Aberdeen Group Plc

Good morning and thank you for joining Standard Life Aberdeen PLC's half-year results analyst and investor call. Today's call is being recorded. I will now hand over to Keith Skeogh, Chief Executive Officer. Please go ahead, Keith.

Good morning and thank you for joining us and welcome to Standard Life Aberdeen's interim results. It gives me great pleasure to be joined by Stephanie Bruce, our new CFO, for her first results presentation. as well as Campbell Fleming, our head of global distribution. In a few minutes, Stephanie will take us through the financial highlights, but before she does, I want to take a moment to update you on what has been a busy first half of the year. Busy, but in a good way, as we continue to drive the strategic transformation that will deliver the world-class investment company we aspire to. In the face of tough industry conditions, With flows difficult to come by and fees under pressure, we maintained our focus on delivering what we can control and building on the resilience we delivered in 2018. This focus continues to concentrate on the three drivers that are most fundamental to our business and to delivering shareholder return. Attracting assets, intensifying our financial discipline, and unlocking the value from our balance sheet. The first half did see a visible improvement in investment performance and continued resilience in gross flows, which are increasingly well diversified. We improved our access to savers and customers through new relationships with Virgin Money and Skipton, and we accelerated the build-out of our advisor business. We also retained $35 billion of AUM in our settlement with the Lloyd Bank Lloyds Bank Group. There was a modest improvement in net outflows, and with help from markets, AUMA increased by 5%. All of that, of course, was made possible by the most important of our assets, our people. I'd also like to note that the leadership changes we have made are working well. Multi-asset investments and wholesale distribution are both seeing a positive impact. Rose Thompson, our new head of HR, is spearheading program to improve engagement and embed a values-based culture. And of course, we are benefiting from Stephanie's fresh insights. In these challenging conditions, Stephanie has helped us intensify our focus on financial discipline. We are making progress in improving our operational efficiency through continuing to execute well on our transformation program. We have actions in place that will deliver two-thirds of our efficiency target. The heavy lifting and investment to upgrade our infrastructure is now well underway, and despite the associated costs, continued careful management of our balance sheet has allowed us to maintain a strong regulatory capital surplus. We are therefore pleased to announce a maintained dividend of 7.3p per share. While there are increasing signs of progress, there is, of course, still a lot to do to deliver the strategic transformation and take advantage of the opportunities it opens up. I'll return shortly to talk about those opportunities after Stephanie takes us through the financial highlights. Stephanie.

Thank you, Keith, and good morning. In summary, the key financial headlines are as follows. Assets under management and administration have increased since year-end by 5% to $577 billion. Growth flows have been sustained, and we are seeing an improved position on redemption, which have reduced to a level below that which was experienced throughout 2018. Net flows remain in outflow at $15.9 billion. Adjusted profit of $280 million is 10% below June 2018, impacted adversely by decreased revenues and benefiting from further improvement on costs. Statutory profit after tax has increased from 111 million to 636 million, primarily as a result from the sale of 6% of the stake in HDFC life. Diluted EPS has therefore increased by 20.8 pence since H1 2018 to 27 pence. Adjusted diluted EPS has increased to 8.9 pence. The interim dividend is unchanged at 7.3 pence. Let me now highlight a few number of areas in more detail. So assets under management and administration has increased to 577 billion, benefiting by 7.5% from a recovery in markets, offset by net outflows of 2.9%. On the right-hand side of the page, you can see the assets under management and administration relating to our platforms of WRAP, Elevate, and Parmenion, which have increased by 11%, benefiting from uplift in markets and further net inflows of new business. Turning to growth flows. Overall, we have delivered $36.5 billion of new business, which is in line with the absolute levels of the prior half year. but also represents a continuation of the improving trend of growth flows as a percentage of opening assets under management and administration. Now, leaving aside strategic insurance partners for a moment, the rest of the business has generated and won $27 billion of new business in this six-month period. This is a higher level than for the last two half-year periods, 2% better than H1 2018 and 33% better than H2 2018. It was particularly pleasing to see improved momentum across a broad range of propositions. And turning just to the specific asset classes. We are still seeing pressure on equities at almost 9% below inflow levels of the second half of last year. The market remains tough with the continued focus on lowering risk profiles in the current global environment impacting demand. A high spot for equities is the interest in the China A Shares Fund. which has delivered strong performance and is generating strong interest as the best-selling fund in that sector. In multi-asset, net inflows were recorded in areas such as myfolio, with the pressure in this asset class still being evidenced in absolute return. In fixed income, we saw an increase of flows on the last two prior periods, supported by strong interest in our offerings in developed markets credit and emerging markets, We continue to see strong interest in private equity and European real estate, and our new index of hedge funds is unique in the market and has been