Aberdeen Group Plc

Good morning and welcome to Standard Life Aberdeen's 2019 full year's result webcast. Even though it's a webcast, I have to show you the usual disclaimer. And I'm also joined today by Stephanie Bruce, our Chief Financial Officer, Rod Paris, our Chief Investment Officer, Campbell Fleming, our Global Head of Distribution, and Noel Butwell, the CEO of Standard Life. 2019 was another year of intense change for our industry, reiterated in early 2020 by a return to high levels of market uncertainty. 2019 for Standard Life Aberdeen was a year when we saw momentum starting to build in the business, particularly in the second half of the year. It was a strong year for investment performance, with 74% of assets under management ahead of benchmark and an improving three- and five-year track record. We saw encouraging momentum in gross and net flows in the second half of the year and our first quarter of positive flows since 2017 in the fourth quarter. This was mainly driven by our institutional and wholesale clients, where 84% of funds were ahead of benchmark. We continue to see net flows across our platforms and wealth businesses, helping to diversify our revenue streams. So there's much to be encouraged by as the benefits of the heavy lifting on transformation in 2017 and 2018 started to become visible. we are also rolling out our common purpose across the business to create a shared culture. The fact that we're once again winning awards, as well as new business, is further evidence of progress. Beyond transformation, we realized 1.7 billion from the partial sales of our stake in our Indian JVs. So despite the drop in adjusted profit in 2019, we strengthened our balance sheet. And importantly, given what's going on in the markets, improved our financial resilience. This allowed us to maintain the dividend, continue to return additional capital to shareholders through buybacks and lift dividends. adjusted earnings per share to 19.3. At a time when uncertainty for the markets and industry are once again rising, the progress made on transforming the business and improving our financial strength gives us the capacity to invest in the business and the undoubted opportunities that lie in front of us. Stephanie will now walk us through the detailed financial results, after which I will return to talk about the opportunities we see in asset management, platforms and wealth. And then we'll move to Q&A. Stephanie. Thank you Keith and good morning.

So our performance in 2019 has demonstrated momentum and delivered an increase in our financial strength. The adjusted profit before tax for 2019 is £584 million, a reduction of 10% on the full year. Through the second half of the year, we improved trends in the key indicators of fee-based revenue and costs, contributing to an increase of 9% in adjusted profit before tax in the second half compared to the first half of 2019. Overall, our IFRS profit before tax from continuing operations has increased by 1 billion since 2018 to 243 million. The improvement reflects management actions we have taken to strengthen our financial position, including the realisation of gains from our holdings in our Indian stakes, offset by the accounting charge for impairment to our acquired intangibles. This improvement in profit has also generated a strong increase in our capital surplus. The resulting adjusted diluted EPS for continuing business in 2019 is 19.3 pence, an uplift of 8% benefiting from the actions taken on reducing the share count. Now our business model is focused on delivering our services through four channels, institutional, wholesale, strategic insurance partners and platforms and wealth. Each channel represents different opportunities for us, given our capabilities and current market strengths, and this therefore determines the focus of our actions in realising these opportunities. Overall fee-based revenue decreased by 13% in a year, with different impacts by channel. In institutional and wholesale, revenue decreased by 19%, reflecting the impact of net outflows in the last three years, together with inflows in 2019 into asset classes with lower margins, as clients sought to change their risk profiles. In strategic insurance partners, the underlying business is mature books, which are naturally in runoff. There is an additional reduction in revenue in 2019 of £10 million relating to Lloyds Banking Group, following the first tranche of withdrawals of £41 billion in the second half of the year. Excluding the Lloyds Banking Group movements, the year-on-year outflows are lower at £3 billion, due to the benefit of net inflows of £1 billion from the Phoenix Group. In platforms and wealth during 2019, we have seen growth in revenue of 4%, which reflects continued net inflows in this channel. Turning to the fee revenue yield, overall for the year, we have seen a decrease in the average fee revenue yield, which reflects principally the volume and allocation of assets within classes. We are now seeing the benefit from our focus on investment performance as creating value for our clients and customers in turn supports the yields we earn on our investment services. Aside from normal competitive pressures, we are not seeing systemic pricing pressure on any particular asset area. Rather, we're seeing recognition of the value of investment performance in a volatile and low-yield market. For institutional and wholesale channels, the average fee revenue yield