Record plc (REC) Earnings Call Transcript

Good afternoon, and welcome to the Record plc Full Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll and I would now like to hand you over to CEO, Leslie Hill. Good afternoon.

Good afternoon, everybody. Yes, my name is Leslie Hill. I'm the CEO of Record Financial Group, and I have with me Steve Cullen, who is our Finance Director. Some of you may have met us before. We're going to work through the results presentation methodically, but we will encourage you to submit your questions as and when they occur to you. And as we have done in the past, we will attempt to answer them on the spot if we can. So I think I was going to kick off now.

Yes. If we start with the sort of financial headlines I'll just run through these briefly. It's been a very good year, a good couple of years for us. We're very pleased with the results and with how things are going against the change in strategy that we sort of mentioned following Leslie's appointment. In terms of AUME, we continue to see growth in our AUME currently mainly from the hedging side of the business. We are hoping for -- or we expect some traction from some of the new products that we've talked about previously to start coming on board in the current financial year FY '24. But we start the year at a probably not probably -- at our highest ever AUME of $87.7 billion, which we're very pleased with. Revenue growth over the last couple of years, we've seen revenue growth of 76%, over the last year of 27%. We have seen some exceptional, I think, performance fees for FY '23, which we're, again, very pleased with, albeit these tend to be more sort of episodic and sporadic and are market dependent. Notwithstanding that, the management fees have continued to grow year-on-year. So I think since '21, we've seen a -- over 54%, around the 54% increase in our management fees. And for the last year, actually it's in FY '23, they grew by 12%. In terms of what that means feeding through to our profit before tax figure, again, over the last 2 years, 135% growth and over the last year, 34% growth. So we are -- we're very pleased. As I said, with how the strategy is on track and how we are growing not just in the new side of the business or the new diversified side of the business, but in the more traditional side of the business as well. I think finally, in terms of sort of the EPS and dividend, we've seen EPS growth for the last financial year of 32%. And over the last 2 years of 116%. And in terms of dividend, what does that mean in terms of dividends? FY '22, we announced 4.52p per share, total dividend and this year, it's 5.18p per share. So the dividends are in line with our policy, which is to sort of grow the dividend in line or progressive dividend in line with the growth in profit. So I think that's very high-level top line financial headlines. We can -- we should probably down -- drill down, I think, a little bit more into some of the strategy -- progress against strategy, Leslie.

Yes.

So an update on strategy.

Yes, so quite small print -- thank you very much, that's great. So as you will all see from that -- this picture that you're looking at, we set out our plans a couple of years ago, and they included 3 main areas of evolution. We wanted to modernize the tech stack, so we could continue to offer the business we've always offered. But more efficiently and more able to scale the business to respect and respond to new clients, we had some asset management plans to come on board this year, which is a relatively interesting development for us. So we needed to modernize for lots of reasons, and we're doing that. Have done some of it, do more. We diversified because we recognize that currency as a standalone was a rather niche activity. So we have -- got a German subsidiary. We have a BaFin license, and we're rolling out a suite of investment products and funds across a raft of different possible opportunities. We're building some partnerships -- have built, and are building partnerships with either specialist asset management providers, which fit in with our open architecture idea of an asset manager who offers their clients their own ideas, but ideas from others as well. And we've launched a string of new funds and have more to launch. So that's so far what we've achieved in diversification, although there's a great deal more to go. The third piece was we needed to build a really robust succession plan, which we've been doing. Both by creating a share incentive plans for those people who wish to promote through the ranks into more senior positions. And also by giving the young people in the business who have shown aptitude, more responsibility, which they responded to very well. Neil has retired now. It is in the process of retiring, I think it's this month. And we have a new Chairman in act, who I've known for a while and has known Record for a while, but who comes from a very innovative and interesting area of the venture capital world, which is proving extremely useful to us. I noticed that there is a question from Steve. And the question is performance fees were described by the other, Steve, as episodic and analysts seem to forecast is at 0. Is this appropriate? Or does it understate likely company performance?

In terms of the analyst forecast, they did use to forecast a 0, but we can deliver performance fees on a fairly regular basis for the last sort of 3 or 4 years albeit at different levels, hence, the sort of episodic mess of the performance fees. So the analysts are actually now baking in roughly between GBP 1.5 million and GBP 2 million of performance fees to their numbers on a -- certainly for FY '24 and going forward. So not a huge amount, but they are -- there is a change in terms of, they do now making a small amount of performance fees versus not previously doing so.

