Aberdeen Group Plc

Good morning everyone and a very warm welcome to Aberdeen's 2023 full year results presentation. I'm delighted to have Jason Windsor with me for his first results presentation as CFO, so welcome Jason. I'll be taking you through our strategy and our progress and Jason will walk you through the financials and then we will open up for your questions. Here with us, I'm pleased to welcome Rene Bulman, our CEO of Investments, Noel Butwell, CEO of Advisor, and Richard Wilson, CEO of II. And they will be here to help take the hard questions. Over the last three years, we have reshaped Aberdeen into a modern investment company that can thrive in the evolving investment landscape. As you can see today, II and Advisor continue to diversify our revenues and deliver improved profitability. We are scaling up these market leading distribution platforms to capitalise on the long term structural growth opportunities in the UK savings and wealth market. At the same time, we are refocusing the investments business. We've hired top talent to lead that business. We've taken out costs every single year for the last three years. We have slimmed down the number of funds in our offering, and we have streamlined our geographic footprint. We have divested from areas where we were subscale, and we've enhanced our investment capabilities in more attractive areas. We have formed a group which has more ways to win with the investment content and the distribution that is aligned to the products and services that our clients need. Leveraging our data and our technology across the three businesses, we're now better able to move away from products that clients wanted yesterday to products that clients want and need today. That's what we call client-led growth. Today's results reflect the action that we've already taken to restore profitability in the group. We're pleased that we've achieved 102 million of cost reduction last year in the investments business, exceeding the 75 million target that we committed to you. When we set that target, we committed to continue the effort beyond this year. And last month, we announced the 150 million cost transformation that does exactly that. Our goal is for all three businesses to deliver their appropriate share of earnings for Aberdeen. Over the last three years, the reshaping of the company has been from top to bottom. We've improved capital discipline and our operating execution. We've completed 11 M&A transactions that have simplified the business, added scale and efficiency, and improved our growth prospects. Overall, we've disposed of non-core businesses with around 3% growth, and we've acquired businesses with nearly 20% growth. We've strengthened our position in the closed-end funds business. We've become third largest globally, adding thematics like health, biotech and logistics through the acquisitions of Tekla and Tritax, both of which represent significant long-term growth potential. The acquisition of ii has transformed our position in the UK investments market. and it has established a competitor that will continue to grow by offering compelling value to UK customers. We've strengthened our relationship with Phoenix, our largest single client, firmly establishing Aberdeen as a strategic investor in Phoenix and as their partner of choice for new business growth. This relationship with Phoenix is the foundation relationship for the investments business. We've streamlined the investments business in terms of the funds that we focus on. We sold the listed stakes in India, 535 million in 2023, 2 billion since the fourth quarter of 2020. And now that noise that previously ran through our stock is much diminished. This investment has, this money that we realized from HDFC has supported the reinvestment in this business. Also, over the last three years, we've returned significant value to shareholders, totaling $1.5 billion through share buybacks and dividends. While maintaining a strong dividend payout and buying back our own stock, we have effectively halved the cost of the dividend to Aberdeen plc. These actions together have delivered a substantially stronger Aberdeen with more diversified earnings. we're well on the way to having established what we call a modern investing company. A company that can sustainably and efficiently grow. As I said, our goal has been to position all three businesses for growth and to operate them in a way that creates strong client focus and that has management teams that are laser focused on their segment. They can move quickly and it's a very different company to three years ago. In another challenging year for the investment market, II and Advisor have offset the reduced revenue within the investments business. In its first full year that we're reporting here today, II has already surpassed the original investment case that we set out at the time of the deal for you in 2022. And II has much more growth potential ahead of it. Together, II and Advisor accounted for 93% of Aberdeen's adjusted profits of $249 million in 2023. That highlights the necessity and the opportunity to restore competitive margin in the investments business. Diversification into these sticky revenue, higher margin businesses, such as platforms and wealth that we have here, has improved the operating mix and created a balance in the group that any monoline asset manager cannot enjoy. We're working to restore a more acceptable margin in the investments business to improve its investments performance and grow flows. Our goal is for all three businesses to make an appropriate contribution to group earnings and in so doing, create a sustainable and profitable Aberdeen. With that, I'd like to hand over to Jason.

