SHNWF - Schroders plc (SHNWF) Q4 2022 Earnings Call Transcript

2023-03-05 23:47:02 ET

Schroders plc (SHNWF)

Q4 2022 Earnings Conference Call

March 02, 2023, 04:00 AM ET

Company Participants

Peter Harrison - CEO

Richard Keers - CFO

Conference Call Participants

Hubert Lam - Bank of America

Nicholas Herman - Citigroup

Haley Tam - Credit Suisse

Bruce Hamilton - Morgan Stanley

Gregory Simpson - BNP Paribas Exane

Presentation

Peter Harrison

Good morning, everyone, and welcome to the Schroders 2022 Annual Results. I know you've had a busy few days, so hopefully we will get through this in and out. But we're going to follow the normal format of prior years. I'm going to spend a little bit time on strategy, flows. Rich is going to take you through the detailed financial numbers. I'll come back to quick outlook and any Q&A that you may have.

So look, this was a set of results that we found pleasing robust and primarily because of the strategic progress we've made. I just want to spend a little bit of time before we get into the detailed numbers on the reshaping of the business. Because to my mind, that was the effort that we've been making over prior years to get this dynamic of the business changing. And so if you look at the high level, now 53% of our Group's earnings from the high-growth areas that we've been talking about in the past. I will come back and unpack that in more detail.

Our recurring revenues, our operating revenues were actually up 1% last year. But the underlying that and the drivers of that were really strong fundraising in our Schroders capital business, so we're GBP17.5 billion of new capital. The Wealth Management business, the Advisory businesses that grew at 6.7%.

And I'll show you the Solutions business, which was in a challenging market in the fourth-quarter. We will come back and talk more about that. Actually, showed flat flows with minus GBP0.2 billion. So that's entering 2023 very much with the winter is back.

So from an operating level, I think we've made a lot of good progress this year. I think that reinforcing nature of growth has come a long way. Clearly, when we had this meeting in the past, we've always talked a lot about in franchise with the non-voting shares, that was done and concluded on the 1.5 rights issued. So that's all being done and put behind us. So at a high level, quite a lot of headlines for 2022 moving in the right direction.

Now, I put this chart to just try and demonstrate the nature of the change we've got in the business. You're familiar with our Wealth Management businesses, we will talk more about those, but long-term sticky clients, high-growth markets where we've got really good market shares and growing those market shares.

Schroders capital, which is now across alternatives, but most importantly private-equity, private debt, real-estate and infrastructure, a full-service proposition, that is benefiting significantly also from our position Schroders Solutions. Schroders Solutions is a big business now, it's GBP220 billion business. There are very few people able to deal with the needs of complicated clients. And is a - really a reference point for the most complicated things we deal with in our industry.

And then our institutional Mutual Fund business, Schroders Investment Management, which as you know we've invested very heavily in new products, thematics, sustainability, and things like sustainability is driving growth in our charities business, is driving growth in our Wealth business. Our Solutions business is benefiting from it.

So to my mind, you can think of these standard identities. But you can also think of them as a bigger ecosystem, whether it's a self-reinforcing growth. And to my mind, the feature of 2022 was the point that that flywheel started working and that self-reinforcing growth started to come through, which is why you're seeing best-in class performance fundraising in areas like Wealth and Schroders Capital.

That transformation I was talking about, when we first talked to you about the strategy in 2016, 35% of our assets have been in these areas. We're now up to 53% of our assets. Perhaps more importantly, revenues have gone from 31% in those areas to 46%. And clearly, as we enter 2023, the organic growth rates that we've got embedded in those other areas, will take that further into the future.

So if I could just dive into the numbers now, I talked about underlying net operating revenues pre-performance fees at 1%. I think those are key for us to show that resilience. Operating profit, our KPI was down 14%. We will come on to talk more about that, but a mixture of markets, lower performance fees, particular, but also the changing nature of our cost base where we've been done, I think really good job of constraining the inflationary element, but a lot of investing for growth still going on. Assets under management of GBP737 billion. And then flow numbers, we saw out of our main asset management businesses across GBP1.6 billion of outflows. I'll come and break those down in more detail and the dividend per share up marginally at GBP0.215.

Clearly, the key metric for us is investment performance. The numbers are here. The three KPI is 73%. That is a really important thing for continuing to grow. The charts on the right-hand side, which is what I've talked to you in the past a lot about, which is the longevity, the stickiness of our client base. So if you look at our fund-raising last year, so gross fund sales, we're actually up 4% at GBP128 billion.

So the thing that changed last year was that we had a higher redemption rate. It's obviously been well reported that 2022 was a tough year for the industry loss of cyclical facts going on. But the reason why our asset-base was resilient was that we were able to increase the fund-raising rates by 4% to absorb the redemptions. But I did have an effect on longevity, but you can see that long-term effect is still - I think that trend is still underlying intact.