Hopefully that answers the question.

Sorry, I just explained that we can get performance fees from slightly different resources. So we've got tender managed passive hedging product where we can earn performance fees, and that's the product that performed particularly well for FY '23. We also have currently for return mandates that sort of -- some of those are linked to performance fees as well. So I think the likelihood of performance fees on a forward-looking basis are greater than they have been on a backward-looking basis. And therefore, that's recognized by the analysts in the fact that they now assume a low level of performance fees in their numbers.

But certainly, the performance fees for this year were very -- were higher than we would have anticipated. Hopefully not our traders, but we are not [indiscernible], so it was good to get. But we wouldn't necessarily always expect that level every year, obviously, as Steve has alluded to. Should we -- unless anyone has any questions on the quick progress rather through. I would now remind you all, if you have seen it before and tell you about it if you haven't. But a year ago, we were encouraged by everyone, our market analysts and investors and the Board to put forward a 3-year plan, which we did, which was everyone felt quite a bold plan, but which was very carefully couched in real opportunities we are working on that we could see have real chances to either natural succeed and exceed our expectations. So the revenue we are targeting in 2 years' time is GBP 60 million, and we are aiming for as high an operating margin as close to 40% as we can achieve. We are somewhat hampered to an extent by inflation like everyone else, but many of the new products that I've alluded to are at higher margin, higher fees than we're used to seeing in currency markets in the currency world. So if we do more of that, that should -- and we keep our costs under control, that should inexorably improve the operating margin in the future. We have a dividend payout target range, which we propose to keep. And again, we've kept it in this year. And as I've mentioned and Steve has too, performance fees are giving us opportunities to do even better than we had hoped. On the left-hand side is something which I think we've sort of hit already but I'll quickly run down. Anyone has a question, let me know. So we are moving from being a niche FX manager to a more widely based asset manager. We're growing our revenue, but across a much broader product range. We are looking for and I think, achieving innovative higher revenue margin products to improve our margins and to improve the stability and robustness, I think that's word, robustness of the business. We have recruited people who wish to be more entrepreneurial, and that means they come with good experience, broader expertise, and that's serving us very well. Our BaFin license and our [Luxembourg] fund structure are now up and running, and we are rolling out a range of funds as we speak. And not always as quickly as we would like. The wheels of bureaucracy can be excruciatingly low, but we are on track to do what we want to do. That comes with the growth in the pipeline of opportunities, both at Record Asset Management and at Record Currency that also in Record Digital Assets. And we have been able to increase performance fees, as we've already mentioned. Now hold on, here's Alistor, right, what's Alistor saying. We're targeting revenue of GBP 60 million by FY '25 but forecast of revenue, GBP 50.7 million in FY '25 and GBP 52.2 million in FY '26. [indiscernible] Okay. They do have a particular way of attacking our forecast. When I say attack, I am not being negative about it. But the way they approach it is that they tend not to put anything in until it's pretty much in the bag, whereas by the nature with 3-year plan, we are obliged to look somewhat further out. That doesn't mean that it isn't something we can see that we have clients for that we're actually working on or launching or negotiating. But it does mean that they -- I don't know if it's too conservative, but they typically, I think, do take a conservative line.

I think it's fair to say, just going back to the slide that the pipeline of opportunities that we refer to are tangible pipeline of opportunities. They're not a finger in the air type estimates. The issue maybe that we've had, and I think Leslie has already alluded to, is that some of the timing of these things are outside of our control. So we had a slide in our Capital Markets Day presentation that alluded to some of the close -- at the opportunities that were a bit closer in terms of timing. There are still very tangible opportunities, but most of them have -- had a degree of slippage in terms of timing. So from an analyst perspective, I think the view is, we appreciate that there's a tangible buyback opportunities there. But until we can hang some numbers on a definite revenue stream then we will build those in as we go. So the plan is, on a quarterly basis, we do trading updates and we will keep the market up to date on where we are on certain -- certainly in terms of our AUME, but on certain fund launches on the asset management side as well. And we will start to report those sections, currency management and asset management and then potentially digital set on a separate basis going forward. And as we do that, the analysts obviously will bake that into their numbers. So I think, are the analysts being too conservative, that's the question. I suppose you then to answer, they're being cautious and they're not -- they will report the revenue as of when they see some tangible progress, which I suppose is fair enough.