decreased due principally to changing mix. This particularly reflects the move in multi-asset, where over 50% of new flows are into myfolio, which is lower margin, while the redemptions in multi-asset are 60% from GARS, which are higher margin. In the platforms and wealth channel, the yield on platforms has been broadly sustained at 25 basis points. This takes account of the price adjustment for Elevate in April, which has created good positive momentum in new volumes. A similar action has now been driven in our WRAP platform, together with launching our drawdown price lock, which has been well received. The decrease on the fee revenue yield is due principally to the inclusion from quarter one of the Virgin Money assets, which are at a lower margin and has reduced the average by seven basis points. Now, just turning to the underlying activity on flows in our key channels. Firstly, in institutional and wholesale. These channels saw net outflows, but we have seen an improvement of 46% since 2018, with a 77% improvement occurring in the second half of the year compared to the comparative 2018 period. We are now seeing the benefit for both new business and retention of existing business from our active focus on two key aspects. Firstly, our improved investment performance, which helps generate and retain business. And secondly, our increased focus on client service and client relationships, which are being extended through a focus programme. We have been successful in adding new clients in these channels this year, attracted by the capabilities and services we provide. Our recent win of a 5.5 billion strategic advisory mandate in the US was one such example of the benefits of connecting client needs with our capabilities and improving investment performance. In summary, all asset classes have improved their net flows position since the prior year, except for real estate, which reflects the specific challenges in that asset class in 2019. On equities and multi-assets, we have generated improvements of around 20% on the net outflows position compared to prior year on both classes. Specifically on GARS, redemptions are 11 billion in 2019 compared to 18 billion in 2018. Turning to platforms and wealth channel. In this channel, the factors are different. This is a large and growing market. We have strong capability, strong credentials and a sound record to date on the net inflows. We see opportunity for market share in a growing market. So our focus here is on building our book of business through connecting all elements of our existing strengths. So we leverage from the sum of the parts of our capabilities, building both the customer numbers and the activity levels with those customers. Keith will highlight shortly more details on the actions we are taking to harness value from this opportunity. Our activity in this channel is concentrated in the UK, and this has been a difficult market in 2019 due to political uncertainty. Despite the backdrop, the platforms and wealth channel continues to be a positive contributor of net flows, and pleasingly, this has increased year on year by 52%. A stronger trend being demonstrated in the second half of the year follows new leadership in our platforms and action taken on pricing practices, creating success and attracting new business. For example, every month in the second half, we have recorded higher new business volumes on our Elevate platform than the prior period, and an uptake of almost three times the number of advisor firms signing up demonstrates the stronger momentum we are now creating. The wealth activity was also boosted further in 2019 by the addition of the new customers from our JV with Mark Burgin Money. In total, clients and customers increased by around 5% in the platforms and wealth channel during 2019. We also have valuable interests in our associates and these contribute to our results and our capital generation. The share of profits from associates and joint ventures is 32% higher than prior year due to the inclusion of a full year in 2019 for Phoenix, an uplift of 24% from HDFC AMC and a reduction of 14% from HDFC Life following the stake sales in 2019. Dividends from these holdings have contributed 93 million to capital generation. Having realised significant value from the sale of stakes in HDFC Life and HDFC AMC, the value of these holdings continues to be over 3 billion. On HDFC Life, there is a lock-in on our holding until March 2021, and it remains our intention to monetise this holding over time. Phoenix Group's holdings represents the key relationship in our strategic insurance partnerships channel. Once the Lloyds Banking Group tranches are fully withdrawn, this channel will primarily comprise those assets we manage for Phoenix Group and Reassure. And given the Phoenix Group's proposed transaction, we are well placed to continue to serve both if the transaction proceeds. Turning now to expenditure. We have made good progress on costs overall, with a number of factors influencing the total levels in 2019. Our focus on the programme of synergies and wider efficiencies has delivered savings of 13% of the opening cost base of 2019. The additional costs in the period reflect increases on employee compensation and other inflation on third-party services. We've also chosen to increase through acquisition our investment in distribution channels and new capabilities during the year. Now, while operating costs have been reduced