Thank you, Stephen. Good morning, everyone. As I said at the Q4 trading update, I'm very pleased to join Aberdeen and to be here today to present these results to you. Let me begin with a summary of 2023 and a little context for our trading. 2023 saw a continuation of the challenging macro environment for the investment industry. Many of the headwinds facing traditional active asset managers were fairly strong. the year saw the continuation across the market of some asset allocation activity by clients that didn't play to our strengths. Away from equities, particularly in Asia Pacific and emerging markets, and also cash was retained in money market funds, cash which would normally be allocated to fixed income funds. So as we said in January, this led to lower revenues and investments, and I'll come on to that in more detail. Putting this backdrop together with the group performance overall, we had a 5% reduction in adjusted operating profit to £249 million. Higher interest rates in the UK were also significant for revenue and interactive investor and the advisor businesses and also group treasury income. The group didn't take the fall in revenue lying down. Costs were 4% lower in the year. And as we announced on January the 24th, we have initiated a new transformation program. And together with improving the group's net flows and investment performance, we are committed to taking the necessary cost actions to rebuild the group's profitability. The work over 2024 and 2025 will simplify our business model and remove at least 150 million of costs. And onto the balance sheet, which is strong. we have 1.5 billion pounds of tier one capital, which continues to support the strategy. In 23, 600 million pounds of cash was returned to shareholders from the dividend and the share buyback program. Adjusted capital generation was up 15% to 299 million pounds, which covered the 23 dividend of 14.6 pence per share by 1.1 times. Let me start my review of the business with a look at assets under management and flows. Assets ended the year at 495 billion. This is just 1% lower, although in fact assets were slightly up prior to corporate actions at 6.9 billion. We saw net outflows of 13.9 billion, excluding liquidity, albeit with positive net flows in Interactive Investor. Within investments, net outflows are primarily in higher margin areas of institutional and retail wealth, reflecting the client asset allocation decisions that I just mentioned. The partnership with our largest client, Phoenix, delivered well, including $5 billion from their bulk purchase annuities business and inflows from their workplace pension business. Net outflows of $2.1 billion in advisor reflect muted client activity across the industry as customers adjust to inflation and and higher interest rate environment with increased drawdown to fund the cost of living. Interactive Investor had strong net inflows of 2.9 billion, or 4% of AUA, showing the value of the Interactive Investor customer proposition. Looking forward, we expect the sale of our European-headquartered private equity business, which has 7.2 billion of assets, and the acquisition of four closed-end funds from First Trust, with 0.6 billion of assets, both to complete in the first half. I'll now walk through the revenue development. Group revenue was 4% lower. This includes £230 million from the full 12 months of Interactive Investor versus seven months last year. And there were some other smaller corporate actions that we haven't called out separately. The combined impact of asset allocation changes, net outflows and adverse market movements for the majority of the year resulted in a revenue margin decline in investments from 25.4 to 23.5 basis points. Performance fees were also lower. In the second half, that margin was 22.4 basis points, and we foresee slight further contraction in multi-asset and Phoenix in the first half of 2024 as client-driven moves from active to passive continue. Group revenue is supported by higher interest income from interactive investor and advisor, contributing £165 million in total in 2023. So you can see the value of the strategy in action, a business with diversified revenue, which can deliver in different market conditions. So let me now change gears and go over operating expenses. Adjusted operating expenses in 23 reduced by £44 million. This included 102 million of cost reduction in investments, partly offset by a full 12 months of I.I. Excluding interactive investor, expenses were 9% lower. Non-staff costs were also 9% lower, and staff costs were 7% down, with 13% lower FTEs. Variable compensation was lowered by £13 million. The group cost-income ratio is stable at 82%, reflecting the efficiency of Advisor and II. But we recognise there is much more needed on costs, which takes me on to the new transformation programme. A new cost transformation programme to remove at least £150 million of annualised costs has required us to look more deeply at the group's operating model, particularly in support services. As previously mentioned, we would expect that around 80% of these cost-saving benefits will accrue to investments, and that's primarily in the middle and the back office. As we said before, we expect the programme overall to lead to a reduction of around 500 roles