It's fine. Yes. There's a question that I can't find again. This is from Tom. Great to see the progress you are making, how confident are you in hitting your 2025 targets? What do you see is the greatest risk? Question. They wouldn't be there if we didn't have a high degree of confidence we can achieve them. We believe actually a year ago and the evidence so far to suggest, would suggest we can. What I would say though, I think, is that timing is always an issue getting things off and running, our UBS fund, which has been a great success -- was, I think, 4 months or 5 months delayed, we're supposed to start at GBP 400 million and surprised everyone by starting at GBP 750 million, which is the right way around, of course. But you do get surprises. We are working on an infrastructure deal with group of Swiss funds and Dutch fund, which is a fabulously and if we can do it, and I think we will. But 2 of the partners in that deal were separate investors, 5, separate investors alongside in the Dutch fund on the other. And we were in the middle. And of the 5, 2 were UBS and Credit Suisse. So for a while, everybody sort of rushed around [indiscernible] saying, well, maybe they can't invest, maybe they can only do half, maybe what entity is going to invest, should they still carry on separate leases, they are separately organized at the moment. And they ended up going ahead. But in the meantime, we have collected a couple of other subscribers from Swiss clients. Who would ask to join, but we had said they couldn't straight away. So -- but it delay us by a month, whilst they had meetings and UBS and Credit Suisse ran around quite distressed about what they should do. So these things happen, but I feel we're okay. I feel we're okay. And you guys looking at if we think we're not okay because this is now intend to be as clear and transparent and never overpromised and to deliver.

I think it's fair to say that this time last year -- I think these can be seen as ambitious targets. We do feel that we can hit them. It's probably a little bit harder now than it was 12 months ago due to the slippage and inflationary pressures.

You are thinking about the margin.

I'm thinking about the margin, yes. So -- there are certain things that are beyond their control, but we do still think that they're achievable, but they are dependent on certain timings and fund launches and clients and due diligence processes, et cetera. So -- but I think the answer is yes. We only still remain confident.

And there are two elements to add to that. One is that the new business when it comes on board is the higher fees than we're used to seeing from currency. So that's good, which should help us with the margins to reach better margins that we're at now and approach the 40% that we're aiming for. And I think -- I'm sorry, there is another question that I see a bit is with the projects that have slipped, is it [indiscernible] more at weeks or months, quarters or longer. When there is slippage, well the one I described with UBS and Credit Suisse, it was a month. I think months is probably fair. That -- weeks you probably don't worry too much. But once it's 2 or 3 months, then obviously, it has got -- it does have an effect. But I don't want to be pessimistic, we're just being kind of realistic really about what we're doing. I said there were 2 factors that were relevant. One was the fact that the new products were at higher margin. And of course, I can't remember what the second was, but it will come to me, so we'll come back to it. Now -- so that's that page, oh wait, wait. Vivak, reading the annual report, I felt the diversification strategy seemed to like focus on oh, Vivak, you are so cruel. Also I see what's the side approach. Can you please provide color on how you approach which opportunities to investigate and go on to pursue. Actually, that was what I said but I kind of agree we've got -- and what I was going to say was, there is a balance to be struck between focus. We know about that because we did currency for 13 -- for 7 years, or however long it's -- yes it's 7 years, only currency, and as you say, a sort of rush around and so to see what happens, see what's next. I would say the opportunities that we can investigate, our aspirations are bounded only really by one thing. But it's a big thing. And that is the available pool of talent that I can recruit, exceptional talent to drive a project forward to completion. So our Head of Sales, and our CEO of Record Currency, our CTO and some of the guys have ran that we've hired and others. When I can find someone who says to me, I would like to do digital strategies is what I want to do. These are the partners I want to bring in here and the guys who want to deal with this. I don't think all of us want too many things. I do think things are possible, is it feasible? Is it commercial? And can we cope with it. I think we're about where we need to be right now in terms of diversification because we have several round strategies. We have emerging markets, sustainable finance. We also have Becky, our CTO and her digital strategies, and we have the mainstream business. So we aren't -- actually I'm focused but we are focused not on, "oh, I really like an equity strategy. So I think I'll have one." But more on going for what the clients want, what the clients ask us for. And secondly, have I got someone who I can turn to and say, can you bring this in and they go and do it. And that means I need to motivate them with good salaries and bonuses and equity shares. But that is the limit of our aspirations, not some sort of mythical in asset allocation where we should be in every asset task. I hope that -- I don't know if that -- hope that answers...