Just coming along and breaking now the business into the segments and I will talk through each of these segments in more detail, but just this is a high-level AUM chart, just showing the compound growth rates of the various businesses we've achieved over the six years since we put this strategy in-place.

At an operating level, Wealth has showed a 10% revenue CAGR, Schroders Capital 24%, and Schroders Solutions 7% because some of the bigger mandates we've taken all. And during the period, obviously our JVs and associates profits has grown very considerably.

So to my mind, what we're talking about is a transformation that not only there is underlying growth of those businesses on the left of the chart strong, but the businesses on the right of the chart have shown a good deal of resilience. And I think that's to my mind, the things that I want to really emphasize that getting those businesses to be resilient into future has been a big part of our investment proposition. And that's I think we've shown that this year.

So if we could just go now in some more of the detail, our Institutional business GBP7.3 billion, it often inflows in the second-half of the year. Really that number, in my sense, is a slight disappointment to me because we are too big. There was one Japanese outflow which I talked about in the first-half of the year and there was one in the U.S.

They really account for all of us GBP7.3 billion, which is a frustration when you think how much work has gone all on in there. But aside from that, I think those quite a lot of progress made are particularly in changing the trend lines. We've talked two difficult markets in the past, which were both Japan and Australia where we've arrested that issue so that - those progress.

Our mutual funds, we'll come and talk more about, but effectively GBP5.9 billion of outflows was driven in large part by the cyclicality in Europe. But over the last two years, net inflows into mutual funds, which I think against the industry background is a positive one. And I'm going to come back and talk about the rest of those segments in detail, so crack on into that. But for my part, GBP11.6 billion of flows into Schroders Capital and Schroders Wealth.

So first of all, the Wealth Management segment and we set-out an objective to deliver 5% growth from the Wealth Management segment. We've achieved that. We've actually achieved 6.6% in our advice businesses around the place, which we think is really important test of, has our organic investment, which we've talked about in the past, delivered. And you're seeing that starting to deliver.

We've also continued to invest in new advisors, so we further increased the number of advisers around the regions and we would expect and feel confident about our ability to continue that commitment to future growth in the past.

We do want to unpack this business for you in more detail. So as a series - number of further Capital Market Days, we're going to do Capital Market events, we can do this year, the first one we're going to kick-off in June with a deep-dive into our different Wealth businesses, so you can get more granularity on those.

A few headlines here for you. I think the Schroders Personal Wealth usually - there's number of questions, so let me address that one. As you know, we have said about the transformation of this business over the last three years. It's now in steady monthly inflows. In fact, the gross inflow level, we're running at 9%.

So the advisors are starting to become a lot more efficient. The conversion rate has moved up very significantly during the year to 13.2%. But, to my mind, the challenge we faced is the relatively old demographic of clients within this business. So you've got about 40% of the client base right at end-of-life.

So for here, there is really good gearing for future growth because we've now hit a level of referrals and writing of new business, which offsets that. And I think looking-forward, the business is feeling like we turn that corner, we feel the conversion rates, the referrals from Lloyds are all working well.

Our benchmark continued to grow its advisor base, the advisor firms on that, so we have made further investments regionally within Cazenove because we see there is more to go for in a market which is really we're the stronger and getting stronger.

Schroders Capital. Now, I talked about the number GBP17.5 billion of fundraising versus 34% fund-raising rate. And you can also see that the number of new clients where we've been able to cross-sell into the Schroders business has gone up very significantly during the course of the year.

However, the GBP6.4 billion is below the GBP7 billion to GBP10 billion that we talked about at the end of last year and the frustration there is two things. One is the, the dry powder, which we carry into this year with some of the deployments that were going to happen at the back-end of last year, have been postponed. So there is about GBP1.5 billion or so which will be deployed early in 2023. It's the first thing.

And the second is during the gilt crisis, we saw about GBP2 billion of false redemptions, which went out of our business, which impacted that NNB number. So, fundraising number, I think we feel very pleased with the GBP6.4 billion was hit by some headwinds, but the underlying pattern of growth, I think, and sense of the dry powder we take into next year, which is about GBP4 billion of dry powder, I think we feel very comfortable in reiterating our target that we've said before of GBP7 billion to GBP10 billion of fundraising per annum.

The areas where we saw growth were really across the piece. So we actually saw growth in BlueOrchard, we saw growth in real-estate, private debt - private assets, private-equity, private debt, infrastructure.

And I think for me, insurance-linked securities, the breadth of that business really is now one-stop-shop. And the competitive advantage against many of our peers that we're able to offer that breadth.

I think the second point, just to reiterate is if you've got a strong Solutions business, you got a strong business serving DB pension funds, there was inevitably a crossover between the impact on private markets on this business. And there has been a hiatus in that during the fourth-quarter of the year. If I look forward into 2023, we definitely feel that that's behind us. And the pipelines that we're seeing and the progress we're making feels confident. I'll talk more about that in just a moment.