across the group. The bulk of the savings will be in non-staff costs, so we're looking at further efficiencies from our outsourcing and technology, We are delaying management structures and increasing spans of control. So not only is this lower headcount, but everybody in the company will be closer to the customer. We'll improve productivity and pursue more opportunities to automate our processes, for example, in client reporting and client billing. There will only be modest cuts to the front office in investments. In fact, the program has been designed to avoid disruption to client service and to ensure we retain absolute focus on delivering investment performance for all of our clients, which, after all, is the most important thing. Key to success is to take these actions soon and to ensure they're sustainable. Just to step back first on the context of the savings and investments, the Cost Reduction Institute achieved in 2023 plus the new transformation will reduce investments expenses by around 24% compared to a baseline in 2022. Our whole programme is designed to do this as safely and as quickly as possible. We do expect the bulk of the implementation actions to be taken in 2024 and the work to be completed by the end of 2025. we expect around £60 million of the benefit to be in the Group P&L this year, and that we will achieve the annualised run rate of £150 million by the end of 2025. In the other direction, we expect approximately 3% to 5% cost growth per annum within Advisor and Interactive, which in 2024 is pretty much offset by corporate actions. Total implementation costs will be around £150 million, which we can fund from our strong balance sheet. Moving now on to the three segments and starting with investments. Net operating revenue is 17% lower than last year, largely due to lower market levels and net outflows, which impacted average AUM and also changed the asset mix. Operating expenses were £102 million lower, exceeding the £75 million cost target. Adjusted operating profit was £80 million lower at £50 million. Though proactive measures have been taken to reduce costs and to focus on improvement in efficiencies and profitability, we remain focused on reducing the cost-income ratio toward industry benchmarks. This will take time, but everyone is fully committed to rebuilding profitability and growing the business. Now onto Interactive Investor, which has had an excellent first full year in the group. Adjusted operating profit was 114 million, and of course, this reflects the full 12 months consolidation. Net flows were 2.9 billion, with personal wealth being an outflow of 0.4 billion, while the D2C business had strong inflows of 3.3 billion. This is the highest flows of D2C platforms in the UK. Total AUA of 66 billion is after the sale of the discretionary fund management business. II treasury income contributed 134 million in 2023, and the margin was 236 basis points. We expect 2024 to be at a broadly similar level. Trading revenue was £48 million, which was slightly subdued, and subscription revenue was £54 million. Personal wealth revenue reduced by £30 million, reflecting the restructure of this business, including the disposal of discretionary fund management and the transfer of our 360 and managed portfolio service to Advisor. Let me now turn to Advisor, which is going through a transition to new market-leading platform technology. This was a strong performance with adjusted operating profit up 37% to £118 million. Revenue was up 21% at £224 million, comprising of £167 million of platform charges, £31 million of Treasury income and £26 million of other income. which is mainly a £15 million benefit from a revised and new distribution agreement with Phoenix relating to the SIP product that we'll be taking direct ownership of in 2024 and will continue from there. The margin earned on cash balances was 228 basis points, and this again is expected to be similar in 2024. Average cash balances were around 1.3 billion pounds, which is about 2% of assets, and that's slightly down year on year. Operating expenses were 7% higher. This mainly reflects higher average assets on the platform. In terms of flows, we've seen a slight drop off in new customer volumes in the last three quarters. In fact, the overall market has been softer after several years of strong growth. The market, we think, was around 9 billion of net flows in 2023, compared to 30 billion average over the three years before that. Outflows have increased across the market as customers take more income to help manage their retirement and other cost of living needs. As rates peak, we are optimistic that the advised market will return to good levels of growth. So let me now touch on some of the other elements of IFRS profit and on capital generation. Adjusted profit before tax of $330 million was 30% higher than last year. The largest moving part here was net financing costs and investment returns, which generated an income of $81 million in 2023 compared to a loss of $10 million last year. Helped by the reduction in the share cap from the buyback, adjusted diluted EPS was 33% higher. 