the most successful USITS fund launch in the alternative space in the last 12 months, attracting 500 million since its launch in February this year. In quantitative, 3.5 billion of flows were received from Virgin Money, which represented the first stage of developing our partnership. I'm pleased to confirm the completion of the joint venture on the 31st of July, which enables the collaboration of our investment content and Virgin Money's customer base, now, of course, extended through the Clydesdale Bank acquisition. On platform, growth flows have reduced in the prior H1 2018 period, but have remained robust compared to the second half of 2018, as we see the impact of ongoing consumer uncertainty in the U.K., Turning to gross flows by our strategic insurance partners. Now, these by nature of the underlying business are much more lumpy and reflect the onboarding of business in those insurance partners. In this period, we have received 9.7 billion of such inflows. This includes incremental flows from Phoenix Group of 1.3 billion. And in addition, Phoenix Group undertook a further bulk annuity transaction, which gave rise to 500 million of assets for management. To touch on global activities, we are pleased that in EMEA, we are reporting net inflows in this period, which is the first time since 2017. An area of disappointment is the fact that of our growth flows, only 3% were in Asia in this period, following further difficult trading for equities. Now moving to redemptions. The two key classes with adverse impacts were equities and secondly, multi-asset, as shown by the purple blocks. The outflows for emerging markets, Asia Pacific, and global equities do remain elevated, while for multi-asset, the outflows are concentrated in absolute return, but these are 44% less than the second half of 2018. Overall, GAAR's assets under management in our institutional and wholesale channels are now 15 billion, which is 3% of assets under management and administration. For our strategic insurance partners, shown in pale blue on the graph, the redemption flows in this period reflect the usual outflows for that book of business, namely the ongoing de-accumulation pattern for those clients taking income as they age and retire. We receive new funds in on a lumpy basis, but once that business is received, it tends to be persistent and moves to a natural pattern of drawdown. In other words, these flows are much less volatile on the way out than they are on the way in. We are pleased that Scottish Widows have chosen to retain 35 billion of assets with us in real estate and quantitative. Both of these areas are key capabilities for our growth agenda. Also through the agreed terms, we now have the pattern for the movement of those Scottish Widows assets that will be transferred out. This will be a key movement in the second half and into Q1 2020. Therefore, overall, it remains disappointing to be in net outflow. However, looking forward, our current pipeline is stronger than in prior periods and encouragingly indicates many more new opportunities with new and existing clients. This reflects two key factors within the good work being undertaken by our distribution team. Firstly, on retention of existing clients, and secondly, the active development of our client and market coverage, creating new opportunities. As Keith highlighted, investment performance has improved. For our pipeline, this will not yet be reflected given the inevitable time lag of investing decisions. So we're also encouraged on the positive implications that should follow this improvement in performance. However, we do continue to be cautious due to the tough markets and subdued consumer sentiments, particularly in the UK, which continues to be impacted by political uncertainty. Moving now to the key components of the adjusted profit of 280 million. Firstly, on revenue, the reduction reflects the impact of those outflows we experienced in second half of 2018 and further outflows in 2019, particularly in multi-asset and equities, which are at higher margins. Turning from volume to margin, the average margin has reduced by 3.5 basis points on comparison with June 2018. Underlying this are several specific factors, both positive and adverse. Margin on equities has improved by 2.1 basis points since the H2 2018 period and broadly has held constant on the June 18 comparator at just under 67 basis points. On fixed income, margins have also increased since year end and are back to broad alignment with those levels at June 2018. And on platforms, the margins we are earning continue to be solid and broadly consistent at 25.6 basis points. On the other hand, the margin on multi-asset has decreased by circa 10 basis points. This reflects growth in the volume of lower margin per million in my folio solutions, but also in part reflects the impact of price agreements from the second half of 18 linked to our retention activities. Encouragingly, if the current improved performance in GARS continues, those fees will increase. Looking forward, another factor to consider is that the transfer of the now agreed tranches of Scottish Widows assets will, once completed, have a positive impact on the average margin. So in summary, while we continue to see an overall pressure on average margin, we are not seeing a significant long-term shift for our business at this time. Moving to our share of associates and joint venture profits. This is an increase in the period due to the impact of Phoenix profits now being recorded in this period. And on operating expenses, we have recorded an improvement with costs reducing to 673 million. And let me move on to financial discipline. Financial discipline is something you will not be surprised to hear that I see as a major objective. Coming into this role, I am looking closely at how we ensure financial discipline is applied through a period of ongoing change internally and as a result of the impact of ongoing external pressures. It is clear for any business and sector going through transformation that there is a balance to be struck. Taking