Our Solutions business, now the underlying assets for Solutions during the year went up, our flows were minus GBP0.2 billion. The gilt crisis was clearly the major issue that happened. The outflows from our Solutions business in the last six months of the year, which includes the September period and October, November, December was GBP6.5 billion.

So we finished the year of minus GBP0.2 billion in Solutions, but the GBP6.5 billion outflow in the second-half of the year. I have to say that the first two months of the year that has been recovered. So we saw a sharp dip and a bounce back.

The River and Mercantile acquisitions proved to be strategically really important. Many of you will have seen the independent research on this sector. We navigated that crisis very well indeed. And I think the opportunity to take market-share in fiduciary management, LDI and OCIO in 2023 is a very good one. Joint ventures and associates had a challenging fourth-quarter. We saw GBP10 billion out just in the fourth-quarter.

So net flow GBP6 billion for the year. But this is a business, it's a high-growth, it's a cyclical business. I think it's hard to make short-term goals looking-forward as to where the assets will go. Our sense is that we had a difficult period in November, December, January, but actually February's turnaround now become positive.

So the key element for this is these are high-growth businesses. They are in markets which do have a degree of cyclicality. But the underlying dynamics and investment performance, particularly of our main businesses is in good shape for the year, but disappointing in the final few months.

Our Mutual Funds and Institutional, the Schroder Asset Management space, the challenge in the mutual funds space I've talked about was GBP3.7 billion out in Europe. Europe - U.K. was actually relatively resilient at about GBP1.2 billion out. And our equities book actually was relatively resilient, which also had about GBP1.2 billion out.

So the issue really across both Institutional, the Mutual Funds was in the fixed-income markets where we saw in aggregate for the Group, including Solutions GBP6.8 billion out. But for these two segments, about GBP8.8 billion of out - GBP8 billion rather of outflows for those two segments in fixed-income markets. And as fixed-income markets are finding a different level, one might hope that the demand stabilizes. I don't want to make that prediction, but I think that the first couple of months of the year have definitely seen that.

One highlight from my perspective is we've talked a lot in the past about Hartford. Hartford actually saw net inflows for the year. I think there are very few U.S. asset managers that saw inflows into active funds for the last year. They actually saw GBP0.5 billion of net inflow. So, some progress there.

And one final issue is China. Our WMC launched in March in the thick of the Shanghai lockdown, which raised GBP2.3 billion for the year. And importantly, at the beginning of January, we were granted a license for wholly-owned FMC in China which is the final piece of that jigsaw of a - we've now got the FMC joint-venture with Bank of Communications, the Wealth Management majority-owned business with Bank of Communications and now a wholly-owned fund management company which will probably begin work subject to inspections, et-cetera, right at the very end of 2023. So it's been a long journey, but I feel very pleased to have got those pieces of building blocks in-place.

What was - at this time last year, we're always talking about the great resignation and the real challenges on staff and maintaining staff and being able to act with real purpose and attract the right people. I put on this page just a series of things that we feel are making us an attractive place to work. And when we survey our staff, 96% of people say they're proud to work for Schroders, that makes retaining talent a good relatively strong. But I think - but Glassdoor said that we are one of the best places to work in the U.K. and we've made a lot of progress with objective analysis of where we stand on sustainability.

And we know that this is an area where being objective is really important in terms of how we will be seen over time and whether you look at surveys in Global Canopy where we were the number one financial institution globally on deforestation where we share action or plan for nature. The number of proof points here gets very stronger and that's really important to clients because at the end-of-the day, proof points is what is determining the actions that they take.

With that, I'm going to hand over to Richard, who will take you back through the financials and then I will come back for outlook. Thank you.

Richard Keers

Thank you, Peter, and good morning, everyone.

Let me now take you through our results, which represented a robust set of numbers given the challenging environment. The performance reflects the benefits of our pivot towards high growth areas that Peter has already talked about. The performance of our Wealth Management and Schroders Capital business, in particular, helped to offset the impact of wider market volatility. And including Schroders Solutions, revenues from these three strategic areas of focus were up 11% and now exceed GBP1 billion.

Given the extend to the falling markets during the year, that's strong growth. This helped us to deliver 1% growth in net operating revenue excluding performance-based fees and a robust operating profit of GBP723 million.

Let me now unpack this for you in more detail. You all know the extent of the bear markets in 2022 which falls in the mid-teens of both equities and fixed-income. Clearly, this has had an impact on our business. And whilst FX movements helped to offset this by GBP80 million, our revenues reduced by GBP137 million as a result. Despite this reduction, our net operating income was up 1% year-on-year when you exclude performance-based fees.

The revenue growth was driven by three main factors, our net-new business, acquisitions, and an increase in interest margin we earn from the banks in our Wealth Management segment. Taking each of these in turn, it was really great to see that our net-new business generated an increase in revenues of GBP48 million. A large part of that stem from wins in first-half of the year as well as the tailwind from the previous year. As you heard from Peter, we had net outflows in Q4, although these were primarily from lower-margin products.

