Aberdeen Group Plc

Just to kick off, sorry, I should introduce the top table, or whatever it's called, in a presentation. Campbell Fleming, Global Head of Distribution, Barry O'Dwyer, Chief Executive of Standard Life, Bill Rattree, CFO, and Keith, who, as I said, is lucky to be here. and myself, Martin Gilbert, the co-chief executive of Standard Life Aberdeen. I'm sure those of you who have been following all the recent asset management releases need no reminding that the industry is in a pretty tough place at the moment, and we're no different from the industry. The pressure on flows and fees and traditional active asset management, growth of passives, ETFs, all pose a threat to our industry. And, of course, the huge impact of technology. and disruption in our industry is also having its effect. And while we do face our own challenges and outflows from strategies that have historically been hugely strong drivers of growth for us, the merger to create Standard Life Aberdeen has created a business which together is stronger and better placed for the future. The sale of the insurance operations has transformed our balance sheet and crystallized significant surplus capital, allowing us to focus on our strengths. where we see the best opportunities to achieve long-term growth and our world-class ambitions. We have a diverse range of investment capabilities, a thousand investment professionals. We're also working hard, which Keith will come back to, to improve performance in our strong capabilities of GEM, emerging markets, GARS, global equities. And as I say, Keith will discuss that in more detail later. Importantly, we also have scale. including in distribution, where our combined team is one of the largest in the industry, with global reach, local presence in 46 locations. Importantly, it is building momentum, as I'll come back to later, with growing inflows returning to pre-merger levels. And also, we shouldn't forget our leading advisor platforms and our... promising strategic partnership with Phoenix provide further diversification and access to the growing retail market. This scale, and believe me, scale is important in our industry. We feel we're ahead of the game in terms of scale by doing this merger a year ago. It's also underpinned by one of the strongest balance sheets in the industry. And as we've shown with the capital return, including the acceleration of buyback this morning, we are very focused on maximizing value and return for shareholders. So how have we done this in this tough market environment? Turning to the highlights, we can see that the profit has fallen to $478 million. However, we have increased adjusted profit from continuing operations to $311 million compared to the second half of last year. And I think that is the true comparison rather than the first half, which is pre-merger. Bill will be in touch with more detail on earnings per share figures, as clearly these are not as representative on the go-forward business, which will benefit from the earnings from Phoenix, the capital return, and the ongoing delivery of efficiencies from the merger. This gives us confidence in our progressive dividend policy, so the interim dividend has been increased to 7.3p. It's got XXX on my sheet here, helpfully, but luckily I managed to find the figure. Assets under management and... Turning to the next slide, you know, net flows remain a challenge for us. And we can see that these total assets, I should say, let's start with total assets, remain a robust $610 billion in what has been a very tough market. As we mentioned in May, we continue to see outflows, although these have been reduced compared to the second half of last year as have sales. Encouragingly, when we look across all our asset classes, about 80% of the flows come from 80% of sales, gross sales, come from our non blockbuster for want of a better word products What else on flows? Continued growth and wrap elevate and advice with net inflows of $2.6 billion. I think, encouragingly, if we look at flows and we exclude what we would term our growth, our blockbuster products, the rest of the business is broadly in neutral flows, which is very, very encouraging. Moving on to diverse gross inflows. While the net flow picture, as I say, continues to be challenging, our integrated distribution teams led by Campbell are upping the rate of activity to improve retention and to capture new opportunities across our very diverse offering. The net outflows amounted to about 2.6% of opening assets. As I've said, encouragingly, the gross inflows, on the other hand, are very diverse, with over 80% coming from other areas than those traditional strengths that I'd mentioned earlier. And momentum is returning to pre-merger levels. We're beginning to see some good traction across a very wide range of capabilities in credit, myfolio, Parmenion, private markets, and real estate. It's also really pleasing to see that the strategic relationship with Phoenix is already working well. We've secured a new fixed income mandate following Phoenix's first bulk annuity deal earlier this year, and we're working to secure 7 billion of Phoenix mandates not presently managed by ASI. Turning now to the platforms, which, as you know, we made a deliberate decision to retain as part of the sale of the business to Phoenix. So the diversity of flows is – our diversity of flows are also helped by these very strong – retail platforms and with the combined assets under management of over 60 billion as you can see we're one of the largest if not the largest platform operator in the UK and as I said earlier this was helped by the strong inflows of about 3 billion coming in in the first half of 2018 These platforms are profitable, and we've reduced the cost-income ratio to 82%, as you can see here, from 88%. And as Barry will answer in any questions, we do think there is further scope to improve efficiency and drive down that cost-income ratio towards our target of 60%. With that, I will hand over to Bill, who will be followed by Keith. Bill will go through the results in detail. And, Bill, I've even turned the page for you. There you go.

