Quilter : 2023 Half Year Results Transcript

Quilter 2023 Half Year Results

8th August 2023

Steven Levin: Good morning, everyone, and thank you for joining us today.

We'll cover two things this morning. First, our business and financial performance during the first half of the year. And second, I'll take you through the initiatives we're driving to strengthen our business around the strategic priorities I set out in March.

Executing our plans will take time, but six months in and despite a tough external environment, I'd say we're in good shape having delivered sharply improved profits and higher operating margins, and we're focused on improving our business to deliver faster growth and higher returns.

Let me start by summarising the key financial highlights. Adjusted profit of £76 million was up 25% on last year with an operating margin of 24%, up four percentage points. That reflects strong cost performance as well as the benefit of higher interest rates. Mark will get into the detail later. We've accelerated our simplification plans. We expect to achieve the target a year early, so the £33 million on this slide will become £45 million by the end of this year. Adjusted diluted earnings per share was up 34% at 4.3 pence supported by the share consolidation last year. And our confidence in our outlook and the strength of our balance sheet supports a higher interim dividend of 1.5 pence, an increase of 25%. All in all, very satisfactory given the challenging market environment.

So next let me summarise the picture on flows where we saw mixed trends across the business.

Let me start by echoing what you've heard elsewhere. Current conditions are squeezing discretionary investments. Clients are keeping more money in cash, paying down debt and withdrawing funds to maintain lifestyles. That's contributed to a slight reduction in persistency levels. Bottom line was net annualised inflows of 1% for our core business and was flat after non-core outflows. That's not where we want to be and I'll get on to what we're doing about that in a moment.

But first let me draw out three numbers that I think are the story of the half.

First, the performance of the Quilter Channel. In high net worth we delivered net flows of 17% of opening balances, and second, in Affluent we achieved 11% and that was after a more conservative restatement that Mark will talk to.

I'm really pleased with the performance of our advice channel. It demonstrates the strength of our integrated model and validates the tough decisions we made to reposition our advisor base.

Third in Affluent £2.6 billion of gross flows from IFAs. That declined year on year, but we've actually increased our IFA platform market share in both Q1 and then again in Q2. That's a strong result. Improving advisor traction in a tough market sets us up well for when the market improves. But we know outflows have broadly offset the new business we generated over this period and that reflected the lower level of new business and slightly lower persistency. We will do better on net flows. We'll do that by driving even stronger levels of new business and we've made some changes to our leadership team to ensure that happens.

Both our distribution channels in the Affluent business have been brought together under common leadership. This team is well advanced in a review of our IFA sales processes to

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accelerate performance here. As I said previously, my three areas of focus are building distribution, enhancing proposition and driving efficiency. We've made significant progress over the last six months.

Let's start with distribution. First top left, advisor numbers. I'm pleased to report a stabilisation in our restricted advisor numbers. It's a base we're looking to build from, but given the competitive environment, that may be gradual. As you can see, we've sharply improved advisor productivity in this half up to £2.7 million of new flows per advisor on an annualised basis. That's a great result in a difficult market.

Next, top right alignment, i.e., capturing more of the assets our advisors manage. You can see the meaningful progress we've made. We transferred £326 million of advisor backed books onto our platform by the end of June with momentum building over the period. We expect to at least double that by the end of the year with plenty more to go for in 2024 and beyond. And to be clear that where those assets are in a Quilter solution on another platform, as they generally are, those transfers do not boost the Quilter channel net inflows I mentioned earlier because they're already in our AuMA numbers. We don't double count.

Third, I'm pleased that we've maintained our leading position on advised platform flows. We were the only advised platform to write more than £2 billion of new business in the first quarter and we broadly maintained that level in the second quarter despite a smaller overall market. More importantly, while the decline in our year on year gross flows was broadly in line with the market in Q1, we significantly outperformed our leading peers and the market in the second quarter with a 5% year on year increase in gross new flows that compares with a 9% decline in the markets with our leading peers underperforming that benchmark.

Finally, bottom right gives you a longer-term perspective. Since our new platform went live in 2021, we have rebuilt new business market share back to low double digit percentage levels and I still believe we have room to improve further. There are two things driving that. We're improving our share of IFA flows and we're getting a higher proportion of flows from the Quilter channel onto our platform. That's what we set out to achieve. This rebuild of market share is really important because we'll drive flows as market activity recovers.

Next proposition. As I said back in March, we need to be more agile, more responsive and more market focused. We've taken several steps here. Having changed the investment team for Cirilium Active, we've already seen better investment performance. And we continued to see good performance and exceptionally strong support for our Cirilium blend and wealth select offerings. We repriced the Cirilium propositions at the end of March to make them more attractive to clients and advisors. Feedback has been positive.