This meant that we started 2023 with a headwind of GBP7 million. However, I'm pleased to say that we now have a tailwind as a result of the net inflows we have since generated. Peter mentioned the acquisitions we completed in the first-half of the year. These contributed GBP87 million of additional revenues. And due to - and due to the timing of the transactions, we still had the benefit of around GBP15 million to come through in our revenues in 2023. The final key driver in the growth in our net operating income was the net interest margin from banks within our Wealth Management business.

As you know, that's a core revenue stream for us, but it's been impacted by the low-interest rate environment in recent years. This increased by GBP26 million to GBP37 million following the rise in interest rates.

Finally, to finish off on the aggregate view of our net operating revenue, we own GBP60 million of performance fees and carried interests that's higher than my guidance despite the market volatility. Looking-forward, we are budgeting for similar level of performance-based fees in 2023. But as always, it's difficult to predict. This took total net operating income to GBP2.5 billion.

Now let me show you how these movements break down between our business areas. Starting with our Wealth Management segment, average AUM increased by 3% to GBP98 billion, driven by strong net-new business. That's despite a GBP9 billion year-on-year fall in the value of AUM as a result to markets. Along with the higher net interest margin I just explained, this led to a 10% increase in net operating revenue, which grew to GBP394 million. The net operating revenue margin increased by 2 basis points to 40 basis points.

Now breaking this down into the individual components of advice platform and managed. Our advice business generated strong growth, higher average AUM and an increase in net interest income drove a 12% increase in revenues to GBP331 million.

Our net operating revenue margin was 2 basis points higher than my guidance, principally due to the higher interest income. We expect this to increase by a further 2 basis points in 2023 to 57 basis points.

Moving onto our platform business, average AUM and revenues were broadly flat. The net operating revenue margin of 15 basis points was in-line with my guidance. We expect it to stay at this level for 2023.

And finally, to our managed business, average AUM increased to GBP20.5 billion, principally as a result to the net flows we generated in 2021. Our net operating revenue margin was 18 basis points and we expect it to remain at this level for 2023. So overall, that's a strong performance across the Wealth segment.

Now let's move on to the Asset Management segment starting with Schroders Capital. The acquisitions of Greencoat Capital and Cairn contributed AUM of GBP9 billion. This together with the net-new business that Peter talked about earlier, drove an increase in average AUM of 35%. The market volatility did have an impact on our performance fees and carried interest, which reduced to GBP19 million from GBP44 million.

It's worth me adding that given the environment we were conservative in recognition of carry. Excluding these fees, our net operating revenue increased by 26%, that's good underlying growth. Going into 2023, we have a tailwind of around GBP25 million as a result of both 2022 net new business and the full-year impact of our acquisitions.

Peter mentioned the GBP4 billion of non-fee earning dry powder in the business. We expect around half of that to be deployed and become fee-earning in 2023, with annualized revenues of around GBP11 million. Our net operating margin excluding performance-based fees was 61 basis points. That's a little less than my guidance, principally because we have moved our EMD book to the Mutual Funds and Institutional business areas to better align with how we manage these businesses. We expect the margin to remain at its level in 2023.

Next, our Schroders Solutions' business. Although, the value of our AUM reduced reflecting the movement in-markets including the impact of the gilt crisis in the U.K., this was offset by the acquisition of R&M's Solutions business.

As a result, our average AUM increased by 12%, driving an increase in our net operating revenue from GBP276 million to GBP292 million. Excluding performance fees, our net operating revenue margin was in-line with my guidance of 13 basis points. I expect this to reduce to 12 basis points for next year due to the mix of net new business, including the strong flows we have generated since the year end.

With a strong start to the year and the strong order book, we expect the annualized net new revenues to revert to showing growth for H1 2023. So overall, as I mentioned earlier, we've had good growth across our strategic growth areas of Wealth, Schroders Capital, and Schroders Solutions.

This helped us to mitigate the broader market challenges that impacted our Mutual Funds and Institutional businesses. Both of these business areas were impacted by the full net debt values and the risk of environment. Average AUM for our Mutual Funds reduced to GBP106 million.

This translated into an 8% reduction in net operating revenue and net operating revenue margin of 71 basis points. That's a touch higher than my margin guidance had in the year. It's always difficult to predict the margin due to the impact of markets on our mix. But for 2023, I would revert back to my guidance of 70 basis points.

For our Institutional business, net operating revenue fell by 13% to GBP520 million. That includes a reduction in performance fees from GBP79 million to GBP33 million. Excluding those fees, our net operating revenue margin was 34 basis points, that's 2 basis points higher than the guidance I provided principally due to the transfer of the EMD book I mentioned earlier. The makeup of our Institutional business has changed in recent years and has become less prone to fee attrition.

As a result, for 2023, I expect the margin to remain flat at 34 basis points, although as ever, market movement could impact this. So overall and in total across the business areas, our net operating revenues remained robust.