overall in the year by 4%, our cost-income ratio has increased in the period, predominantly due to the revenue reduction I highlighted earlier. In addition, the cost-income ratio for our platforms and wealth activity is suboptimal, and we now have clear plans to address this position, which I will come back to shortly. During a complex transformation, the cost-income ratio was always going to be impacted, but with the revenue decreases experienced, this has been more adverse, with the cost-income ratio at 71%, including our JVs and associates, and 82% excluding our JVs and associates. This is certainly not our goal, and it's not where we will end up once we realise the benefits of our transformation activity. As we complete our transformation in a period of volatile market conditions with revenue challenges, we do expect our cost-income ratio to remain high. And thereafter, the benefits of our actions enable the achievement of our goal for the cost-income ratios to be back at levels aligned to industry averages. Changing our cost base and the structural mix of costs is a key goal of our transformation. So turning to this slide, which shows the progression of synergy targets and their realisation since the transactions. Now, during 2019, we've been progressing with our programme of transformation and we have now realised 352 million of overall savings since the asset management transaction. In respect to synergies, we have now realised within our profit and loss result, the benefit of 67% of the total synergy target for 2021, which includes 77% on integration targets. Within our transformation activities, we're aiming to do two things. Invest in practices that are modern and fit for the future by harnessing the benefit of new tools and technology that we did not have in the business. And secondly, change the nature of costs, creating flexibility in services which are not core competencies. This is hard to achieve, and it does take time to see the benefit. Examples in 2019 include moving to new managed service provision and outsourcing of specific services in middle office, technology and change support, which will now benefit the future run rate. Successes in transformation activity more broadly in 2019 include moving to a single HR system, completion of 79 UK custody and fund migrations, successful go-live of third-party and new funds, enhanced marketing componentry, consolidation of all UK funds and rebranding of 80% of funds. The key areas to complete are investment platform, the final platform, the final fund migrations and operational separation from Phoenix. Now, looking forward on the right-hand side of the chart, we are on track to achieve the run rate of synergies of 350 million by the end of 2020. In addition, we have identified 50 million of additional synergies that will arise in 2021, taking the total synergies to 400 million, with those synergies expected to be realized in 2021 as planned. The associated costs to achieve these synergies are also expected to increase to 555 million, reflecting additional complexity, which in turn extends the duration of program activity into 2021. The run rate for our costs of £1.38 for every £1 of synergy generated remains good and compares well with other such programmes. In a challenging market with revenue headwinds, we are very focused on control of the nature of our expenditure base. Our actions to date have been balancing the need for cost reduction while investing in areas that will create value and assist the structural improvement in our cost base. These actions will continue and are a shared objective across the business to support our ambition for a much improved cost income ratio. Now we are ultimately focused on capital generation to deliver financial strength that supports both the investment in the business and returns to shareholders. This chart highlights the key sources and uses of capital and I will walk through starting on the left hand side. We have strengthened our capital position in 2019 through management actions to realise value from our stakes, our successful completion of the arbitration case with Lloyds Banking Group, and our focus on enhancing the generation of capital from our operating activities. Our uses of capital in 2019 have supported transformation restructuring, acquisitions of Grant Thornton and BDO Northern Ireland, completion of the JV with Virgin Money, and provided returns to shareholders of £1 billion. This completed the buyback of £750 million announced at the time of the sale of our insurance business to Phoenix in 2018. The financial strength we have created provides enhanced resilience, which is even more important in challenging markets. With the reduction in revenue that we have experienced and the ongoing transformation, the capital generation from our operating activities at £333 million, shown in the box on the right-hand side of the page, is not at the levels we want – so this remains a key focus through the transformation period. Of the wide range of activity being undertaken to support this aim, I would highlight three key factors. Firstly, having invested in the technology platform and upgraded to modern working practices, post-transformation, our cost requirements in operations and technology to support our asset management activities will be very different. Secondly, transforming our approach to sales and relationship activity is a priority for our distribution team, and we are seeing