, but still very, very healthy versus where it's been certainly during the pandemic. It's possible that the market volatility does suck up a little bit of the bandwidth that trustee clients have with regard to reviewing their advisers when there's just only so many hours in the day to be talking to advisers and getting through everything that's going on. But no, we remain in a very, very healthy place with all of that. And we're continuing to drive our market force initiative to get more and more opportunities to continue to drive that pipeline. And as a reminder, that's very much a multiyear play about introducing XPS and building relationships year-on-year that create these bigger opportunities in time. Everybody is working very hard on these relationships, of course, being the firm of the year and so on is really helpful in driving those conversations. And it's exciting to think where that might all lead us. In terms of M&A, so in bolt-ons here, we look for deals that are typically small enough that we can do them reasonably easily, integrate them well, typically finance them directly out of our own cash flow. We did the Michael J. Field deal late last year, and that's bedding in really well. As a brief reminder, that has given us extra scale in our SIPP business. And our SIPP business is generally going from strength to strength and is joining a couple of panels of 1 or 2 of the bigger industry players that will give them a real opportunity for strong organic growth going forward. And the Michael J. Field deal has given us the extra scale in that market, which is undoubtedly proven, really helpful. The Penfida deal we did during this half, and that is a great deal. So as I mentioned, that's to do with advice to pension scheme trustees about the strength of best sponsoring employer. It is a core essential service that all pension scheme trustees need. Penfida, we're a real market leader in this space. We already had a little team doing this work, but we were struggling actually to meet the demand across our client base and what the Penfida acquisition has done is give us enhanced scale to provide the service to more of our existing clients. And of course, it goes in the other direction, too. Penfida's business has a tremendous client list to some of the very biggest pension schemes in the U.K. And we're very excited about investing in Penfida to continue to serve them. But of course, it will potentially give us opportunities to broaden and deepen those relationships. And it's exactly where XPS wants to play in the market, and it's very early days, but we've already seen some opportunities to bring those wider services to Penfida clients. So that's very exciting. So in summary, we talked at the end of our last full year about just how far we've come in the 5 years since listing. And that we were gathering a huge amount of momentum and that the investments that we paid were in many ways really starting to pay off. And as I said at the beginning, I think this half has just continued to deliver on that. And actually, our momentum is only gone great and only growing. And this is probably the best half again that we've had since we listed, which is a fantastic thing. Our organic growth is very strong. It's driven primarily by very high demand for value-added services that we can provide to our clients, whether in risk transfer, wider areas of advisory, consulting and onboarding some of those big wins, particularly the administration that we've had in recent times. It is partly driven by inflation, but only partly, there is a lag in the benefit that we get from inflation that will continue through H2, but primarily, it's underlying very strong business performance. There's good revenue drop-through. So now I'll talked about operational gearing within the business. We continue to focus on our efficiency and we continue to focus on the profitability of accounts that we have when we are so busy, and we're very pleased to see the profitable growth that we are delivering here really coming through. I've just talked about Penfida and all the opportunities that potentially brings us, and we're very excited about that, too. And I think there's just an underpin to the demand of our services that at the moment, looks like it'll lasts years into the future with everything that's just happened with regard to market changes, with regard to regulatory change coming through just underpins very strong demand across our client base for many years into the future. And as such, we're very excited about the opportunities we've got to continue to deliver on the momentum that we've got at the moment.