Aberdeen Group Plc (ABDN) Earnings Call Transcript

Good day, and welcome to the Aberdeen Analyst Webcast and Conference Call. At this time, I'll turn the call over to your host today, Mr. Stephen Bird, CEO. Please go ahead, sir.

Thank you, George. Good morning, everybody. Thank you for joining us for our Q4 trading update. And for the first time with you, I'm pleased to say that I'm joined by Jason with Jason Windsor, our CFO. Today, we are doing 2 things: first, announcing a new cost transformation program; and second, we're updating our AUMA and flows for the second half of 2023 and giving you a preliminary outlook on the full year of 2023. Starting with the transformation program. We have said previously that we plan to go further on cost. We have conducted a root and branch review of all our support and operational costs. And today, we're announcing a transformational cost reduction program to save at least GBP 150 million by the end of 2025 as we rightsized the corporate center to fit a fully competitive modern and vesting business. These savings come in addition to the GBP 75 million cost reduction target and investments that we have achieved in 2023. Our Investments business remains core to our group, and we are committed to taking the steps that are necessary to improve its profitability. Around 80% of the total cost savings will benefit our Investments business, representing a substantial unburdening and providing more opportunity for future investments into the areas viewed by the Board and by management as fundamental to improving the performance of the business. The changing dynamics and challenges within traditional asset management are very well known to you, and we have been reshaping our business to address these factors. We have a clear view on what our clients want and on our areas of core strength. And we are continuing to align our resources and capabilities accordingly. Market conditions have remained challenging. Institutional clients have been derisking portfolios moving into cash primarily in response to the geopolitical uncertainty and high inflation. That has had an impact across the entire industry, as you will have seen from our sector peers. The strong rally late last year did not change those fundamental dynamics. I'll now hand over to Jason to give you more detail on both the cost savings and the AUMA and flows disclosure that we are sharing with you today.

Thank you, Stephen, and good morning, everyone. I'm very pleased to have joined Aberdeen and to be here today to present this new transformation program and the trading update. As Stephen just mentioned, the business has made considerable progress in recent years and have successfully refocused on 3 core segments. Today, we will concentrate on the group's largest segment, Investments and the steps we need to take to improve profitability and transform the way we operate to be as simple as possible using best-in-class technology wherever possible. The cost transformation we're announcing today to remove at least GBP 150 million of costs has required us to look more deeply at the group's operating model, particularly in the support areas. Let me give you a little color on how we're going to achieve this new target. We will be delayering management structures and increasing spans of control, so everybody in the company will be closer to the customer. And whilst we do expect a reduction of around 500 roles across the group, the bulk of the savings will be nonstaff costs. So we're looking at further efficiencies from our outsourcing and technology. There will only be modest cuts to the front office and Investments. In fact, the program has been designed to avoid disruption to client service and to ensure we retain absolute focus on delivering investment performance for all of our clients. The work to achieve these savings is already underway. We expect the bulk of the implementation to be in 2024 and the work to be completed by the end of 2025. We expect around GBP 60 million of benefit to be in the P&L this year and that we will achieve the run rate of GBP 150 million by the end of 2025. Turning now to assets and flows. At December 31, 2023, group AUMA was GBP 494.8 billion, which is pretty much in line with the end of the first half position. There are a number of corporate actions which moved AUM up hands down and represent active reallocation by the group. The divestments of the discretionary fund management and U.S. private equity businesses accounted for GBP 10.2 billion of AUM. And this was partially offset by the acquisition of Tekla for closed-end funds from Macquarie added GBP 3 billion of AUM. In aggregate, corporate actions led to a net reduction of GBP 6.9 billion. Looking at flows. In the second half, we saw group net inflows -- net outflows of GBP 12.4 billion, which is about 3% of AUMA. In Investments specifically, AUM was GBP 366.7 billion, down slightly from the 30th of June 2023 following positive market movements, offset by net outflows and corporate actions. Insurance partners' net outflows was GBP 1.3 billion, benefiting from strong bulk purchase annuity wins. Institutional and retail wealth net outflows were GBP 11.2 billion. Excluding liquidity, net outflows of GBP 8.3 billion were driven by equities and fixed income, reflecting the challenging market environment. This is a common picture for the sector, but one of the key differentiators for this group is the diversity of our revenue streams that we achieved through our Adviser business and interactive investor. Adviser ended the year with AUMA 2% ahead at GBP 73.5 billion compared with the 30th of June. However, there were net outflows of GBP 1.5 billion in the second half. Q3 in particular, saw the lowest net flows on record across the Adviser platform market and Q4 was also soft. It was great that ii delivered net inflows of GBP 1.1 billion in the second half, with growth in customer numbers. We are now 407,000 people paying fees to the ii platform. I now want to take a moment to walk you through the 2023 margins, which we've set out in our statement. Starting with Investments. Average AUM in the second half of the year was approximately GBP 363 billion, which is around 2.5% lower than the first half average. Outflows were most significant in higher-margin asset classes. And the second half market recovery was stronger for us in fixed income and in our higher-margin equity business, which is, as you know, Asia and emerging market focused. Putting this together, our revenue margin in Investments for the second half was lower at 22.4 basis points compared to 24.6 basis points in the first half. Group revenue was supported by higher interest income in ii and Adviser, which offset the revenue decline in Investments. And with lower group operating expenses too, we expect 2023 adjusted group operating profit to be broadly in line with the consensus that we have collected from analysts. And for completeness, we expect adjusted capital generation to be ahead of that consensus, which is a result of the higher interest income on cash balances in group treasury. And finally, for me, a note on segment reporting, where we have decided to make the following changes. Finimize and our Group Digital Innovation Group will move from Investments to Corporate/strategic. Corporate/strategic will be renamed Other Business Operations and Corporate Costs, and the Personal business will be renamed interactive investor, which is a terrific brand that we should be using consistently. Thank you, and I'll now hand back to Stephen.