Thank you, Martin. Good morning, everyone. I'll touch in briefly on the overview of the figures for the first half. Martin's already touched on them in the passing. The overall adjusted profit before tax is down slightly on the second half last year, but at the continuing operations level, it's slightly ahead at $311 million compared to $305 million. Rupert? Try and get this right. If we then turn over looking at taking it down to post-tax and EPS level, fairly normal rate of tax charge, around about 19%, as you might expect. That's reduced from second half last year. Those of you who looked at it closely, there was a catch-up tax charge in relation to the Indian investments that we took had a bit of a mismatch in timing last year. So I think no surprises in this period and no surprises in the tax rate going forward. Looking down to the EPS level, you can see that overall EPS for the period 12.8 pence compared to 13.6 pence second half last year. But on continuing operations slightly up in last year, again, part of that benefit is the discrepancy in tax rates that I mentioned second half last year. The interesting thing here is, as we've said at the bottom of the slide, if you look at that 8.2 pence of adjusted EPS for the half-year period, and we then look at that pro forma for the impact post-completion of the sale to Phoenix. And recognizing that sale and recognizing pro forma the intended capital return of 1.75 billion, that would be an adjusted pro forma EPS figure of 12 pence under the new regime. In terms of the revenue margins, a little bit reduction this half year compared to last year. A lot of it down to the mix of the asset classes. There is a little bit of slippage in equities, for example, where surprisingly the second half of last year was up in the first half, I think largely due to the impact of strong markets in that period. But at 67 basis points, it's still very much within our expected range that we've seen historically. So I think the theme, as we've talked about in previous discussions, is that we may still see some small reduction in the overall blended fee rate in the short term. But longer term, medium term, longer term, the gross new business we're selling is coming in at pretty decent rates of sort of 45, 50 basis points. So medium and longer term, we don't see material pressure to that sort of level. On adjusted operating expenses, we've seen a small improvement in the cost-income ratio to just over 69% this half year, compared to 70.6% for financial year 2017. Clearly, we're all aware that cost-income ratio is driven both by costs and by revenues. In the context of a tough period, a challenging period for revenues, we've achieved quite a lot on the cost side to begin to reduce that margin. Clearly, as the cost efficiencies begin to work through more fully, we'd expect that number to continue to trend downwards towards our medium-term target of 60%. On the cost efficiencies, as Martin, I think, has already touched on, we now have a headline figure of £350 million in total. You'll recall that we announced an expected £250 million from the merger of synergies. and a further £100 million of efficiencies as we move to a more efficient operating model post the sale to Phoenix. Of that £350 million, we've already implemented £135 million worth. That's not to say it's all in place in the first half. Action has been taken and these will phase in as we go forward. The benefit of those efficiencies to date, we've seen a £40 million beneficial impact in the first half results, so clearly £80 million on an annual basis, and we'll begin to see the further improvement come through in the second half based on that 135. And then finally, the remaining £270 million out of the 350 that we are still in course of implementing, Put very simply, if we work that through on the same pro forma share count basis post the capital return, that's effectively equal to nine pence of earnings per share on that basis. I mean, clearly before any reinvestment in the business or inflation and so on. And then finally, on the interim dividend, we've continued the policy of a progressive dividend at the interim, an increase of just over 4% to 7.3 pence per share. And again, looking at the sort of annualised EPS on the pro forma basis, that would effectively give us... dividend cover of 1.1 times from continuing operations based on the last 12 months dividend payments. And with that I'll pass over to Keith.

