Quilter plc (QLT) Earnings Call Transcript

Good morning, and welcome to our results presentation for the first half of 2025. This morning, I will start with our business highlights, our strong flow momentum and the scale of the opportunity ahead. Then I'll spend a bit of time on something that I don't always think is appreciated, the scalability and market leadership of our Affluent business. Finally, I'll say a few words on our strategic priorities and my areas of focus to further improve our business. As usual, Mark will then take us through the financials. Then I will summarize as to why recent policy developments are a positive Quilter and we'll end with Q&A. We've had a good start to 2025. Profits have increased from a very strong 2024 base and flows are much higher. Let me start with the highlights. Core net flows were much higher, up to GBP 4.5 billion. That's only GBP 700 million less than we achieved in the whole of 2024, and flows into both segments were sharply better year-on-year. Our operating margin, which has improved steadily is now at 30%, in line with our medium-term goal. Adjusted profit increased 3% to GBP 100 million. That reflects higher revenues despite a lower contribution from interest on capital and good cost management alongside business investment. Earnings per share increased 4% to 5.4p, and the Board has declared an interim dividend of 2p, an increase of 18%. Let's drill down a little bit more into the flows. This slide shows gross new business outflows and net inflow performance for the last three half years. The key points are new business flows have continued to increase in 2025. Outflows have returned to more normal levels as both cost of living pressures and consolidated activity has eased. Note that our outflows include regular income drawdowns as well as surrenders unlike how some of our peers disclose. The combination of these has led to the excellent improvement in net flows. And given the momentum of our business, the current levels of flows, which annualized to around GBP 9 billion feels sustainable. And as you can see from this slide, we've outperformed our peers again in the first half. We remain the market leader for net inflows in both our Affluent and High Net Worth segments. So we're doing well. And as you know, we're operating in attractive markets, which benefit from structural growth trends. And everything we've seen recently has reinforced our conviction with three key drivers. First, the complexity of U.K. tax rules, including recent changes to bring pensions into the inheritance tax net continues to drive demand for advice from baby boomers who wish to pass on their assets in a tax-efficient way. Secondly, the U.K. faces a significant retirement funding challenge. As state support diminishes and with future retirees having little or no defined benefit pensions, individuals are going to have to take more personal responsibility for their financial security and retirements. Fundamentally, most people need to invest significantly more. Finally, policymakers and regulators now recognize the scale of the problem. The focus on targeted support, encouraging long-term investments and other recent initiatives is a constructive first step. We now need to see effective implementation to give people the confidence to make long-term decisions. Our firm belief is that individuals need to invest in diversified portfolios to build capital over time. That's what Quilter is built to deliver. These growth dynamics provide a positive backdrop for our business. Let's look at the long-term growth trends. As you can see on the left, there's currently about GBP 700 billion on advice platforms, and there's around GBP 1 trillion managed by high net worth firms, including private banks. Independent observers expect U.K. advice platform assets to increase by around 70% by the end of 2029 and for high net worth assets to grow about 50% over the same period. Clearly, that's a very attractive growth opportunity. Our Affluent segment is a highly scalable market leader in what is clearly a high-growth market. I'll get into those dynamics shortly. Our High Net Worth business is more relationship-focused so less naturally scalable. However, we see the opportunity to grow by increasing productivity and operating margin, adding larger accounts and gradually increasing advisers and investment managers. Let me say a few words on the performance of each segment. Affluent had a very strong first half. Net inflows more than doubled, up 132%. That annualizes at 9% of opening balances. Revenue was up 6% and cost discipline offset business investment, giving strong adjusted profit growth of 10%. High Net Worth had its strongest period for net flows in quite a while. Net inflows were up significantly year-on-year, equivalent to 3% of opening balances. Revenues were stable, reflecting mix shift and continued investment in the business led to broadly flat first half adjusted profits. Now I'd like to turn to our Affluent segment and say a few words on the scalability and market leadership we enjoy here. First, when it comes to managing assets, platforms with their flexibility and ease of use are the natural custodian for household wealth. And as the leading advice platform by both flows and assets with not far off GBP 100 billion in assets, we enjoy a strong competitive position here. Scale matters. I'm particularly pleased about the strong momentum that our platform has enjoyed over the last year. The chart here shows the progression in gross and net flows by half year over the last 18 months. The Quilter channel is in green and the IFA channel is in gray. Increased use of our platform by IFAs means our market share of IFA net flows has been on a sharp upward trajectory since late 2023, reaching around 30% in Q4 2024 and Q1 '25. On the right, I've included a quote which gives you a market view from Lang Cat on our platform proposition. It summarizes how strongly our platform performed in 2024, and it's clearly doing even better in 2025. Now we often get asked how independent advisers rate our platform, and this chart sets out some of the data from the recent investment trends report. In each case, Quilter is shown in green. Far left, you can see the breadth of our independent adviser relationships by primary, secondary and other. Across the market, we enjoy the largest breadth overall, and we lead by a number of primary and secondary relationships. In the middle, you can see how that breadth has evolved over time with substantial improvement over the last 2 years, that's the result of hard work from our distribution team. Finally, on the right, you can see the evolution of our Net Promoter Scores over the last 5 years. This again demonstrates how we've won hearts and minds since the new platform was launched. Basically, our platform enables advisers to deliver for their clients so they like using it and are putting an increasing amount of business with us. So our platform has got great recognition. Our MPS, WealthSelect is also recognized as a market leader too. As you know, regulation has encouraged an increasing number of independent advisers to focus on advice and to outsource investment solutions. WealthSelect meets these needs very well. Its strong performance and competitive price make it attractive to both our own and independent advisers. That's why we've grown AuMA strongly in the last year. As you can see, we've been vying for the #1 position with our nearest peer. These figures are at the end of the first quarter. And at the end of June, our AUM had increased to GBP 21 billion. Again, I've also included some independent views which provide a market perception. So our platform together with WealthSelect provide a very strong combined proposition that few of our peers can match. We believe it's not just the platform per se, but the linkage between our platform and solutions and the scalability of the Quilter model that gives our Affluent segment a distinct competitive advantage. Let me explain. In the first half, we attracted gross flows of around GBP 7.6 billion onto our platform, a year-on-year increase of over 36%. That additional flow can be managed through our existing sales and support teams without a notable increase in costs. Where assets are both on our platform and in our advice-based solutions, we believe that delivers a better result for both our customers and for us too. And in the first half of 2025, GBP 2.5 billion or around 1/3 of the gross platform inflows went into our solutions. Again, the cost base of our solutions business is largely fixed. So additional flow can be managed without a notable uplift in expenses. The crucial thing to understand is that both the platform and Quilter solutions are highly scalable. That's why we focus on maximizing the assets in each by using multiple distribution channels. Now let me turn to our three strategic priorities: building distribution, enhancing propositions and being future fit. We've made good progress across the board on all. First, distribution. It's been a good 6 months year. We've continued to take market share, and encouragingly, we've increased both the number of advisers and adviser firms in the Quilter channel. So far this year, 63 advisers have graduated from our Academy and are starting to build their books. Our high-performing WealthSelect, MPS is now on 5 third-party platforms. We announced the acquisition of GillenMarkets in Ireland, which adds meaningfully to our High Net Worth footprint there. Next, propositions. We are developing a smooth managed fund proposition, which we'll update on in due course. And as you expect, we've been working on a new proposition for targeted support. I'll say more on that later. And on becoming future fit, we've continued to make progress on our simplification and transformation programs as well as investing in other growth initiatives. So you'll sense the momentum in these areas is really moving Quilter forward year-on-year. Finally, before I hand over to Mark, let me say a few words on my near-term priorities. We've nearly completed our second simplification program. We've delivered GBP 43 million of run rate savings with the rest due by year-end. And as I mentioned earlier, in the first half, we completed the merger of our advice and investment management businesses within High Net Worth. Looking forward, there are four key areas that I'm focused on. First, building the advice business of tomorrow. Our 1,500 or so advisers wrote about GBP 2.5 billion of new business in the first 6 months of 2025, a broadly similar figure to the prior year. Our advice transformation program aims to materially increase adviser productivity to drive clients and asset growth to ensure we continue to increase our ability to write new business. Next, we'll continue to invest in new channels to broaden our distribution including developing a targeted support proposition to support clients earlier in their wealth journey. Turning to High Net Worth. Andy McGlone has done a great job of ensuring that we're well placed strategically by repositioning our business to capture more higher-value clients. And by moving our advisers into our investment business, we're able to serve clients better and at lower cost. I've tasked Andy's successor, John Goddard, who joins in September to build on that. I want us to offer fully integrated advice and investment solutions to a wider range of high net worth clients. Finally, we will invest more in our brand. As you may have seen, Quilter is the title partner for Rugby's Quilter Nation Series later this year. That's the start, and there's more to follow. Right. With that, let me hand over to Mark.