Great. Thank you, Jason. We hope that you appreciate these additional disclosures that we're offering today. We are happy to take questions, but please remember that this is a trading update and the more detailed full disclosure and audited disclosure will wait until February 27. So with that, we're happy to open up for questions.

[Operator Instructions] Our first question today is coming from Mr. Nicholas Herman calling from Citi.

Yes. Just 3 questions for me, but all kind of on the same thing -- all on the same theme rather. So, excuse me, you referenced the savings as free up capacity to reinvest. I guess with expected investments in inflation, how do you see net cost savings evolving over time? That's the first part. Secondly, given that these are mostly back office related savings, do you expect -- could you kind of give us a sense of expected revenue attrition from today's announcement? And then finally sort of rounding that a lot together, are we still looking at an approximate 70% cost income ratio for the group over the medium term? I guess I haven't seen any reference to a target cost income ratio. So I'd be interested to hear how you're thinking about longer-term profitability for the group, please?

[ Certainly ]. Thank you for those questions. Let me hit the program that I'm going to hand over to Jason in a moment, but the program has been designed to protect clients, protect the process of investing and to protect relationship management. So we have not built into or expect asset attrition or revenue attrition. We've actually -- as you know, we've completed most of our fund rationalization that we previously shared with you. This program has been designed to have minimal impact upon the front office. Let me hand over to Jason to put the other 2 elements to that question.

Thanks, Nick. It's good question. Overall, the program we've announced is GBP 150 million of cost removal between now and the end of 2025, we'll hit the run rate. I mean what we say in the statement is a GBP 60 million benefit to P&L in 2024. That's a net figure for the group overall. Beyond 2024, we will expect some growth in expenses in Adviser and Personal. But the GBP 150 million, you can see is, we're saying 80% of it is coming out of the Investments business. So around GBP 120 million and GBP 30 million, primarily, if not exclusively, in the group of strategic costs. And that is an absolute removal there. But there will be some growth in the Adviser and Personal business. I think within our envelope, there will be some opportunity to reinvest, but see that is further down the path, more of '25, '26 issues as we do push or we prioritize cost reduction in the near fall. In terms of -- we have not established a cost income ratio that we're aiming for. This will move us materially towards industry averages across the piece. We think this is a significant program and we'll make the business considerably more profitable.

If I could ask one final, just a follow-up. I mean, Stephen, you've been at Aberdeen for 3.5 years now. I guess the group has always kind of stood out a little bit in terms of being -- having a heavy non comp cost structure. Why are you only doing this now?