Moving to platform. Our platform is market leading with outstanding functionality. To be more competitive we reduced pricing at the end of Q2 for new customers and we're in the process of doing the same for our existing customers. Our revised proposition means a meaningful basis point reduction to customers with this partially offset by us retaining a margin on client cash for the first time. We've structured this as a sharing arrangement as the size of deposits we can make with banks attracts better interest rates than our clients could achieve individually. And we offer one of the highest rates across the markets. Again, these changes have been well received by advisors.

We've also introduced automated tiered advisor charging, which is something advisors want, and it's something that very few platforms support. This makes it easier for advisors to set advice fees on a sliding scale linked to the value of their customers' assets. It helps advisors align their business to the new consumer duty principles. There's been a lot of discussion around consumer duty. As you know, we built Quilter to be a modern wealth manager with clients at the heart of what we do, so no lock ins or exit penalties, our pricing structures are unbundled. Customers choose what they want from us and only pay for what they take. The

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introduction of consumer duty has given us the opportunity to reinforce the advantages of our approach to advisors and their clients, and I'm delighted with the positive feedback we're getting.

Lastly, with interest rates, we want to allow customers with high interest rates, we want to allow customers and advisors to manage cash as another asset class on our platform. So, we'll be adding a cash savings hub later this year.

Overall, we're confident these changes will leave us in a materially better position to capture more flows when market conditions improve.

Finally, efficiency. As you can see, since 2021 we've reduced our first half costs by 5% in absolute terms and that's particularly impressive given inflation levels. That's contributed to a six percentage point improvement in our operating margin since 2021. We've also increased profits by 36% over the same period. That's a 16% compound growth rate.

I've seen some commentary that our focus on cost is limiting our ability to invest. I want to be categoric on this point. That is simply not the case. While we've been reducing costs, we've also been investing in the business and we'll continue to do so.

In addition to these initiatives, we've also got major work streams underway to improve each of our business segments over the longer-term. These are evolving our high net worth business to service customers in a more seamless fashion, revamping our IFA sales processes, continuing the transformation of our advice business and all of this will be underpinned by the next stage of our cost reengineering simplification Phase 2. Let's take each in turn.

I'll start with our plans for high net worth. This has been a strong and stable business for us. Building our own advice business to add another distribution channel has delivered significant incremental inflows. But for historical reasons, our high net worth advice and investment management businesses sit in different legal entities. That complicates integrated client servicing. Once we obtain the necessary regulatory approval, we intend to bring both teams together in a single legal and regulated structure. That will allow us to manage client relationships more seamlessly, enhance productivity and drive efficiency. That's a win/win both for clients who want a one stop solution and for us.

We're happy with the size and shape of our high net worth business and believe we've got significant organic growth as we add investment managers and financial advisors. But as you know, there's been a lot of consolidation in the DFM sector over the last year and we think the fallout from some of that activity could create opportunities for us to accelerate growth.

Now the Affluent segment where we have strategic initiatives in place for both distribution channels. In both cases, one of our objectives is to increase flows and to have more of those flows managed by Quilter Investors. We've got around £70 billion of assets on our platform covering all advice models across the market. We are unique in the breadth of distribution and proposition we support in advice. We've got clear plans to grow assets on our platform and increase the use of our solutions.

I'll start on the left with IFAs, where we want to make this channel work harder. We administer around £57 billion of assets for IFA firms, and on this chart I've broken the IFA base down into two categories. Platform partners who either don't use our solutions or have a limited amount in Quilter Investments. There are some firms in this category who run their own investment models, so they are unlikely to use our solutions, but we can still do a lot more good business with them given the scalability of our platform.

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Next, there's our strategic partners the vast majority of whom have at least £5 million in Quilter Solutions. Here it's about deepening our relationships and increasing our share of their business.

As to specific plans, we want to become the primary platform for more IFAs across both groups now that we've got a platform that covers everything they need. There are clear efficiency benefits for advisors putting the majority of their flow onto their primary platform. We are achieving good gross flow performance, but we want to accelerate momentum. Our platform repricing will help us here.

We will support IFAs to move their back books to us where it makes sense for the customer. And we'll take on board what we've learned from the Quilter channel back book transfers to ensure this is a smooth process. We know our leading large strategic partner firms have up to 50% of their assets in our Solutions and again having a preferred centralised investment partner helps them to be more efficient and deliver consistent outcomes for their clients. We see consumer duty as an opportunity to encourage more advisors to outsource their investment proposition to us.

Our Wealth Select MPS was designed to meet advisor needs and its strong track record with over £11 billion under management speaks for itself. So, we see a great opportunity here.