Thank you, Steven, and good morning, everyone. Let me start by echoing Steven's comment that our business is in great shape. We delivered a strong financial performance in the first 6 months of the year. Let me give you the three financial points that tell the story of our half year results. We delivered solid growth in net management fees of 5% with overall revenue growth at 2% as a result of lower interest income on shareholder capital. Costs were a little higher year-on-year, as I guided to you back in March, reflecting business investments and higher FSCS levies. But our cost discipline and simplification initiatives gave us a percentage point increase in our operating margin, which is now at 30%, and our balance sheet remains in good shape. Let's get into the details with my usual analysis of the P&L dynamics. Starting top left, net flows of GBP 4.5 billion in the core business were substantially ahead of 2024. Average AuMA was up 11% on last year. Now against the year-end position of GBP 119.4 billion, what we've actually seen is a contribution from markets after currency headwinds and positive flows. While the sharp but temporary market decline in April had an impact on our revenues, you can't see that in average AuMA, which is based on month-end averages. Top right, you can see revenues grew 2% to GBP 337 million in total despite lower interest rates reducing investment revenue. Costs, bottom left, were up 2% to GBP 237 million, reflecting higher FSCS levies and business investment. As a result, adjusted profit increased by 3% to GBP 100 million. That gave an operating margin of 30%, and we reported adjusted diluted earnings per share of 5.4p, an increase of 4%. Now getting into the moving parts, let's start with revenue margins, which are in line with guidance. On this slide, each chart shows the average revenue margin for the past four half year periods. In High Net Worth, on the left, the margin was down 2 basis points on the year-end, largely reflecting mix and lower client cash balances. In Affluent, the decline in the managed margin largely reflected mix shift with Cirilium Active outflows offset by growth in MPS and other solutions. In line with my previous guidance, I expect the managed margin to fluctuate around the low to mid-30s basis points level with mix being the driver of movements. And finally, our platform or administered margin, was 23 basis points. The step down on the second half 2024 run rate appears exaggerated here as a result of rounding, along with the revenue impact from the April market decline. Let's now turn to revenues by segment. Our High Net Worth revenues were stable. Higher average assets were broadly offset by the lower margin with total revenue increasing by 1%. In the Affluent segment, revenues grew 6%, clearly, a good performance. The main contributors were higher net management fees on both administered and managed assets with a lower contribution from investment revenue and advice fees. Let's now turn to costs. As I flagged at the full year, in 2025, we've stepped up business investment. However, I'm pleased to report that we kept cost growth to just 2%, while absorbing inflationary pressures and quarter of higher national insurance rates. We reduced base costs marginally as a percentage of revenues, which drove the improvement in the operating margin, while the cost of revenue generating staff and variable compensation remained broadly stable as a percentage of revenues. The waterfall on the right summarizes the main cost changes year-on-year. Increases came from inflation, higher national insurance and regulatory levies as well as the investments we've made. Reductions principally came from our simplification program, which is on track to complete by the end of the year. In the bar far right, you can see how the overall cost base breaks down by segment. High Net Worth and Affluent segment costs increased by 2% and 4%, respectively. These reflected inflation and higher regulatory costs coupled with investments in Ireland for High Net Worth and investments in NuWealth, the Quilter Academy and other initiatives in Affluent. These increases were partially offset by simplification benefits. Looking forward, I previously guided for cost to be around GBP 500 million for the year. And I believe that will be towards the upper end of my expectations for the group's total expenses this year. So putting the segment revenues and group costs together, this slide shows the segmental contribution to group profitability. High Net Worth delivered profit of GBP 24 million, broadly in line with the prior year. And Affluent profit showed a healthy increase of 10% to GBP 79 million. The operating margin declined marginally in High Net Worth, but improved by 1 percentage point in Affluent. And as you heard from Steven, this part of our business is very scalable, so there's scope for further improvement here. Now let me turn to the balance sheet. As you'd expect, we've maintained a strong solvency ratio and cash position. The solvency ratio reduced marginally over the period, largely due to the impact of bolt-on acquisitions. In terms of cash, you'll note the level of capital contributions into subsidiaries where we've injected cash to fund M&A deals we've announced, and we've capitalized our regulated advice business to cover the potential cost of remediation in respect of ongoing advice. On the right, you can see we've got around GBP 350 million of cash available after payment of the interim dividend. That leaves us with a good buffer to cover contingencies, liquidity management and business investment while retaining balance sheet optionality. So our balance sheet is in good shape. And as I've already mentioned, we will undertake a full review of our capital requirements and allocation priorities, and I expect to update on that with the full year results. The Board has declared an interim dividend of 2p per share. That has been set at a level of 1/3 of the 2024 total dividend. While that is a year-on-year increase of 18%, that largely reflects the low base level for the interim dividend in 2024. So I wouldn't take that increase as an indication of likely full year dividend growth. Before I get to guidance, let me take a step back and highlight the change we've delivered over the last 5 years since we sold Quilter International. Average AuMA was essentially flat for the first half of that time line as flows were weaker than expected and market levels struggled with low growth and macro factors, particularly in 2022. Despite that, we have increased both our adjusted profit and operating margin significantly. What has driven that is modest revenue growth combined with cost discipline. Costs have decreased over the period in nominal terms despite the inflationary environment. That cost discipline has allowed us to manage the revenue margin change experienced across the industry as advisers look to reduce total costs clients pay for advice and investment management services. Looking forward, we expect the pace of margin deterioration to ease, and while I still expect some revenue margin attrition in line with guidance, we will continue to benefit from our integrated model. That, coupled with a better environment for flows and stock market performance should deliver positive outcomes. And with our simplification programs now drawing to an end, we have significantly realigned the cost profile of our business, making our operational infrastructure simpler and more efficient, as we said we would do. While we expect more normal cost growth into next year from inflation and business development, the scalability of the business will deliver improvements in operating margin, so supporting our goal of steady compounding of earnings over time. Let me finish with our usual guidance slide. Our expectation is for the operating environment to remain constructive and guidance across all the other key line items remain largely unchanged. I spoke earlier about cost expectations for the remainder of the year. That includes brand spend and investment in the business, which we anticipate will increase in the second half. I currently expect these increases in costs to largely offset the higher revenue contributions from our net flow momentum in markets. As a result, we currently anticipate the second half adjusted profit will be broadly equivalent to the first half outturn. And with that, let me hand back to Steven.