Certainly. Thank you for your question. So first and foremost, what we did when I joined the group, we first focused on strengthening the relationship with Phoenix, which is our largest client, which we did, and we renewed them until 2031, and we have an excellent relationship with them. In fact, you can see strong BPA flow coming from them. Secondly, we established the 3-vector model. And the reason we did that was because we wanted to take the listed state capital from India primarily and invest in areas of higher growth. So we acquired interactive investor and then established a leader in U.K. savings and wealth. The group has benefited enormously from that investment. And in fact, as you could see in these reported numbers, interactive investor continues to grow and take share during 2023 in spite of a tough environment. We made commitments to rationalize our fund range from over [ 700 ] to less than [ 400 ]. We have completed the bulk of that. And as you know, the Global Investments business, complex regulated business, we've refocused in areas of strength, which is specialist equities, fixed income and alternatives. What we're now doing, and we promised GBP 75 million of net cost reduction in 2023, which we fully delivered. With this change that we have announced today, which is a step change is about having a lighter corporate center such that the 3 businesses are entirely responsible for product delivery, process, technology, competitive responses. That's the model that we built. So we have -- and you'll note, if you look at the numbers, we have reduced costs sequentially for all 3 years. The challenge has been that the revenues have fallen faster. Now that's -- the external environment was GBP 1 trillion of outflows in 2022 across the market. There was GBP 500 billion of outflows in 2023. Traditional active asset management has had 30 consecutive months of outflows. So the environment has been tougher than we anticipated. But our design of our group and the rigor within which we have established this operating model is -- continues.

We'll now move to Kirk Lam calling from Bank of America.

It's actually Hubert Lam from Bank of America. I've got 3 questions, too. Firstly, on fee margin. The fee margin dropped significantly in the second half by 2 bps half-on-half. I know Jason mentioned a mix shift out of high-margin equities. But is there more than that in terms of repricing driving the margin lower in the second half? That's the first question. The second question is on cash margin and consumer duty. The FCA is asking you to get back to them by the end of January in the Dear CEO letter. I was wondering if you can share with us your thoughts on cash margin NII, how we should think about it going forward given the pressures the FCA is implementing? And lastly, on fund performance. Can you share with us an update on your fund performance at the end of the year? I don't know if each one above -- [ 50% ] of your funds are above benchmark, what is that today? And can you also talk about fund performance in equities and fixed income?

Thank you for those. There's a lot to unpack there. Jason, I'm going to hand it to you to talk about fee margin and fund performance that we're focused on. I'll deal -- let me deal, first of all, with the CEO letters and cash margin in ii. So I've said this before, but we welcomed the consumer duty focus because we believe that transparency in pricing, delivering high value for clients is the right way to serve the U.K. market. That's why we bought interactive investor, who is well known as being a challenger in that market with very high customer satisfaction and supporting growth rates. ii have been incredibly transparent in the interest rate increases that we give. If you Google them right now, you'll see a table pop up, and you'll see the interest rates that we have -- that we pay and our clients enjoy. And we are -- we have responded already to the Dear CEO letters in a very detailed manner. We are confident that the overall value proposition that we provide is high value, is enjoyed by customers as transparent and explicit pricing because it's a subscription-based model. And we believe that we will continue to be able to take share in the U.K. because of the unique value proposition, the way that we deliver in interactive investor. So I think that we're in a strong position there. Let me hand to Jason to address the other 2 pieces of the question.

Okay. So -- on the fee margin, I mean, it is basically what I said that we've seen a shift in the AUM from -- slightly in it from higher-margin equities and alternatives to slightly lower-margin liquidity and fixed income. We -- that's partly market movements, it's partly the gross flows. And there is a small delta between the new business, which is coming on slightly lower margins, some of the old business that's going on, and that's sort of going on within that. So there's -- there are a few moving parts across that piece. But we haven't given fund performance updates. I mean the trends are not dissimilar from what was discussed at the half year. We know fixed income continues to perform well and equities is under Peter Branner and Devan's leadership, very focused on addressing some of the issues that they've had and improving the performance within that. That is at the heart of the overall program is to make sure that we protect and then we enhance investment performance and there's no ambiguity about that. And the way that we've gone about setting up the group for success is to absolutely be focused on investment performance.