15% higher adjusted capital generation reflects the rise in adjusted profit before tax. And as you know, this included £54 million of dividend income from Phoenix and £10 million of other that won't repeat in 2024. The tax rate on our adjusted profit was 15% compared with 9% last year. Restructuring and corporate transaction expenses were £121 million after tax, which mainly consisted of property-related impairments, severance, platform transformation, and costs to affect the savings in investments. In 2024, we expect restructuring costs to be a little lower than in 2023, mainly reflecting the implementation of the new transformation programme. My objective is to remove the vast majority of these so-called below-the-line costs by 2026. It will take a little time to transition to that, but in 2025, I do expect there will be materially below 24. Of course, low restructuring will improve net capital generation, which takes me on to the next slide. As Stephen just mentioned, the group's gone through some very significant changes in terms of capital allocation over recent years. In 2023, that continued, with the sale of the remaining stakes in HDFC Life and HDFC Asset Management, the divestment of discretionary fund management and US private equity, which both increases the strategic focus and simplifies the group. In total, these disposals generated £713 million of capital. And as I said, 600 million of that was returned to shareholders through a share buyback and dividends. We've also continued to invest in the business through strategic bolt-ons, acquisitions, for example, like Tekla. We have fewer non-core assets, but we'll continue to act to streamline and simplify the group, for example, with the recent exit from the Virgin Money joint venture. The most important element, however, is to improve organic capital generation. And by that, I mean the addition to equity capital each year. Simply higher profits and lower restructuring costs. And the Board's dividend policy remains unchanged. The medium-term dividend coverage target of 1.5 times capital generation. Which takes me on to our balance sheet and the capital position. This slide is a simple way to set out a balance sheet. For me, the fundamental strength comes from the one and a half billion pounds of common equity tier one capital. This alone is 139% of our total capital requirements. And of course, we have qualifying debt too, which makes the overall solvency ratio 184%. It's my objective that over time, debt should also be lower and closer to the regulatory capacity. which is around 450 million pounds, but we have no redemptions or calls for several years. The balance sheet at 31st of December includes total group cash and liquid resources of 1.8 billion, and of this amount, just over 400 million pounds was in the PLC or group treasury. On top of the group's cash, we have around 400 million pounds in seed capital and in co-investments, for example, in property and infrastructure funds, This is capital used to support product development in the investment segment. Of course, we also have our stake in Phoenix, which had a market value of $557 million at the end of December. This is a significant asset that isn't included in our capital and is part of a multifaceted and very important relationship. I'm really pleased to see the growth that Andy Briggs, Andy Curran and their team have achieved at Phoenix. as they establish a leading bulk annuity and workplace pension business, which both have significant structural growth opportunities in the UK market. And importantly for me, Aberdeen is very well placed to support them as they develop their strategy with excellent investment solutions for annuities and for pensions, and also as a supportive shareholder. And finally, a note on the defined benefit staff pension scheme, which has a significant IAS surplus of 0.7 billion. I'm going to explore options that could realise some of this value, and you will have seen the DWP consultation that came out only on Friday, which may offer some new opportunities. So just to conclude on Outlook. As you can see in our 23 results, the group's been reshaped. The resulting diversification in sources of revenue and the cost efficiency within advisor and interactive investor partly offset the impact of net flows and markets that has made profitability in investments very challenging. In 2024, we expect high interest rates to continue and maybe start to fall slowly later in the year. Interest income is expected to be broadly similar for the group. But the outlook for global markets remains uncertain. Headwinds we faced in 23 and changing client demand and preferences will continue into 24. Within investments, we expect the global theme of asset rotation from active to passive strategies to continue. This is expected to lead to some further pressure on revenue margin. With this backdrop, we will take proactive steps to improve profitability and to transform the way we operate through simplification and leveraging technology across the group. As we have said, the work to achieve at least £150 million of annualised cost savings is well underway. And in 2024, we expect group operating expenses all in to be around £60 million lower. The strength of our balance sheet underpins our strategic action. Our focus remains to be disciplined in our allocation of capital to drive sustainable growth and to support continued returns to our shareholders. I now hand back to Stephen.