Thanks, Mark. All right. Before I conclude, let me pick up on just how well suited we are to the evolving policy environment that I discussed earlier. First, the ever increasing complexity in U.K. tax law and especially recent changes to inheritance tax for pensions has increased the number of people who need personalized advice. Second, the evolution towards encouraging a better investment mindset is clearly welcomed. Individuals do need to be encouraged to invest more for retirement and confidence in the stability of the fiscal environment is key to getting them to commit for the longer term. And both these strongly underpin demand for the services that we provide. And finally, there's now potentially a new growth opportunity emerging from the advice guidance boundary review, targeted support. This is a way of bridging the advice gap and helping people who need but don't currently have access to financial advice or guidance. This is an interesting long-term opportunity for us as we've clearly got the capability and the scale to provide an integrated proposition to meet client needs here. So to conclude, we are really pleased with our start to 2025 with strong flow momentum and revenues and profit continuing to move in the right direction. The three messages I'd like to leave you with are. We operate in a large, fragmented and growing market, helping us deliver sustainable growth. Our propositions and the breadth of our distribution are both market-leading and they're delivering strong inflows. And our platform and solutions businesses allow us to generate scale efficiencies and operating margin progression. That's why we're confident in our prospects and why we expect to deliver steady compounding of earnings over the medium term. Right, let's open up for questions.

