XPS Pensions Group H2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
June 19, 2025
Earnings Conference Call
XPS Pensions Group H2 2025
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good morning, everybody. A very warm welcome to London Stock Exchange. Thank you for coming along to see us this morning. We're going to present our results for the year ended 03/31/2025. Now it was another great year.

Operator

We're really, really pleased with the results. As you can see, we're announcing revenue growth of 18%. Of course, announced that a few weeks ago, but we're pleased to show you that's been delivered with really strong operational gearing. We've got EBITDA up 27% and adjusted EPS up 36% over the year. Now that's the third year in a row of really, really strong performance.

Operator

So we're absolutely delighted that we're compounding the levels of growth that we've seen in recent years now, which is fantastic. Now it's fair to say that the market that we operate in is a good one. There's a lot going on. You just open the Feet and there'll be a story about pensions in there. And whenever that happens, it's quite likely there'll be things for us to be talking to our clients about.

Operator

But I guess what we're really proud about in the results that we're showing today is that the growth has come in areas that we invested in some years ago and built our capability to be ready to help our clients. And that's in areas like risk transfer, where pension schemes might want to access insurance solutions. It's in areas like GMP and data work and so on where we continue to be extremely busy. And of course, it's also been in MacLeod, this public sector rectification project. And that investment in MacLeod really paid off, and we're the only firm very proud to have delivered for its clients in that very big project this year.

Operator

Now the margin improvement that you can see is partly a mix of business effect. We are doing more high margin project work now than ever before, and that's helped. But it's also driven by underlying efficiencies, and Snail will say a little bit more about the impact of these. But we are using technology in smart ways, and that's really helping with our efficiency and margin as well. And I guess, most of all, we're really proud that we've done things the right way.

Operator

We are big believers that if we have happy, motivated people, first and foremost, they will in turn deliver good service to clients and good things will follow. And this year, we had fantastic results from our employee survey again, and that in turn has led to really happy clients. The results of our client survey are very, very strong as well. We've got a really strong brand in the market. This was a year where we won more awards again.

Operator

We're very proud to win arguably the biggest award, which was the actuarial firm of the year at the Professional Pensions Awards, again, which happened during last calendar year, which is fantastic. Now of course, we're also broadening our horizons. The world of pensions and insurance increasingly overlap. This year, we hired a number of senior people headed by David Honor to build an insurance consulting practice to take advantage of some of these opportunities in front of us. And of course, we then accelerated our path into that with the acquisition of Polaris, which happened towards the end of the financial year at the February.

Operator

So that really sets us up for some exciting broadening of our horizons into the future. In combination basically with that, but all that's going on in the pensions world where we are incredibly busy and there's just so much happening, continue to be really, really excited about the future. So with that, we'll get into it and we'll unpack a little bit of detail.

Speaker 1

Thanks, Paul. So FY 2025 was another strong year, as Paul just said, and marks the third consecutive year of growth across all key metrics. In the three years, revenues were up 66%, adjusted EBITDA up 104% and diluted EPS up 104% as well. So the growth rates are a real testament to the quality of our business. Returning to FY 2025, adjusted EBITDA margin has improved further to 30.1% from 27.9% last year benefiting from the business mix, one off impact of MacLeod Remedy project and continued cost efficiencies.

Speaker 1

Adjusted diluted EPS of 20.6p is up 36%, benefiting from of course the higher operating margins, but also slightly lower finance costs and a one off tax benefit. Leverage at the end of the year was just below 0.6 times, which includes the initial consideration for the Polaris acquisition, and it remains well below our medium term target of one to 1.5 times. And in line with our progressive dividend policy, the Board has proposed a final dividend of 8.2p, which is up 17%, making the full year dividend 11.9p, up 19% year on year. This underscores our continued confidence in the business model and growth prospects. Paul and Ben will cover the divisional revenue performance shortly.