Let's turn to the next slide, please. So this is the shape of the modern investing company that we're building. We have two leading businesses in the UK, which is an attractive growth area, UK Savings and Wealth. Many of you have written about it. Media and the public really recognize that this is an area that needs further growth in order to help people take ownership of their investing future. Both of the businesses that we have have recently upgraded their technology to help support their growth and to stay ahead of their competitors. They sit alongside a specialist global investments business that's moved away from a broad waterfront to a much more focused set of particular skills. So think specialist equities. fixed income, and alternatives. I'm pleased to say that within our investments business, so we conduct regular client feedback, and it shows consistent positive client satisfaction within our investments business. I'm very proud of our team there, and particularly in the area of client service. Now, each of these three businesses has got strengths and opportunities. But across the three businesses, we have the investment content that can feed into these distribution channels and service the segments that these businesses are focused on. I want to set out for you how we see the opportunities, and the competitive advantages of these businesses and how we are measuring them as they journey towards growth. Within investments, we've adapted to the evolving landscape. We've focused on areas with the greatest growth potential and where we can drive margin. We're focusing on improving investment performance where it's necessary and also operating the business more efficiently. II operates in the growing 326 billion DTC market. It benefits from our unique subscription model. This provides greater financial resilience with additional income from trading, FX and cash margin. We're delivering customer growth and, importantly, growth in SIPs, which brings higher cash balances and the highest retention rates. Our advisor business has a long-established presence. It has significant market share and it has very strong relationships. Last year, our technology upgrade within that business was designed to differentiate it and to increase advisor capacity. They want to have more capacity to grow their business. We're focused on three things, increasing the number of tax wrappers per customer, winning more primary relationships, and increasing our overall market share. Let's talk about investments. We all know that it's been an incredibly challenging year for the investment management industry. Cross-border flows last year were down 23% on the three-year average, and the active management industry saw almost $600 billion of net outflows. In this context, our AUM was relatively resilient. It was down 2.4%. That was in line with the industry trends. This was largely thanks to the resilience of our large alternatives franchise, as you can see here on the slide, and the strength of our Phoenix partnership. Our biggest challenge related to our asset mix. 22% of our overall assets are in Asia and emerging markets versus an industry average of about 11%. This is particularly the case in equities. We have 57% that is exposed to these markets, APAC and emerging markets. And in that space, we've experienced client de-risking, particularly at the end of the year, and outflows from equities. Yet, we continue to win business in these strategies during this same period of time. So we remain optimistic that when the cycle turns, which it will, our book is well-positioned to attract the flows into it. Looking at 2024, we expect sales growth to marginally turn positive. as our growth sales are already tracking the industry and we expect marginally net positive growth sales in the industry. Our one not funded pipeline is very healthy. We're currently sitting on $5 billion, this one not funded, including $3.5 billion in the border-to-coast mandate that we won last year, the heavily contested mandate that we won last year. Our team are focused on leveraging our scale relationship with Phoenix and their thought leadership and pensions to grow in the $1.5 trillion DB market. Fixed income remains a key strength of this group. We have 81% outperformance versus benchmark in that business. We have a great fixed income team. When interest rates begin to fall, it benefits that business, but we also expect equity income and multi-asset income products to perform well as well. Our emerging market income fund is six out of 330 funds since we launched it, and it's top quartile across all three time periods. Our newly repositioned multi-asset offering has got competitive active and passive offerings, and we aim to leverage those in the advisor business, NOLS business, and in I.I., Whilst recognizing the cyclical and stylistic challenges of managing a large equity book in emerging markets, we are working very, very hard to improve our investment performance. Under the leadership of Peter Branner, who's been here almost a year, we're leveraging targeted performance improvements where we need to in our fund management business. And I can give you an insight into that. Over the last three months of 2023, we have close to 50% of the equity franchise outperforming again. So hopefully Peter is doing what we hired him to do. We believe that our large alternatives franchise provides strong growth potential as well and helps clients to achieve diversification. I want to highlight a few things that I'm particularly excited about. Our real estate franchise has been very resilient during the downturn. And although valuations have not yet fully recovered, we expect in March, when these year-end performance numbers are published, that that franchise is going to be above 60% outperformance. And we've got some great products in this space. For example, the Pan-European Residential Fund, which is the second largest fund in this space, which is nearly 2 billion euros, and it has a five-star Gresby rating. We think that that is one of the best funds in the market. We're also expanding our My Student Living franchise. We talked a lot about that last year, and you'll see us do more in 2024. Private credit is a key area of strength