Okay, we'll go to questions, and I think we're going to the phones first. Andrew Sinclair from Bank of America Merrill Lynch.

I hope you can hear me.

Yes.

So first, it's great to see momentum building in the adviser headcount and the Academy generating recruits. There have been a few comments about moving the advice business to completely restricted operations. Just can you give us a little bit of an idea of how many independent advisers you have remaining today? And maybe just a little bit of color in terms of how retention rates have been evolving for advisers? So that's the first question. Second, it's well done, Mark, again, bit on costs again. Just really if you can give us a little bit more color in terms of how much there is still to be done on costs. You're now at a 30% operating margin and with, hopefully, revenues accelerating, just where do we think we can go from here? And third was just on the flow mix within the platform. You mentioned that there's been the noise around pensions. What are you seeing in terms of mix of flows between different products, I guess, for both gross inflows and retention. Just any color you could give us there would be great.

Thanks, Andy. So I'll take the first and the third question. I'll let Mark pick up the second question. So on adviser headcount, yes, as you see, we have increased our adviser headcount both through recruitment and through people coming through our Academy, which we're very pleased about. In terms of the number of independent advisers, they're not included, first of all, in our adviser numbers that we give out. The adviser numbers we give out only the restricted financial planners. We have a very small number of IFAs, and we haven't actually recruited new IFAs for at least the last 5 years. So this is a very small number of IFAs. We -- I don't think it's material sort of either way on that point, Andy. But they're not included in the numbers at all at the moment. And any of those that move to restricted will be additions. And then in terms of the third question about the flow mix, what we've seen is we have seen small increase in new cash investments, and that generally is not the pension side. So we've been doing very well in insured bonds. And because in the first half, it's always ISA season. So there's been a bit more mix of ISA in the first half than there sort of was in the second half last year, as I think you would expect in terms of flows. But our pensions business remains sort of incredibly strong. But what we have started to notice is a small increase or shift in mix, I suppose, in terms of new cash versus transfers. And that's something that we think is going to continue, and we've sort of talked about before, about the very significant amount of cash sitting in the system that needs to be invested, and we're seeing the starts of that now.