Speaker 1

One thing to note, increasingly, we're finding that there is a significant overlap between our consulting services offering. And so in the future, we intend to disclose and discuss performance in our advisory, administration and SIP divisions. I won't go through all the numbers, but to give you the highlights, the group revenue growth of 18% grew from obviously the MacLeod impact. And if you take out the impact of MacLeod, that's a 14% growth, which is still a very strong performance year on year. Costs, which I'll cover in the next slide, have grown 14%.

Speaker 1

MacLeod boosted EBITDA margin by about 1%. So even excluding that, margins have grown strongly year on year. Net finance cost decrease reflects the debt reduction following the sale of NPT, and the effective corporation tax rate is 24% due to a one off prior year tax adjustment. That's resulted in adjusted profit after tax growing 36% year on year. On the non trading and exceptional items, which are all consistent with previous treatments and majority of them noncash Amortization of acquired intangibles, flat year on year, but will go up to about 9 to €10,000,000 from FY 2026, reflecting the Polaris acquisition.

Speaker 1

The higher share based payment charge reflects the higher expected vesting on the back of strong EPS growth, improvement in TSR and of course, the higher National Insurance charge, both from a higher share price as well as the increase in the headline rate. Exceptional costs include deal fees in respect of acquisition of Polaris and they also include the contingent deferred consideration for both Polaris and Penfida. The Polaris deferred consideration will be built up over three years because of IFRS three requirements, and we expect that to be a charge of circa €10,000,000 per annum depending on expected business performance. Turning to the underlying guidance for the near term. The one off impact of MacLeod washes out in FY 2026 and we are also in a much lower inflationary environment.

Speaker 1

Short to medium term, we expect organic revenue growth rates to normalize to mid to high single digit percentage, but of course, 2026 will also benefit from a full year impact of Polaris. FY 2026 margins will be comparatively lower as MacLeod washes out and we have the cost headwind from higher National Insurance. This is all reflected in current consensus before this morning. And beyond FY 2026, we're confident of delivering 0.5% improvements in margin per year in the medium term. Interest costs will be higher to reflect the full year effect of Polaris acquisition in 2026, but then it will start to come down as we pay down debt.

Speaker 1

On the operating costs, total operating costs are 14%, well below the 18% growth in revenues. Additionally, costs as a percentage of revenue have continued to fall, leading to further margin improvements. Within that, staff cost increase of 15%, 10% of that is driven by higher headcount and the rest due to inflationary increases in pay as well as the higher accrued bonus, which is commensurate with the performance of the group. Increase in IT costs reflects our continued investment in technology, particularly cybersecurity. Increase in property costs reflect inflation increases, partially offset by the closure of two of our offices.

Speaker 1

Within professional fees, the largest component is PI insurance, which usually tracks the growth in revenues. However, this has remained flat, reflecting the quality of our business and our focus on risk management. All other costs as a percentage of revenue remain in line with prior year. Turning to cash flow. One of the key features of our business remains a strong cash conversion.

Speaker 1

And once again, we've delivered slightly ahead of our guidance of 90% to 95%. The comparative year was higher because of the advanced receipts in respect of the MacLeod remedy project. Lower interest payments reflects the significant reduction in debt following the sale of NPT. The EBT has spent just over €18,000,000 during the year to buy back shares, which have been used to satisfy the vesting of share awards, therefore minimizing the dilutive impact. Remainder of the outflow relates to dividend equivalent payments and employers NI contributions on share awards.

Speaker 1

CapEx of €8,200,000 was spent on a combination of Aurora on leasehold improvements and BAU IT spend. In March, we completed a refinancing exercise, increasing our total available facility to 120,000,000 until March 29. Of this, we currently have €65,000,000 undrawn. Combined with the impact of strong operational performance, this has led to a net debt at the end of the year of €40,300,000 and a covenant leverage of just below 0.6 times. Just to reiterate our capital allocation priorities, the focus remains in capturing the organic opportunity within our core and tangential markets as we have done in FY 2025.