for us at Aberdeen and is in high demand. Many of you have written about that. And we expect to raise further assets in private credit this year with our upcoming new infrastructure offerings. In short, we've taken decisive actions over the last three years to re-engineer the investments business and position that business as a global specialist investor. It's not a broad waterfront. It's not all things to all people. It's a specialist investing business. Our disciplined approach... has allowed us to refocus what we offer clients, reduce the cost base, and as you know, we promised 75, we delivered 102 million cost takeout in that business, and it needed it. In 2023, we exited Australia. We sold the US PE business and we announced the sale of the European PE business, raising over 105 million. We completed our fund rationalization process that we had been talking about for the last two years, and we closed or merged subscale funds in order to do that. This involved some tough decisions. It's very hard to do, including the closure of the much reported GARs in December. But the overall program that we executed has resulted in significant cost savings and means now that 74% of our funds are over 100 million assets each. Moving forward, we will continue to capitalize on growth opportunities with a specific focus on bolt-on acquisitions. You've heard me talk about the Tecla acquisition. Incidentally, we acquired Tecla last year, spent a lot of time in Boston chasing that down. We acquired Tecla last year. Those fund managers who came with it, all doctors investing in health and life sciences, biotech is having its most sustained increase in value in the last five years. And so we're particularly proud that we chose that well. Just lost my teleprompter. Gents, we've gone to a green screen. Letting you, just pausing to let you absorb the technical acquisition. Now, let's switch. That was investments. Now let's talk about I.I. They always want a big building for I.I. We had a green screen, we had colours and everything, Richard. That must have been you that did that. So I.I. has transformed the shape of Aberdeen in the UK, positioning us as one of the UK's leading personal wealth businesses with strong long-term structural growth. Despite the cost of living crisis that has affected all of us in the UK, II's subscription-based model offers financial resilience. In 2023, II increased its market share of trades and delivered the highest net AUA among the UK's direct platforms. Customer growth was 4% in 2023, and we aim to achieve over 5% in 2024. We've got a series of further improvements in products, increased SIP penetration, and further strengthening of the II brand. You'll notice II is now advertising on TV. Average assets per customer rose from 134,000 to 152,000. That's average balances. That's two to three times the market average. SIP customer growth was 21%. in 2023, and we believe this rate of growth will continue. You'll recall I was very excited about II as a self-invested personal pension platform, the vision of the future where everybody has their pension on their phone. The integration of financial planning and the transferring of insights from II to the investments business will further enhance the group. Let's talk about advisor. The advisor business faced market headwinds in 2023, but the long-term opportunity is clear, and everything we're doing here is about the long-term, with the UK advisor market expected to grow at 11% through 2028. Our focus is on attracting new clients, as I said, and new assets from existing clients. As you know, in 2020-23, we made a significant tech upgrade. That was the biggest tech upgrade in 17 years to that platform, and it was designed to make the platform better for IFAs and their clients. This has laid the foundation for growth of the advisor business at Aberdeen, including the next stage of our advisor experience program with the launch of Aberdeen SIP and Junior SIP, which happens this year. The launch of these products forms a core element of our strategy to increase the number of tax wrappers per customer and increase the number of tax papers per customer, and grow the existing customer base, as well as attracting new advisors into our platform. Advisor OS will be launched to clients later this year. You've seen us headline that, and it provides a broader range of services to advisors that improves their business efficiency. And we believe that Advisor OS will be a market differentiator. The other important change we have made is the integration of Aberdeen's model portfolio service into the advisor business. In December, we repriced Aberdeen MPS and sustainable MPS ranges to make them even more competitive through leveraging existing relationships with 50% of the advice firms, which is what we have. We expect that that will drive significant growth for us in the current year. And this example, the NPS example, is an example where having Aberdeen content within the group benefits the advisor business and benefits the II business. As I said at the beginning, the macro environment is very challenging. We have been transforming this business against headwinds, but we've taken decisive action, we've controlled the things that we can control, and we're very determined to do it. We delivered a strong profit performance in the advisor business and in II this year, and that continues to help us as we transform the investments business. Our cost transformation program that Jason talked about will support improved profitability and investments. We have an extensive list of actions that are already underway in this building to address investment performance, and we have a strong presence in the areas which are relevant to our clients, and we think that that will drive future growth as the market turns. We've been clear that there is much more work to do and we are confident in the trajectory that we're building. We've created a business that is much more modern and has the ability to grow. As a team here at Aberdeen, and it is all about the breadth of our team, we're building a stronger company. It's a diversified business model that positions us for success through the cycle. And now Jason and I are happy to take your questions.