Now moving on to the returns from our associates and JVs, which is the final component of net operating income I want to cover. The development of our partnerships remains an important part of our strategy. As you can see from the chart, we've had excellent growth from these businesses in the last five years with a CAGR of 41% despite the market challenges of 2022. And going forward, we continue to expect good growth in the markets in which they operate. In 2022, SPW delivered good underlying growth with revenues increasing by 3%, driven by an increase in initial fees as a result of the flows that Peter mentioned earlier.

Our share of profits from our Asset Management interest was broadly in line with 2021 with good growth from our Indian venture with Axis Bank, helping to offset a fall in profit from our longstanding BOCOM JV. The latter, principally due to a smaller gain on seed investments in 2021.

It's worth me pointing out that we consider the underlying performance of BOCOM to have been really strong. Not only did it have the market headwinds to contend with, but it was also impacted by the China lockdowns, which were only recently lifted. So overall, that's an important contribution from these partnerships. And in 2022, their contribution to our profit-after-tax increased from 13% to 16%.

Now moving onto our operating expenses. Reflecting our good cost discipline, we reduced compensation costs by GBP15 million or 1% year-on year despite the increase in headcount resulting from the acquisitions we completed. This cost discipline enabled us to maintain our compensation costs at 45% of net operating income.

For 2023, as always, bonuses will be finalized at the end-of-the year based on market conditions. Moving on to non-compensation costs, these were GBP631 million, up from GBP543 million in 2021. It's useful for you to understand the drivers of this, so I have set out the key movements on this bridge.

Let me take you through each of these in turn, starting with FX. As you know, around a third of our cost are non-sterling, the weakening of sterling led to an increase in our cost of GBP19 million, although this was more than offset by the GBP80 million positive impact that the changes in rates have had on our revenue which I referred to earlier.

Next, onto travel and marketing costs, the ability of our people to travel and meet with clients is an important driver behind the success and future success of our business given the global distribution footprint of our business. And fortunately, the end of travel restrictions has enabled activity to return, albeit in a disciplined way as we remain mindful of our aggregate carbon footprint and costs.

For 2022, the increased volume, travel and higher marketing activity has contributed to an increase in cost of GBP18 million. That said, our focus remains on managing expenses and we have embraced new technology to help people to communicate more effectively. This has helped us to limit the increase and our travel costs remain 25% below pre-COVID levels, despite the increased size of the business and significant rise in airline prices.

Moving on to our investment activity. As you know, we continue to think long-term and invest in the right opportunities, our strategic acquisitions and continued expansion in China, including through our WMC, a new approved wholly-owned FMC contributed to GBP23 million of additional expenses.

Both the acquisitions and investment in China will lead to increased revenues. Another area where we think long-term is in our approach to investing in the development of a flexible and scalable technology platform through our cloud migration program. We have made significant progress here and have been able to accelerate the program, completing the migration phase nine months ahead of schedule.

As a result, we are already benefiting from greater cyber resilience and operational agility. This program led to an increase in cost of GBP15 million. But we will generate significant savings in the feature. I will come back to that in a moment.

Finally, on our 2022 cost, we continue to drive efficiency and cost savings wherever possible. As a result of the number of - as a result of a number of efficiency measures, the impact of inflation was limited to GBP40 million. That's only 2.5% of our prior year costs despite the strong inflationary pressures.

Now turning to 2023, we have a continued FX headwind of around GBP7 million. And again, through our cost control, we expect to limit inflation to around GBP5 million, which is less than 1% of our 2022 costs. We will continue to build-out our presence in China with a full-year of WMC operational costs and our wholly-owned FMC going live later in the year. This along with the full-year impact of the acquisitions we had completed in 2022 will drive an increase around GBP15 million.

And finally, we are entering the next phase of our cloud program, which involves further decommissioning and data optimization. One of the benefits of the cloud migration is that it has enabled us to avoid spending GBP100 million in several updates. And with that, we have avoided the associated depreciation of around GBP20 million per annum.

We've also avoided the material costs we're nearing our data center leases and associated electricity and maintenance costs. When you put all those factors together, they translate into a like-for-like saving of GBP15 million per annum, which we now expect to realize in late 2023, early 2024. Putting all of this together for your models, I would assume non-compensation costs around GBP660 million within operating expenses for 2023.

I hope you now have a clearer picture of all the main drivers behind the movement in our operating profit year-on-year. Lastly, before I sum-up, let me quickly update you on our capital position. As you know, we put a large part of our surplus capital to work-through acquisitions. This, together with other movements including regulatory changes, means that our surplus now stands at GBP655 million compared to GBP1.5 billion at the end of 2021.

We will continue to hold a level of capital that allows organic investment and continue to target a dividend payout ratio of around 50%. In addition, we will be putting forward a whitewash resolution at the AGM, which if approved, will provide us with additional option of share buybacks to manage our surplus capital position.