Speaker 1

We want to continue to invest in creating market leading proprietary tech that creates a competitive advantage as well as drives efficiencies. Now relative to the size of the business that we are, we still remain CapEx light. We will continue with our progressive dividend policy and scan the horizons for strategic M and A, but we will remain disciplined in that approach. With that, I'll just hand over to Ben. Thank you, Stijl.

Speaker 2

So before we get into the business review, just a quick reminder of how we structure ourselves at XPS. We've got three key parts of the business. So Actuarial and Consulting, which is where we advise clients and help them to make sure they're compliant with a myriad of regulations that apply to the schemes themselves and defined benefit schemes that obviously includes making sure there's enough money to pay out all the benefits. We have our investment business, where we advise on where to invest the assets and broader risk management. And, of course, as Sejal mentioned, these two parts of the business work really close closely together.

Speaker 2

They also share resource on occasions as well, so we often talk about them under the combined banner of advisory. We then have our administration business where we deal with the members themselves, and this covers everything from record keeping, answering their questions, and ultimately doing everything needed to make sure we pay the right benefits to the right members at the right time. At the bottom in terms of our market, the bulk of our work is for pension schemes. But as we previously mentioned, we're increasingly providing services into the life insurance market as well. Now this share slide shows what's going on in the private sector DB world, which is a big part of our addressable market.

Speaker 2

And for the vast majority of my career, probably the first twenty five years or so, was spent helping clients deal with deficits, and I was generally giving clients bad news. Probably the only silver lining was that one day, many years in the future, they might have enough money to pass the scheme to an insurer and do what's called a pension scheme buyout. Now as you're probably aware, we've had rising funding levels, they've improved quite dramatically over the last few years, mainly because of rising interest rates. And now more and more schemes have got enough money to do a buyout, and you can see from the chart in the top left that this has led to increasing volumes of bulk annuity transactions. Now whilst the scheme ultimately disappears when a buyout is completed, these are really good for XPS as there's a huge amount of work involved, along the way.

Speaker 2

It typically takes three to four years from a scheme deciding they want to go towards an insurance transaction to completing a buyout. And during that period, we typically earn a multiple of the fees that we otherwise would for care and maintenance. Now for each transaction, there's also an insurer on the other side, and they often need help too, whether that's dealing with all the data that's being thrown at them or just to make sure they keep paying the members their correct benefits. So buyouts also create opportunities for XPS with the life insurance companies. Now what's really interesting is schemes now have a choice, and this is because as part of the government's agenda to try and get more money invested to grow The UK economy, they're they're encouraging schemes to run on.

Speaker 2

And, actually, just last week, a pensions bill was laid before parliament, which paves the way for this now to happen. And this option's getting lots of traction. A recent survey by one of our competitors said that 60% of large schemes now think that that's the way that they'll go. And every time there's another survey, this just seems to get bigger and bigger. And you can see why.

Speaker 2

One of my large clients, which has got about £5,000,000,000 worth of assets, they were previously heading towards buyout, and they've decided now that they're going to run on because they're excited by the prospect of about a billion pounds of surplus emerging over the next ten years or so, and that can be used to improve member benefits or ultimately benefit the company after they've paid in so much money over the last decades and and beyond. So run on's good for XPS two as alongside providing all of the care and maintenance services, we also have to help schemes with all of the new challenges that go with that different phase of their journey. So the key message here is this backdrop is really positive for XPS. Whichever way schemes go, it will drive a lot of demand for our services. Now you can see all this coming through in the actuarial and consulting results, which grew 14%, of which 13% was organic if we exclude the impact of Polaris.

Speaker 2

And this was driven by lots of risk transfer work supporting clients head towards buyout, and we're also still very busy on GMP equalization. We did more work for insurers, primarily supporting their Balkanerity businesses. And as Paul mentioned at the start, we also established our footprint in the broader life consulting market, firstly by making some senior hires and then by the acquisition of the Polaris business. And Paul will come on to talk a bit about more bit more about how we see the life consulting business developing. Looking ahead, we've still got lots to do on GMP equalization, and there are some other regulatory changes that come into effect that clients will need help with.