I think maybe 2 -- probably the 2 best examples of listening to clients and developing products based on what they need or want are EMSF fund, which we launched 2 years ago and it's been a very successful, performance very good. And we will be looking to roll that out and develop that going forward. And also the infrastructure fund, which we've touched on, which again was an approach by existing clients, asking us to put together an infrastructure fund on their behalf. So it's not a hazard sort of approach, it's listen to clients sort of approach, what do they need, what do they want? And if we can partner with some experts that -- infrastructure experts as an example and help us do that together, then that's what we do.

Exactly, so hopefully, that does answer the question. I know you'll come if it doesn't.

Shall we move on to the next slide which sort of tries to show that the evolution, if you like, of the group structure, Leslie.

I mean I do know what's up there, so I probably don't even [indiscernible]. So 3 years ago, if you look at Record, you would have only seen the dark blue boxes and not all of those. That was all our traditional passive and active hedging and currency for return. And obviously, we wanted to diversify away from just that. We did add the Emerging Markets Sustainable Finance Fund that Steve has alluded to, which is also a dark blue box, because it is principally a currency funding, and that includes some fixed income, some impact bonds as well. So in the quest for diversification and perhaps partly to address the next question about how we choose opportunities. We found a team who had been at city, who are 20-year veterans and wanted to start their own asset management firm, to distribute and also do investment management on funds because they were expert at funds and structuring for existing clients that they had or new off with existing managers and partners, some of whom they knew or will have approached. And we were getting a BaFin license. So that means we were able to take them on. Initially, I think they plan to do it all themselves, which I totally understand, but they didn't find a weight of regulatory effort, time, money, all the stuff that goes with being the asset managers . It's expensive to set up an asset management firm from scratch today. And very challenging. I think even if you have good clients, to build the track record and can stay alive through the early stages. And what we provide, I think one of the things we provide, is a house where people can bring their ideas and their entrepreneurial enthusiasm and energy and experience, and we can help them build it. And on that right-hand area, either the funds we distribute, the trade finance fund, digital lending and bank loans, all the funds which we've launched where we are the investment manager and one of them is the infrastructure deals I needed to in the bottom right box, and another one we're just launching is a protected equity fund. And perhaps if it makes sense, I might just touch on that briefly to give you a taste for how we go about things. So we had a Dutch family office who one of our RAM guys knew very well. In fact, I think he had them as a client in the past. They had a protected equity fund that they ran for themselves in their sizable family office, which had an equity manager and a protection fact, let's call it, a risk off manager, equity manager, so options based. Their integral is to work well, and they wanted to offer it to other clients and other families, people that they knew, but they didn't want to build a fund, and they didn't want to asset manage it themselves. They do find the clients, they would do the strategy, the oversight. But in terms of the day to day, they wanted someone like us. So we've launched that fund for them with our Luxembourg structure. And they are a client. But their clients will also be -- or the new clients they want to bring in will also be [ client ] to us. So that's an example of where someone brought us an idea which we were able to help them realize. We can bring other clients into it. We are not limited. It's not a close added fund unit, it's not on where it's by subscription only. People can join, and it's done well. So that's a good example. There are 2 other boxes on this page, and what I don't want to spend too long on it. One is the light green, the [indiscernible] box, which says record digital assets. And there, for example, we have a number of strategies in early stages. We've invested directly with 1 or 2 businesses. I would also invested more about money in a couple of funds to get our toe in the water. Any of you who came or no not came, but listen to the Capital Markets Day, which I think you were able to do. We had our CTO, Rebecca Venis, who described what we were doing. We're now at the stage of launching a fund. We've signed an agreement with a cryptocurrency manager who has been trading for 10 years very successfully for himself and his clients and wants to become more of an institutional manager or should we say he wants to bring it into the world of regulation and institution. He sees that is the future, which I think is good. And we're helping him build that fund in Luxembourg. He pays for it but she generously -- quite very generously shares his fees and performance fees with us for doing that. And if we bring clients to him as opposed to him bringing the clients to the fund, which is the way we envisage at the moment, we will get a greater share in revenue. So that's a very nice diversified. He comes with a very good pedigree. He is an excellent person and very clever and talented. He has been mining coin since he, well he really quite young, started very young and he's sort of 30, I think, now. So he's an interesting guy. And he came to us because he liked us because we allowed him to run his own business the way he wants to because we are supportive. He gets on how well and worked very closely with our CTO. And I don't think we would have him coming to us were it not for her. And it's an interesting avenue. It's a diversifier. It will never take over. It will never be other than a share relatively, contained share of the business, but it is an opportunity for us to own performance fees from another source and to learn more about the world of cryptocurrency, tokens and stable coins and all of that stuff which Darren is teaching us and which we hope to be able to show to some clients, although we don't need our clients for this to be successful because he brings his own clients. I think there's an opportunity there. And in coming years, I think this whole world will become more acceptable and more institutionalized, and we see the merit there in doing that. So that's the pale green box. But it's -- there's a couple of things we're doing. She's doing some other stuff, too, but we will talk about that.