Now to sum-up, our operating profit for the year was GBP723 million, a decrease of 14% compared to the prior year. Our central costs, which reflect the cost of the plc were GBP49 million, down from GBP54 million in 2021. We had net - we had a net loss on financial instruments in other income of GBP7 million, mainly relating to the changes in the value of our seed and investment capital. That's a real improvement from the position at the half year.

In a normal year, we - and you can see this, if you look back over the past 10 years, we would expect gains from these investments to broadly offset this, the central costs. Our acquisition-related costs increased to GBP86 million, reflecting the impact of the transactions that we completed in the first-half of 2022.

These costs include the amortization of intangible assets and expenses related to contingent consideration. For 2023, we expect these costs to increase to GBP95 million as the full-year impact to the 2022 acquisitions comes through. These items resulted in a profit before-tax of GBP587 million. Our dividend payout ratio is now based on our operating earnings per share and our effective tax-rate and operating profit was 17.1%.

We expect this to increase to around 20% for 2023, principally as a result of the change in U.K. tax-rate that comes into effect in April. This meant a basic operating earnings per share of GBP0.374 in light of these results tend to reflect our progressive dividend policy, we have declared a final dividend of GBP0.15 per share. This provides a total dividend per share of GBP0.215.

After allowing for the change in our share structure, this represents a slight increase on the prior year and represents a payout ratio of 57%. Overall, and given the market backdrop, these results demonstrate the resilience of the business.

Now back to Peter.

Peter Harrison

Thank you, Richard.

I am just going to spend a moment on outlook. I've already spoken about how the strategic focus change, how the business will be an important part of the profit drivers going forward. I don't think we want to do it today is to underline our confidence in the Wealth growth and the private asset growth that we've talked about before. So there will inevitably be a market impact on them, but sort of many of us will have views on what that is. I'm sure you would factor-in your views on that, but I think the underlying resilience and growth dynamics of Wealth Solutions and Schroders Capital will remain strong.

I think the comments I made about the year starting well, I would just put out that particularly in Solutions, but also a much more stable environment in Mutual Funds and Institutional world have come through. So we're confident in the business we're building. We think the strategic focus is right, both as reemphasize the investment for future growth is the right thing to carry-on doing. And we are very willing now to take any questions you may have, quick off the mark.

Question-and-Answer Session

A - Peter Harrison

Could you just state your name and your firm?

Hubert Lam

Thanks. It's Hubert Lam from Bank of America. I got two questions. Firstly, on Solutions, Peter, just want to clarify what you said about the flows going back, did you say that the GBP6.5 billion that you lost in second-half, has it come back this year?

Peter Harrison

Yes.

Hubert Lam

Okay. And if you could give us the reason what's driving that?

Peter Harrison

So, look, there was a very major change in the quite a lot of independent research published, but different managers responses in different ways. We were very fortunate that we didn't have to forcibly redeem anybody we - our pricing works. Our - we have sufficient collateral.

So when the analysis was done at the end of the day, our pipes worked incredibly well, our governance models worked incredibly well and we have sufficient people to talk to clients through that. I think what that's going to lead to is a shift in-market share over time that will both reflect our business model and the quality of the pipes that we've got. So we feel confident that there will be a net gain of market share and the fact that the market is changing.

Hubert Lam

Thanks. And the second question is on Schroders Capital is one of the consequences, potentially the LDI situation is people looking for more liquidity. Just wondering how that change the outlook from U.K. pension funds going into private assets and other effects?

Peter Harrison

So. You're obviously right. There has been - it was something about fundraising hiatus in the U.K. DB market in Q4. And the denominator effect of people feeling overexposed to less liquid assets is going to be a feature going into 2023 and possibly even '24. We are reiterating our overall guidance because we think we can achieve the growth elsewhere.

But undoubtedly, it is a headwind in the U.K. DB market. The converse - and we don't know what the government will finally come out on this is, whether or not there is going to be a change on Solvency II, which would free-up more money to flow into private markets and risk assets over-time, but there is still work in progress.

Hubert Lam

Thanks. And final question is on your surplus capital position, it's about GBP650 million I think. Just wondering what your target for that is? I think, historically people always think about it as close to GBP1 billion before you able to do larger deal, like more deals or just the buybacks, just what's your target for capital before you start thinking about doing external acquisitions or buybacks?

Richard Keers

Hubert, I wouldn't characterize it quite the way you described. What we've said is, if it was in excess of GBP1 billion, we would find ways returning that to shareholders. But anywhere between where we are now and GBP1 billion, we might have plans for M&A, we might have plans for organic investment, but within GBP500 million to GBP1 billion, we feel very comfortable, but over GBP1 billion, we'd be looking at ways returning that to shareholders.

Peter Harrison

We get embarrassed over GBP1 billion.

Nicholas Herman

Yes. Thank you for taking questions. It's Nicholas Herman from Citigroup. Three from me. If I could just come back - if I could turn to costs, please. Just I was interested by the comment, GBP 5 million inflation for 2023. Can you just dig into the moving parts there? I thought you would have comment on that one, please?