the early signs of the benefits in new business. We continue to prioritise this key activity as part of our transformation programme. And thirdly, in platforms and wealth, the transformation activity has both a revenue objective of expanding market share and a cost objective of delivering much improved cost levels through modernising the back office practices and de-layering the manual processes. We now have specific plans for the 12 to 24-month period that address the issues in the cost space, which result in our cost-income ratio being higher than average. Thereafter, we will progress to our ambition to be aligned to industry leaders. The combination of our focus on growth in asset management and platforms and wealth with appropriate cost ratios ensures that we are targeting increased capital generation from our operations post-transformation. Our financial resilience and capital strength generates options for creating shareholder value. We are able to support investment in the business and returns to shareholders as we progress through the transformation activity and into 2021. We have announced a further 400 million buyback in February 2020, which will further reduce the cost of our dividend. Our distributable reserves are 2.3 billion, an increase of 44% from 2018. Our net liquid resources have increased to 1.7 billion and our regulatory capital surplus has increased by 1.1 billion since 2018 to 1.7 billion. The full year dividend is maintained at 21.6 pence with the cash cost of the dividend continuing to decrease. So in summary, there are four key principles driving our focus on generating shareholder value. Firstly, diversifying our sources of revenue in a changing market by focusing on growth of our clients and customers across asset management and platforms and wealth. Secondly, harnessing the opportunities we have to grow from our existing presence in large markets by making the capabilities that differentiate us count. Thirdly, applying financial discipline in order that we think return in everything we deliver so that we invest in areas where we can improve return through growth and ensure that we obtain better return from all parts of our business. And finally, utilising our strong financial position to create return for stakeholders through investments in areas that will generate sustainable growth. Using these principles we have made progress in 2019 particularly on enhancing our financial strength and returns for shareholders. These principles will be central to our focus for 2020 and into 2021 to support our ambitions for generating shareholder value. I'll now hand you back to Keith. I'll take my microphone with me.

Thank you Stephanie. As you can see, 2019 saw building momentum across the business. We really started to feel the benefits of the heavy lifting on integration that was done in 2017 and 18, particularly in the second half of the year. Now, dealing with market uncertainty is part of our day job. But I think it's also important to recognize that the elevated level of uncertainty that's returned to markets will accelerate disruption in our industry. This inevitably brings short-run challenges and it's important as a management team that we continue to focus on what we can control. Action on costs is a key focus for me and my team. Stephanie has talked you through our plans. However, continued disruption also opens up significant opportunities, providing you have, as we do, the capacity to invest. And it's to those opportunities I now want to turn. While many of you know our business well, I thought it's important to remind ourselves about the key revenue drivers for our business. It's pretty simple. Roughly 80% of our revenue comes from our asset management businesses, from the institutional, wholesale and strategic sectors. insurance clients in 70 countries that we serve through distribution and investment teams in 46 locations. Around 20% comes from our platforms and wealth business, which provide advisory and platform services to both intermediaries and end clients. These are largely UK businesses. Our associates and joint ventures in India, China and the UK add diversity and strength to our balance sheet and increase our potential pool of client and customer relationships. The focus on investment will be driven by three clear-cut criteria. First, to expand or improve our investment capability and product sets. Second, to bring us even closer to clients. Finally, improving productivity through the actions that Stephanie identified. In my view, there's plenty of opportunity in both asset management and wealth and platforms. So let me first turn to asset management. As ever, the asset management industry has been driven by the roller coaster that combines the vagaries of the economic outlook with the fear and greed that drive markets. 2018 and 2019 couldn't be more different, with 2018 one of the worst return years on record and 2019 one of the best. The result on fund flows was equally dramatic, as can be seen from the panel on the right-hand side of this slide. A combination of the coronavirus and the rapid market correction suggests that the same rollercoaster effect could impact both 2020 and 2021, with current market levels, in my view, pricing in a global recession. The structural improvements in investment performance put in place through our performance enhancement plans is bearing fruit, and we are better able to help clients. 