out costs at the right pace to achieve the economic outcome required and taking out the right costs so the space is created for the investment in those areas of growth for the future. We remain on track to deliver the 350 million of savings that have been highlighted previously. As a reminder, this represents 23% of the baseline cost in 2017. We are making good progress. And at the end of June, we have undertaken actions that will deliver £234 million of efficiency. So we are now already two-thirds complete across these transformation activities. As we have seen in previous periods, the profit and loss benefit, as shown on the lower slider on the left-hand side of the slide, lags the actual actions taken, and as has been highlighted before, a number of the key planned benefits in our operational and technology arenas will not be realized until the end of 2019 and into 2020. In the first half of the year, the benefit of efficiencies amounted to 103 million for the period, 206 million annualized, compared to 40 million as of June 2018. Given we are ahead on the completion rate on actions, we are expecting an increased proportion of benefits to be realized in the results in the second half of the year. During this period, we have also seen investments in acquisitions and preparations for the Virgin Money activity, together with investments in our staff through new hires and staff inflation, and through acquisitions such as Orion, providing real estate capability in the Far East. Now, given the ongoing pressure on the top line of the business, we continue to look at all opportunities in terms of both our cost savings and how we are adding cost in our business in order that we increase the pace for realizing these benefits and to ensure a relentless focus on the business as usual disciplines. This includes accelerating the actions planned for subsequent periods, such as accelerating the review of those funds which are subscale and not economic, quicker streamlining of administrative processes and robust supplier cost management, and accelerating our work to aid those areas of the business where the cost-income ratios are too high for this environment. In particular, there are opportunities for us to be more agile and coordinated in how we operate across our ecosystem, and we are seeking to accelerate these opportunities. Our cost profile does not lend itself to being flexed in any one half-year period to respond to the revenue challenges we have experienced. The cost-income ratio, therefore, has increased in the period to 72%, reflecting the changes in revenue. However, I have now intensified our financial discipline on revenues and cost to make sure the business is the right size for these conditions, with the resulting benefits of the cost-income ratio over the medium term. The costs to achieve transformation are being funded from our balance sheet and continue to be in line with budget. The transformation we are undertaking is significant in its scale, and that scale brings upside by incorporating investments in the business for the future. For example, within the restructuring spend of 198 million in the first half of this year, there are costs which represent key investments in our business, and I will take just a moment to give you two such examples. Firstly, Charles River and the front office platform. This accounts for circa 10% of our spend in this period and provides the core data platform on a consolidated basis for all fund managers. The upgraded versions are far superior to the original and will place us in the top quarter for investment platform technology, thereby providing future proofing for some years to come. And secondly, as Keith has highlighted, our people are essential to our business. So a key area of investment for us is the transformation of our HR systems and processes. This had been slow to get moving, but with new focus in H1 2019, the pace has picked up and the outcome will be a consolidated system and process by Q1 2020 that will be a key enabler for connecting our people and providing an enhanced experience for our people. Turning now to our capital position. As Keith has said before, we have a strong capital position and balance sheet, which is an important source of benefit to the business and to shareholders. Key movements in this period comprise the buyback, the debt retender, and the sale of 6.21% stake in HDFC life. Overall, since the start of the year, our regulatory capital surplus has increased by 300 million to 0.9 billion. The regulatory position only includes 200 million of the 5.2 billion market value of our strategic investments, ignoring, therefore, significant value. However, regardless, Our regulatory surplus is strong. We have also continued to optimize the debt arrangements, re-tendering debt that was Solvency II compliant but not appropriate for the CRD4 regime. We will continue to optimize our debt arrangements given ongoing consultation and change within the regime. And finally, turning to the dividend. It was highlighted clearly at the year end that the Board intended to hold the dividend throughout the period of transformation. I can confirm that the interim dividend position is unchanged. However, the estimated cash cost of this dividend has changed, with a reduction of 19% to $173 million. For June 2019, diluted EPS is 27 pence, a considerable uplift on the prior period due primarily to the crystallized gain on sale of 6% of HDFC life. Diluted adjusted EPS has increased to 8.9 pence. This has been helped by our focus on financial discipline, combined with a 19% reduction in our share count over the last 12 months, a product of returning over 1.5 billion to shareholders via the B-share scheme and buybacks. Looking forward, the distributable reserves will be further supported by these profits, the receipt in the second half of 2019 of the compensation payments from LBG, and the continued realization through 19 and 20 of synergies and transformation benefits. With that, Keith will now comment on the positioning of our business for the longer term.