Thanks Bill and good morning. As Martin's already pointed out, the current operating environment for asset managers is tough. The four global trends that we've long talked about, the democratization of financial trust, the lack of trust, digitalization and compressed returns, continue to buffet the industry and are intensifying. The political and economic background is also unsettling markets. And this isn't just having an impact on the level of volatility of markets, it's also affecting the structure of return within markets. The spread between growth and value on almost any measure you care to choose is at levels not seen since the TMT bubble in the late 1990s. While equity markets value growth very highly, what is valued is highly concentrated. In the U.S., for instance, 60% of the market's performance is driven by the top 20 stocks. This is a very odd market, one I've only seen a couple of times in a career spanning nearly 40 years, and it does make life difficult for active asset managers, particularly those who are very disciplined in their approach to identifying long-term value markets. As the largest player in the UK and one of the largest active managers in the world, Standard Life Aberdeen is inevitably affected by these headwinds, and that's clearly reflected in our interim results today. What I want to do in the remainder of this short presentation is concentrate on three specific areas, investment performance, investment innovation, and capital strengths. The actions we're taking in these areas will not only help us weather the tempestuous environment facing the industry, but also leave us well-placed to deal with the long-term disruption shaping the savings and investment landscape. Our rigorous and long-term approach to delivering investment returns for clients has been challenged by this strange environment that currently pervades financial markets. This has been a particular case, as you're aware, for our absolute return funds and some of our equity funds, especially those orientated towards value and emerging markets. While history strongly suggests that these return environments don't last forever, I think it's also very important that we learn the lessons from periods of underperformance. So at the same time as we brought our 1,000 high-quality investment professionals together, we also instituted a comprehensive review of investment performance. We focused on idea generation, idea capture, and idea implementation performance. to improve, to generate improved investment outcomes. And we've put in place a number of important management actions outlined on the slide and put in the form of performance enhancement plans. We are investing in enhanced risk analytics. We are investing in new investment talent. And alongside these improvements to our processes, we are confident that this will deliver improved performance across the house. beginning to be visible in some areas. So as the last couple of months, as I'm sure you're aware, we've had a minor turn in the value growth, and we can see that being reflected in improved performance in some of those equity asset classes. However, I have to tell you it's going to take a bit of time for the full benefit of these improvements to be felt. The GEM three-year track record may remain challenged until 2020, unless, of course, there's a very dramatic reversal in that growth versus value chart. GAAS could return to a positive three-year absolute return actually in 2019 if it delivers an absolute return for the rest of the year. How that affects client appetite will, to some extent, depend on the state of the markets. Gas tends to do well when equity markets are under pressure. While it will take some time for investment performance to have a positive direct impact on those redemptions, the same difficult markets we've been talking about are having an immediate influence on client demands. Given that we have critical mass across alternatives, private markets, multi-asset and solution, our active approach leaves us well positioned for the growing demand for new active solutions, which according to the Boston Consulting Group will account for two-thirds or 23 trillion of the increase in industry AUM over the next four years. So a very significant opportunity indeed. Our conversations with clients, which Campbell can talk about at the strategic level, have emphasized the importance of investment outcomes, the new active to their risk budget. And, of course, a focus on investment outcomes has been a key feature of our innovation agenda as we've looked at outcomes in accumulation, preservation, and the income space. Where we have good performance track records and can deliver investment innovation to meet those demands, this creates an opportunity to have a positive impact on gross inflows. It's an area where we have a strong record, enhanced by bringing together our investment capabilities across the merger. Over 10% of our AUM is sourced from funds launched over the last decade. eight years, but that rises to 20% if we exclude the more traditional insurance assets. We have launched 20 new funds or strategies in the first half of 2018, and they're spread throughout the risk-return spectrum. We've got plans to launch another 20 by early 2019. These fund launches are designed to improve as well as diversify our product suite. I firmly believe this is territory where Aberdeen Standard Investments is a leader in the industry. While the markets and operating environment have created some serious challenges for both us and the rest of the industry, I think Martin and I both believe those challenges have reinforced the strategic logic behind the merger. The need for scale, not only to weather the storm, but also to invest in the business and reshape it for the future is even clearer today than it was 18 months ago. In the 12 months since completion, a lot has been done to reshape the business. Integration, as Martin pointed out, is progressing well. We're simplifying our business and we're putting in place a new global operating model that embraces modern working practices globally. lays the foundations for a common culture, and helps deliver the 350 million of cost efficiencies that Bill talked about. And that will ensure we are right-sized for the future. As we reshape our business, we also continue to simplify our balance sheet and make sure that it's appropriate for not just our business model, but also our shareholders. We have a long and proud track record of reshaping our business and our balance sheet and returning capital to shareholders. And we continue. We intend to continue in that tradition. The first phase of this is to return, as Bill said, up to one and three quarters of a billion of capital as we shift from Solvency 2 to CRD 4 and optimize our regulatory balance sheet. And, of course, we've announced the acceleration of the buyback program recently. today with an initial tranche of $175 million starting in the next couple of days. Even after this significant return of capital, we will have one of the strongest balance sheets in the industry, buttressed by the value of our investments in India and in China, as well as the strategic partnership with Phoenix. We are deeply aware these investments are held ultimately to create value for shareholders. And as we continue to reshape our business, we will remain focused on ensuring the assets on the balance sheet are an important source of benefit to shareholders. In summary, over the last 12 months, we've made good progress in integrating and reshaping our business. We've taken actions to improve investment performance and continue to invest in innovation through increasing our new active offerings and growing our advisor platforms. This, together with the enhanced partnership with Phoenix, makes us confident that this will be reflected in flows over time. There's still work to be done, but the foundations are in place for a modern, dynamic, world-class investment company that's well-placed to deal with the disruptive forces reshaping the industry. And all of that will enable us to deliver $350 million of cost inefficiencies and return $1.75 billion of capital to shareholders. As we do all of that, we will continue with our long track record of ensuring the assets on our balance sheet are an important source of benefit for our shareholders. Our focus on shareholder value is even sharper than ever. Thank you. With that, myself, Martin, Bill, Barry, Campbell, and some of the executive team in the audience will be delighted to answer your questions. Thank you.