84% of institutional and wholesale funds are ahead of benchmark at one year, 73% at three, and 76% at five years. As I pointed out earlier, we saw positive net flows in Q4. Now it's dangerous to extrapolate too much from this, given the large and lumpy nature of these flows. Yet I do believe we are witnessing, from what I see in the business every day, a significant improvement in our flows position. Investment performance has always been a strong driver for flows, but it's not the only one. The great advantage of our integrated distribution team is the enhanced ability to match our strongest investment capabilities with client demand. We have been able to connect clients to some of our best-performing funds, the China A-share, small cap inequities, emerging market debt, global corporate and fixed income, and European property in both alternatives and private markets. Actually, we doubled gross flows in those sectors where the focus on client needs was the greatest, leading to a significant increase in our net sales rank in 2019. 2019 was a year when we launched 36 new products and 48 funds globally throughout the risk-return cycle. I think it's also worth noting that the 77 funds we've launched since the merger have now attracted 10 billion. Evidence that the hard work to upgrade our product suite is delivering. To maintain this building momentum, we continue to invest in launching innovative strategies and new funds, as well as rationalizing those that don't gain critical mass. We invested a total of $120 million in seed capital, $23 million of which was recycled from successful funds to ensure a rapid route to market. As a result, we were recognised as one of the top ten European master groups by the success of our fund's launch. All of this is supported by our very strong and award-winning ESG credentials. ESG is not a buzzword in our business. This is how we've been running our investment process for almost three decades. We embed ESG criteria in virtually every investment decision. There's an increased demand for ESG-specific mandates. Not many houses now listing eye-catching ESG targets can outpoint to an outperform ethical fund with a 20-year track record. We have long believed that you do not have to sacrifice return to have a positive impact. And in 2019, several of our ESG funds generated a return as good. or better than their mainstream equivalents. This is not a thesis for us. It's what we do every day. Turning to platforms and wealth, an area where we really do need to make significant progress, we have the opportunity to build on some very strong strategic foundations. We have scale with 86 billion of assets under management and administration. We have the top advisor platform ranked by assets and flows and a top 10 position in financial planning. All of us, of course, have to take more personal responsibility to invest for their own futures. And this democratization of financial risk, coupled with a larger retirement gap and the current dislocation in financial markets, present us with a huge opportunity to support customers and clients and meet their financial needs. These businesses may currently account for only 20% of our revenues. In 10 years' time, they could be closer to 50% based on the growth potential that we see. To take advantage of these opportunities, we are bringing our successful but fragmented offerings together into a cohesive platforms and wealth division. We're focused on delivering a seamless customer experience. Transformation in this area will also improve the basic economics of our platforms and drive growth by leveraging our unique customer access. We have a focus plan well underway, led by Julie Scott and Noel Butwell, and we will share further details on this transformation activity before our interim results this summer. So while continuing to operate in a tough and uncertain environment, everything I know after 40 years in the business says this is the time we need to be investing in our future. As we move into the final stages of transformation, my focus is firmly on ensuring that we grow and diversify our business. We have the investment track record and the distribution strength to deliver our ambitions in asset management. We will launch a further 25 funds in 2020 and continue to deploy seed and co-investment capital to ensure a rapid route to meeting customer and client needs. We will invest further in expanding our platforms and wealth activities to drive growth and diversify our revenue streams. And in doing so, we will also build on the shared culture we are creating through our strategic blueprint that's in today's annual report and accounts. All of this is being executed in a disciplined manner from a shareholder perspective. Mindful of the headwinds facing the industry and the continued volatility in financial markets, we took positive steps in 2019 to strengthen our balance sheet and improve our financial resilience. This allowed us to maintain the dividend, return additional capital to shareholders, and lift on an adjusted basis to 19.3p. Our priorities are to continue to improve our operational efficiency, be tough on costs, reshape the assets on our balance sheet to sustain our financial resilience, deliver sustainable financial returns for shareholders, and invest in the undoubted opportunities that the continued uncertainty in markets is creating. Thank you very much. Stephanie, Rod, Campbell, Noel and I will now be delighted to take your questions.