I would just add to that. I think, I mean, the crypto is one project underneath that particular sort of subsidiary. But I think you described it on another presentation is the whole world of digital assets. So as a business, what we must do and can't ignore is the speed of innovation on the digital assets sort of sector and how that impacts the financial services sector that we're in business in. So it gives us the opportunity to sit down next to experts in these different fields to learn and to understand and to build relationships and hopefully build products in the future to service that sort of client set.

Exactly, exactly. And that sort of segue us quite neatly into the last box, the light blue box, the sky blue box which was just buried inside all the dark blue boxes a couple of years ago because we only had record currencies. So therefore, everything we did to support our business was living there, but we've now split that into record group services. There is a number of ways. First of all, we're modernizing the technology which lives in that box because the technology is available to all the people who are part of the group, and then we transfer price that everyone pays fairly for what they need. But it also includes finance and legal, HR compliance, very important. Risk management, also very important. Operational services, trading and that sort of thing. And at the moment, it's a cost center in the sense that it provides shared services to the group. But we are starting to see, particularly with Record Digital where things like our expertise in compliance and risk monitoring can be sold to those guys who are busy with their own activity. But once they get involved with the institutional world, they want someone else to take care of managing the compliance necessary that the presentation should all be appropriate. All the things we do as a matter, of course, KYC, all that sort of stuff. So that black box is not a profit center and may never be very profitable, but it can perhaps help to support itself over time by providing shared services to clients as well as to everyone in our group. It's not essential for us to meet our targets, but it is potentially an interesting avenue we can explore. So that's what we look like now.

So there's a product performance section next, we can talk briefly about the performance on the [indiscernible] -- summary and outlook, yes.

Okay. So here is just a recap, which I know might be useful to some of you, I won't dwell on it too much. So as I think you've heard, we've made some good progress with diversification, modernization and succession and plan to continue to. Hold on, Michael has appeared with a question. In terms of modernization is there further work to be done and is further investment in quite for your digital offerings. So I'd like to split the modernization of the business away from the digital side of the business. For modernization, yes, there is further work to be done. We sorted 2/3 of the way through, I think, roughly where we want to get to as a stage 1. But I'm on to the belief that if you are an asset management firm in 21st century, who offers a service offering, if you like, as well as products, you will need to be the fintech. You will have to be a tech firm because that's how the economies of scale are achieved. That's how you produce the kind of reporting the clients want, the kind of attribution, the kind of data, how you store it and manipulate the data cost effectively. So I don't think we're the -- Michael, I don't think we'll ever get sort of there and it stops. In fact, we did do that in Record once before, and it was a bit of a mistake, we did a big project, probably 15, 12 years ago. We're also exhausted, but it was over a decade, that's enough of technology. We won't do any more of that. And of course, it just doesn't work that way, and it doesn't work that way anymore. So we were behind the curve, and we're catching up, but we're not there yet. As far as the digital offering is concerned, at the moment, we'll build a fund for Darren , and we will invest either indirectly or directly with several people and we are working on an infrastructure, very interesting green energy infrastructure offering, which I will park for the moment in this way out there. For the digital offering, we don't need to change our technology, and we are not planning to do cryptocurrency trading in-house. Darren will bring his business into the fund, acting pretty much the way he does now and always has successfully. So in a way, we provide the framework, but the plumbing or the engineering, we don't need to spend money on to achieve what we want. Now what that means in the future, I expect that will change too. I suspect things like the dreaded AI that everyone always talks about, is something we will use more and more of and we'll probably find ways to be much more cost effective in what we offer. Everything from compliance to trading to analysis and everything else. But we will be investing in our mainstream business to scale the currency side of the business, more than investing in speculative digital technology, I would say.