And finally, we're making sure that our business development efforts are more targeted where the greatest opportunities lie. These are some of the things that the review I mentioned earlier is focusing on.

Let's turn to the Quilter channel on the right where our advisors have around £12 billion of assets on our platform of which roughly £9 billion is managed in our investment solutions. To grow our advice business, we need to continue to do two things. Increase advisor numbers and ensure greater alignment. As I mentioned earlier, we've stabilised advisor numbers and we are looking to grow from the current base. We will do this by increasing graduates from our advisor school, selective hiring and potential acquisitions as well. Greater alignment also ensures we capture more of the flow onto our platform and into our solutions. Part of this will be capturing the £6 billion back book that our advisors manage on other platforms, highlighted on the right of the chart.

A second opportunity to increase alignment comes from the heightened market consolidation activity we are seeing. Advisors are now much more aware of the value that can be created through proposition alignment. So, we see potential for a new franchise style model that complements our existing propositions. And so, we're piloting a new proposition that we're calling Quilter Partners. We're looking to combine the entrepreneurial drive and focus of owner operated businesses with full alignment with our investment and platform propositions as well as brand. We've already signed up several founder firms and are working with them to evolve a compelling proposal. It's early days and you'll hear more from us in due course.

So, I hope you can see we've got clear plans to drive growth through each channel.

Now, as I said back in March, we also need to transform our operating model. We're investing to move away from multiple advice systems and technology solutions onto a consolidated set of modern advice technology. We've also got opportunities to reengineer our processes and deploy automation to reduce costs, improve controls and ultimately enhance client experience.

Now let me turn to our group efficiency plans which complement what we're doing at segment level. Since we listed, we've run a number of successful cost programmes. As we made strategic business divestments and returned sale proceeds to shareholders and as we've restructured our business, we've created further opportunities to unlock additional cost savings. Optimisation was the good housekeeping we didn't have the bandwidth to get done

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prior to listing, such as moving to a single general ledger and driving efficiencies in HR procurement and an initial phase of technology rationalisation. And you'll recall we targeted £50 million of savings and actually delivered some £65 million by the end of 2022.

Following the completion of our platform transformation which increased automation together with the sale of Quilter Life Assurance and Quilter International, this allowed us to deliver our second programme of savings called Simplification. That's targeted £45 million of savings by extricating ourselves from costly legacy IT infrastructure. And now the second stage of simplification where we are targeting a further £50 million of additional cost savings. This will capture rationalisation benefits from fully implementing our revised segment structure as well as investing in the systems used by our advisors in the Quilter channel which will enhance productivity and reduce support costs. This is all about making Quilter a leaner, more efficient organisation. We aim to deliver these cost savings by the end of 2025 on a run rate basis.

So, stepping back, as you can see, we're doing a lot to invest in our business and drive towards our longer-term targets.

Before I conclude, let me summarise how we see current market trends and how we are responding to them. While market uncertainty weighs on flows, we've continued to increase our strong platform market share position, maintained a healthy level of flows in the Quilter channel and continued to grow our share of IFA new business. The Quilter platform is the number one advised market platform for new flows.

Despite consolidation across the market, we've stabilised our advisor numbers even though it remains a challenging environment. And we've offset PNL headwinds from high inflation and a lack of market momentum by maintaining strong cost discipline. This has reduced costs by 5% in absolute terms over the last two years.

Right, before I hand back to Mark, let me conclude by repeating the targets that we're driving towards.

First, operating margin. We're highly confident of reaching our 25% operating margin by 2025. The acceleration of our original simplification savings will support this and may well allow us to deliver this target earlier, assuming supportive markets. I still believe an operating margin of more than 30% is the right goal for our business and I want the business to deliver that as soon as possible.

Next, in terms of flows, back in March, we were guiding towards only modest improvement in net flows across the industry this year as investor confidence recovers. Echoing the sentiment you've heard from others in the market, the environment feels like it's more challenging than we thought back then. So, while we still expect to deliver a 4% to 5% flow rates when markets normalise, that may now take slightly longer to achieve than we previously anticipated. Importantly, we are building momentum and we're confident of our expected profit trajectory this year, again assuming broadly stable markets.

Right, let me hand over to Mark to run through the financials.

Mark Satchel: Thank you, Steven, and good morning, everyone.

Before I start, I want to call out three changes to the way we report today.

First, given its increasing prominence, we've called out the £27 million of investment income we generated on shareholder funds that are held in cash as a separate line item in the PNL. That comes through mainly in the corporate centre and the Affluent segment given the amount of regulatory capital that supports the pension business.

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