Richard Keers

Yes, there's lots of moving parts. There is obviously this inflationary environment, particularly in IT costs, license cost, Microsoft - most organizations use Microsoft. Microsoft price increase to 9% year-on year. So to limit that to 1% is - requires a lot of other programs to mitigate the inflationary environment we're in. But there - the background inflation, especially in technology is significant. But we are working really hard to mitigate that.

Nicholas Herman

Okay. And there are other savings as well from traditional businesses too?

Richard Keers

Right.

Nicholas Herman

It's having overall investment budgets is trending year-on-year.

Peter Harrison

We - in terms of the change program, we have reduced our change appetite by 20% this year. But at the same time, costs were clearly impacted by full-year of acquisitions. They are sort of avoidable. They are obviously part of our strategy in terms of driving revenue growth and there is rollout to those two wholly-owned - one wholly-owned business in China and subsidiary in WMC. It's also a full-year effect of that is significant, but they are real growth businesses that would deliver real enterprise value in the future.

Nicholas Herman

Got it, thank you. And then the other two questions, one on the ESG and one on Schroders Capital. Just curious that you talked about a strong focus on investment in ESG. Any comments about particular areas of investment there? I think that'll be quite interesting if you can comment on that, please?

Peter Harrison

I think the - this is now which is growing quickly. And I think if you look at the flow dynamics of the industry, getting it right is critical. So despite all the noise in 2023 - 2022 about change in dynamics to the world, sustainable funds still took market share. And I think that's really important underlying dynamic despite what's going on.

From my perspective, we've made - we started by making very significant ability in data and helping people understand that portfolio. That's the first thing. That's a really important basis from which to manage and give regulators comfort that you're doing what you say you're doing. So the data piece was a big part of that and helping your analysts really understand what's going on.

Well, this goes to next is engagement. And I think we published our blueprint for engagement earlier this year. That ability to demonstrate the companies on moving along the curves that they've set out or helping companies establish the curve they've set out on being clear on the governance positions. So, the ability to speak with and understand companies and explain that back to the asset owners is a really important part of the next-stage of sustainability.

I would say this - people do tend to oversimplify this discussion. So there isn't - there is a narrative, which says the U.S. doesn't do this stuff and the rest of the world does. We are seeing very significant growth in socially orientated funds in the U.S.

So being able to slice this through an environmental land, social land, and the governance land is an important part of having a more nuanced debate with people about what people want out of their investments beyond return. Some people want impact, some people want to make this sizable, some people want something environmental. So that's where this goes next.

Nicholas Herman

And then last one, I'm conscious of time. But on Schroders Capital, you're clearly very constructive on the flow outlook. We've seen a lot of the list alternatives seeing much lower growth this year in a tougher environment and an industry that looks like the overall commitments will be down this year.

So what are the areas that you talk about a specific areas where you expect to be defining those trends to take share? And then, I guess, you also commented that the business will now focus on operating leverage. I guess, I can repeat the question I asked at the half year, which is kind of how much the tailwind is that now? And then I guess for the overall asset management business? Thank you.

Peter Harrison

It's an important question. We recognize that many other people have downgraded our expectations for growth. I spoke a little bit about the flywheel effect and the self-reinforcing growth that you can get from being involved in other parts and stressing that that will help our position. We've also got the benefit of having acquired Greencoat during the course of the year, which is a helpful piece.

But most critically, having the full hand of cards, private debt, private-equity, real-estate and infrastructure is a really important part of being able to have a holistic conversation. So you can solve someone's private assets also as a whole. And that's relatively unusual position it's been as I outlook. Haley Tam?

HaleyTam

Thank you. Haley Tam from Credit Suisse. Last two quick questions please. Can I just confirm are you not giving any compensation costs to revenue guidance anymore, so I didn't pick that up in the presentation? So I just wanted to check?

Richard Keers

Haley, I haven't done. It clearly depends on market conditions. And if I was doing it now, if you could tell me what markets are going to do, I'll give you an absolute commitment, we'd be very disciplined. But if we look back 20 - the real proof point is 2022 was very difficult year. Yes, we didn't increase our ratios and we actually reduced compensation costs notwithstanding quite a significant increase in headcount principally due to the acquisitions we've made. So we've got a track-record of being disciplined. But I don't want to look forward and tell you what revenues are going to do, which are clearly depended on markets.

Peter Harrison

There's one more news, Haley, is the crossover between non-comp and comp cost is quite common, what you're bringing and what you put out. And I think one of the things we're doing this year is focusing more on what the total envelope of costs and have we got things in the right place and should we be in-sourcing or outsourcing. So another thing what we're reluctant to say it's all one-way because we just went on and highly said where we're going to fit, what we're going to achieve on - in that next change during the year. But we will be very transparent at the end-of-the year.