Andy, just on your...

Just on that, Steven -- sorry, Mark, just can you give us an idea of roughly what the mix is today of cash versus new transfers for pensions?

The mix of cash is about -- cash investments are about 45%, and transfers about 55%, and that's up a bit from 60-40 to 55-45 that sort of ratios.

Okay. Andy, just on your costs. I mean, I think, look, we've maintained very good cost discipline. And I think we've sort of proven that as a track record now for a good number of years. If you remember, back when we were selling businesses and we had stranded costs and everything, we had an optimization program that took out GBP 60-odd million. We then had simplification Phase 1, that was GBP 50 million were Simplification Phase 2, which is another GBP 50 million, so in total when we through all of this, it's about GBP 150 million of costs that have taken out with different baseline measures and stuff like that, but in broad terms. We're GBP 43 million on a run rate basis through the last GBP 50 million, we've got another GBP 7 million to go, which I'm pretty confident we'll achieve by the end of this year. And at the full year results, and actually, I think in the slide deck in the appendices, we've kind of put together there the sort of the way that we look at the business model going forward. And on the expense side, I'm expecting sort of going into sort of '26, '27, et cetera, that the sort of cost profile of the business more or less will be an increase of inflation plus a few percentage points to reflect ongoing investment within the business. But cost discipline will continue to be something that's maintained. And obviously, some of that will also be influenced by what's going on in the revenue side and the macro picture and how market performance, et cetera, is developing too.

Okay. We'll go to the next question, please. [Operator Instructions]. The next question comes from Ben Bathurst at RBC.

Hopefully, you can hear me okay. I've got questions in two areas, if I may. Starting on High Net Worth. Steven you referenced moving from being principally investment led in that area to offering a more integrated wealth solution. Do you think you'll need more adviser capacity in order to deliver that? And on that subject, could you just give us some more color on the starting point now in terms of the percentage of flows into high net worth assets currently that are fully integrated, i.e., relate to advice and investment? And then the second area is just on the capital requirements review for Mark. How broad are the terms of reference for that review? There has been a long-term debate as to whether being part of the Solvency II regime is really suitable for the group given so much of your business is uncovered or not insurance business. Are you planning to tackle that question as part of this review? Or is that one still for the longer term?

Thanks, Ben. So on the first question on high net worth, yes, we do see the benefits of integrated solutions, basically advice and financial planning together, and that is a focus. So we are increasing the number of advisers. And our plan, as I've said, is to increase the number of advisers and the number of investment managers we have over time. But we do actually have capacity at this point in terms of the number of advisers that we currently have. The details on the exact splits, we don't -- we haven't actually disclosed that, so I'm not going to give any numbers now. But remember also a lot of the business that we get is via IFAs. So the client is getting an integrated advice and investment management solution. What we're doing is we're adding our own advisers as well. So we will have the options of doing business in multiple different ways in our high net worth business, and that is a key part of our future growth opportunity there. Mark, do you want to take the next question?

Yes, Ben, look, the capital review in sort of -- if I just take a step back, will be pretty comprehensive in terms of what you're doing. You had a specific question just around Solvency II there. I have had discussions with both regulators about the regulatory regime in the past, in the recent -- fairly recent past, actually. The issue that I think the industry has more generally is that in order for us to come out of the Solvency II regime on an ongoing basis. So in other words, that I've got the certainty that we will actually be out of it because waivers can be provided, but they're normally temporary in nature, and then you've got to reapply, which frankly doesn't help me at all in sort of longer-term capital planning because you kind of want it to be permanent and a certainty around it, is that it would actually require a rewrite of the solvency regulations in the U.K. in order for us to come out of it. On every one of the metrics or virtually every one of the metrics that are measured in order to determine whether a company should be Solvency II regulated or not. We are firmly within the metric that suggests so that says that we are forced into Solvency II regulation. So there's actually sort of not a -- you're actually looking at the regulator applying dispensation. As I say, dispensation can't be provided irrevocably, it doesn't really provide sort of sufficient certainty to sort of go ahead with anything on a sort of long-term planning. So -- that's where we are. I'm sure I'll probably have those discussions again. But bluntly, I'm not -- I can't speak for the regulator, but not necessarily expecting a different outcome to come about as a consequence of that.

The next question comes from Enrico Bolzoni at JPMorgan.