Yes, let me just add a little bit of color there. I mean, we have -- as you know, we have a high proportion of assets, about 38% of equities are APAC, 23% are EM, 3% China, 15% U.K., 21% world equities. So we do over-index to Asia. And that has -- because EM has been somewhat out of favor that has been a challenge. But we are seeing very strong interest, RFP flow into these strategies as people prepare for the next stage of development of the world economy. So I think that it's been challenged and you saw the equity outflows that we refer to. But the combination of our focus on improving performance, Peter has been in for almost a year now. Peter and Devan and team have actually a whole series of investment process improvements because we are focused on turning that number around, and we're confident that we're going to get there.

We'll now go to Enrico Bolzoni calling from JPMorgan.

Three questions from me, please. So the first one is just a clarification. If I look at the expected cost reduction, is it fair for to expect a year-over-year decline -- sequential decline on the Investment vector in '24 versus '23 and then in '25 versus '24, while if I look at the other division, considering the reinvestment, we might actually not see a sequential decline year-on-year in costs? This is the first question. My second question is on the Adviser vector also in light of recent reports from some of your peers, the flows were -- as you say, they were a bit weak there. Can you just give us an update in terms of what do you see from a competitive landscape standpoint? Are things evolving in a way that you even expect there's more competition or anything that we should be aware of? And my final question, I guess, will be more generic. In light of these cost savings and reinvestments, shall we expect any change in terms of dividend policy or whether additional buybacks in the future will be more likely or less likely?

Okay. So...

I'll deal with the first one.

Please go ahead, Jason. Yes.

So as I said in my prepared remarks, the GBP 60 million benefit is to group operating expenses in the P&L. The overall program is targeted at investments and the group and strategic costs now as other and corporate going forward. We do expect some growth in the Adviser and interactive investor costs. But that's a much smaller percentage of the overall group. So even with that, we -- given the scale of this program, group operating expenses will be coming down across the piece. Those 2 segments will continue to grow modestly. They're already efficient, but there will be some modest growth in the expenses side.

And let me talk about the Adviser business. So we shared with you before that we did a very substantial tech upgrade last year in the spring. That was the first time in 17 years that we were able to really invest in improving the experience for the independent financial advisers user platform. We had challenges as we did it. It was -- these large complex tech programs are tough. And we had challenges, particularly in the summer. And we have -- internally, we have a focus on the timeliness of all of our service indicators, all our transaction processing indicators. And we've now got them all back to green, which is very important in terms of having the business set up out there competing. We should -- we're telling you today that net asset value is up 2%, benefiting from market movements, but we had net out GBP 1.5 billion in the second half. We haven't seen -- we mentioned that the environment has been tough, cost of living pressures. We have seen clients [indiscernible] faster. That's really what that number is that we shared with you as they coped with the inflation and cost of living pressures. We should expect those to ameliorate over time, but mostly, we should expect us to be back competing hard for business. And we'll talk more about that at the full year, and we'll have no -- address that topic at the full year.

Next question today will be coming from Andrew Crean calling from Autonomous Research.

Could I ask a number of questions? Firstly, to be clear around the base rates, if base rates come down to 3%, do you think your own cash margin will be unaffected? [indiscernible] have given that indication, but that's before the Dear CEO letter. Secondly, could you talk about -- you say that you're going to come in, in line with your consensus. Could you actually give us what the consensus is? And then thirdly, this is the second round of cost cutting, GBP 225 million cost cuts is substantial, particularly in the Investments business. If markets don't recover in time, what is your plan B? Is there a further cut which we've made or is it really disposed as well?

Terrific. Thank you, Andrew, for those. So base rates, what consensus numbers we're using and plan B. Jason, do you want to pick up on those?