Haley Tam

Thank you. And the second question is about the 44% of funds that are outperforming over one year. Is that a metric that matters? Is it something that we already have been seeing? And the outflows you saw in Mutual Funds and Institutional last year, was it maybe something you might take into account for this year?

Peter Harrison

No, I think it's very much a reflection of fact that indices are down. So where you've got particularly in multi-asset, for example, where you - many multi-asset funds have a CPI hurdle or an absolute return hurdle. So you get this - you get this impact when markets are down. You've missed your - you missed your straight hurdle, if you look at where we sit versus competitive funds. But the picture is much better.

So, I - and that's the first thing. The second thing is that yes, active managers had a bad year versus index last year and so although the - about 44%. I don't think it - I mean, in the short-term, it doesn't feel like there's is an impact on flows. Three-year number is still very strong, the five-year numbers very strong. If you sell those weakening, I think that would be a bigger conversation, but I don't feel under any performance pressure at the moment relating to flows.

Richard Keers

But it's also very pleasing to see since October every month, it's been a very strong relative performance since October.

Peter Harrison

Yes.

Bruce Hamilton

Bruce Hamilton, Morgan Stanley. Just one question from me. On obviously significant progress in terms of the strategic pivot to the - to the growth areas. In terms of sort of flow well - flywheel benefits, sorry, from here, are there any sort of missing ingredient or things that you still need to kind of strengthen through inorganic? And where is - or in worst case, just accelerating that sort of virtuous circle, you mentioned a bit of our private capital where would the other opportunities be perhaps in private wealth bespoke solutions or another sort of portfolio delivery, but I'd be interested in that.

Peter Harrison

Yes, it's a really good question, Bruce. Do I feel there is a big gap, no? I think we've - those - getting those four pillars in place and getting a good sustainability and impact offering together was the priority. Getting the - that integrated into the business in a different way, I think is the next stage of challenge. We've made some quite fundamental changes in how we go to market. So we've - our industry in the past has talked about distribution. Distribution feels like something you do to electricity or water, what you do to your client, you send them something.

My most great item - professional services firms or other industries focus much more on what the customer need is. And because we're able to wrap around every element of that, figuring out how you - how you put the client piece in the center to accelerate the flywheel is the next piece. So if I take something like sustainability, the ability to really help clients understand the whole of our assets and that opens up conversations about OCIA, opens up conversations about you're solving the problem or you need a matching asset for that or you need - or you create wealth needs.

Or if you think about post-retirement, micro LDI being a long-term solution for individuals retirement rather than just being an Institutional product. So I think that, that development function of meeting the client needs becomes the next, if you like, the third-generation of our industry, when we start to think about people other than being the end of a distribution hose and you want to paint one red or one blue and that doesn't feel the right way to go-to-market.

Gregory Simpson

Good morning. It's Gregory Simpson from BNP Paribas Exane. Can I just ask about the potential ban on retrocessions or inducements in Europe? Any thoughts at this stage and how that might play or how that might impact business in our continental Europe?

Peter Harrison

We're very relaxed about it. I mean, we've obviously worked very closely with distributors who are embedded in a lot of what they do as a bunch of the brightest trust. Where Europe finally settles down and we've been talking about this issue for 10 years. So RDR turned out to be I think a relatively good thing for our business in the U.K. We've seen the same happen in other markets and relaxed about where Europe comes. I mean, the power of the banking distribution model is a really embedded part of how European save.

Gregory Simpson

Thanks. And then are you seeing any signs of changing appetite between asset classes in a higher-rate environment between equities, fixed-income, multi-asset? And how would you characterize your relative on performance fund? Is there a return to fixed-income in higher risk environment?

Peter Harrison

There is massive returns - demand for asset allocation conversations and the role of multi-asset because I think last year was the first year where people - Greg, this stuff matters. So that is important. The second is I think we've seen a complete stabilization of fixed income. So you went through a really difficult period last year where fixed income funds were very much out-of-favor, some quite strong changes of direction, that's definitely stabilize coming into beginning of this year and demand for credit funds returning quite nicely and we're seeing that come through.

There is a - in the core real-estate space, particularly in the U.K., I mean, as a comment that was made earlier, I think it was Bruce, but as you - but on-demand and for real-estate and posted in the post DB environment, that's clearly weak because people - that - but the value-added space is alive and well. So, I think there are some nuances, but the big shift is the governance and asset allocation thinking within clients is the area where they're thinking we've got to get this right going forward.

How we're going to deliver in a world of inflation and low returns is a really big issue for clients around the world. If you're a low-risk European saver, last year was a really difficult year. And that's challenging people's thinking and making them think about their business models and that's a good thing from our perspective.

Peter Harrison

Great. Thank you. Five minutes ahead of time. Thank you all very much and look-forward to seeing you in either in June for our Capital Markets Day or July for the interim results. Thanks, everybody.

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Schroders plc (SHNWF) Q4 2022 Earnings Call Transcript