Sure. So on -- I'll start with the easiest one. So consensus of the 12 analysts that we've looked at, we've got -- for op profit, we've got a mean of [ 247 ] and a median of [ 239 ]. That's not everybody. And the Bloomberg and FactSet source is slightly higher than that, they picked up a couple of older discontinued ones. So when we say consensus op, just to be clear, that's what I'm looking at is those 2 figures. We'll publish this in due course, but obviously, it might change slightly. And for CapGen, which is fewer people provide this, but we see consensus as [ 303 ]. That's the number we've got from -- I think that's the numbers, just to deal with that one. I mean, base rates, obviously, if it moved that much, we would have to think about how that would affect the cash margin that we are currently moving. I think with more modest reductions, we'd expect a similar level of cash between -- if you -- I think when you say own cash, I think you're thinking about interactive and Adviser, but I'll talk about both. So there would be some adjustment given the percentage of that is a material reduction. I couldn't give you a figure on the hoof in it for that. Obviously, for group, we've got around GBP 1.8 billion, GBP 1.9 billion of cash and liquid resources investors, and then we make a yield that is just below bank base rate. Some of that is slightly longer invested. So there will be a period where we'd perform higher, but eventually, that would catch up to something closer to base rate. I think that's where our forecasts are a little bit low at the moment is on that level of interest income that is coming through the group. In terms of the plan that we set does not rely on markets recovery. Obviously, we would expect flows to recover, but we haven't -- we're not sitting here expecting to make materially higher revenues from a massive correction upwards in equity markets, for example, or any of the other markets. The cost position that we are going to move the company to will be resilient in the face of different market conditions, we will have a higher variable component as we look forward. But clearly, we're confident that we can turn around the flow position, which will have a number of things to happen and to set the business up for more profitable growth into the future.

Next question today will be coming from Bruce Hamilton of Morgan Stanley.

Firstly, just on the revenue margins in the asset management -- or sorry, in the Investments business. Obviously, those came down quite a bit and you've explained why and that all makes good sense. But I assume the -- given 22.4 basis points is the average for the second half and you saw kind of flows throughout from higher margin, I'm assuming the exit could be a fair bit lower than that. If you could give any sense on how sort of 21 bps or 20 bps or whatever, that would be helpful? And then anything around your sort of confidence on flow recovery. I mean, it sounds obviously the -- your performance is improving, but still quite tough. And then secondly -- and sorry, I may have missed this earlier, but in terms of the sort of capital return planning and distribution policy, given the downgrade, the GBP 150 million cost to achieve, which I guess is a cash cost, how are you thinking about the strength of the capital position and any ability to do further buybacks or support the dividend? And where are we with the FCA sort of discussion around perhaps reassessing your capital requirements?

Okay. I'll take the first one, if that's the case. So the revenue margins were under pressure as we said for the reasons I set out. We're not giving more precise figures than that, but you can imagine there was some movement across the 2 quarters. The Tekla did come in, in the -- which is a small but not insignificant benefit to revenue margin that came in sort of mid-October. So there's a little bit of movement in the other direction as well. I won't give you sort of forecast margins for 2024. I think we do want to make it clear where margins did end in terms of the second half overall for '23. I think on capital, we remained a very strongly capitalized business. We've got significant excess capital today, common equity under a total basis. I think what I'm going to do is part this conversation until February 27. We've got further inputs to come, and I've got further work to do, frankly, just to piece all this to go, and I'd rather think about capital allocation, capital return and deal with it comprehensively. And today is about the flows, quarterly reporting and cost reduction. Can you say anything on the flow recovery?

Yes. Let me -- Hi, Bruce. Let me talk a little bit about it. We had some very significant wins last year, which are in the won-not-funded category. You know that we won the Border to Coast deal, which is GBP 2.5 billion, which is won-not-funded. So that was one which we expect to fund in 2024. If you -- when we analyze our total, we do 2 things. We look at our total pipeline, we look at won-not-funded, but we also look at loss not yet redeemed, and our won-not-funded exceeds that quite considerably. I'll not get you all the client needs, we're not allowed to, but [ we won't disclose, one ] has been announced. In Asia, we have a couple of significant wins as well, which I can't disclose like names, but I can tell you they're in APAC. So I think that the deployment there, there's about GBP 3 billion that I'm looking at here that we'll deploy in '24. The -- we also have -- we -- and then we track through the sales pipeline, we look at all the bids and RFPs that we're doing, and we've got about a 14% increase in RFPs within equities. So we're beginning to see some of that rotation of client interest into our equity positions. We struggled a bit last year because the China recovery had impacts across Asia, and there was more of a value tilt to the factors that outperformed and achieved a bit of long-term quality book. So we expect that to benefit as the rotation continues.

Our next question today is coming from Gregory Simpson calling from BNP Paribas Exane.