Speaker 2

We expect to see lots of demand continuing to help schemes figure out which way to go and then help them implement their routes to buy out or run on. And this is both on our own clients and also potentially new ones as well because it's quite common that schemes will tender for a specialist risk transfer adviser, so it gives us the opportunity to win that work on other people's clients. We're also finding that schemes will often review their advisers as part of their decision to run on to make sure they've got the best people in place to help them over that new phase of their journey. So we hope that will create some new business opportunities for us as well.

Operator

So in investment consulting, the same market changes are having an impact as well. But in a sense, what happened in investment consulting is the impact was just more immediate. When interest rates rose and funding levels got better, of course, there was a huge amount of turmoil in the market, the LDI crisis and so on, which caused our team to be extremely busy helping clients to navigate their way through that. And that caused growth of 46% over the last two years. Against that backdrop, a performance of almost flat is actually not bad at all, hanging on to a lot of that increase in volume even as things have stabilized a bit.

Operator

And that is the outlook. Things are generally more stable in the sense that well funded pension schemes generally need a little bit less advice than when there's a huge amount of turmoil going on around them. Now it's not to say that we don't see good opportunities from the market changes that are going on around us. So for example, if a pension scheme is getting itself ready to potentially go down the path towards buyout that Ben was describing, they may need to remodel their assets. They may need to get them ready so that an insurer can take them on.

Operator

And in particular, that might mean removing illiquid assets that they hold. Now at the same time, on the flip side, if you're planning to run on, there may be opportunities to acquire illiquid assets potentially at a discount, especially if there are now some forced sellers in the market. So what we've established is something called exchange, which is a mechanism of bringing buyers and sellers together such that transactions can then get done. And we expect to do quite a bit of work in that area in the coming years. Now another consequence of rising funding levels is that some of our clients don't need some of the more expensive and complex products that they might have invested in over the years, particularly in the area of fiduciary management.

Operator

Better funded schemes are fine with a simpler care and maintenance type offering, the type of thing that XPS excels at delivering. So again, we also see potential opportunity for those using fiduciary management products that are provided by some of our competitors may prefer to work with us at XPS instead. And more generally, of course, regulatory change, the new pensions bill, new funding regulations and so on, all of that affects our investment clients as well. So the backdrop for having a lot of things generally to talk to clients about is pretty favorable. So we're optimistic about the direction that investment consulting is heading in.

Operator

Now in terms of administration, an absolutely fantastic year, 30% growth, a lot of project work as well as onboarding of new clients contributing to that growth as well. We've been very busy on things like GMP work, very busy on data cleansing, helping schemes that might be getting ready towards insurance. And of course, we've also been really, really busy on the cloud. So just to say a little bit more about that, that is a rectification project. Essentially, about ten years or so ago, the government made changes to public sector pensions that were then legally challenged, and ultimately, those legal challenges were successful.

Operator

So we're now having to rectify and put people back where they might otherwise have been had these unlawful changes not been put through all those years ago. And it's phenomenally complex and challenging to do that. We look after about half the police forces in The UK, and for those clients, we sent 38,000 statements before the statutory deadline of thirty one March this year. And we're the only administrator to have achieved actually that kind of milestone of hitting sending statements to every single one of our members that needed one. So we're very, very proud of that.

Operator

Of course, it has contributed to our revenues and so on this year, but really excitingly, it creates potential opportunities because our reputation in public sector administration is now very, very high. So as you look to the future, there's lots going on. There are those McLeod type opportunities and so on in the public sector. There's a huge amount more activity around GMP and wider data cleansing and things like that. And we still see a healthy pipeline of new business opportunities in the private sector.

Operator

And of course, this was the year that we onboarded John Lewis successfully, our new biggest win in the private sector, which is great. We are driving efficiency. Aurora, our administration platform, we've continued to develop and onboard clients. We still haven't even hit half of our members under administration on Aurora yet, but we expect to get there by 2027. And with that comes operational efficiency and just better working models internally and all sorts of good things will follow.

Operator

On technology more widely, this is the area of our business that's perhaps most got most of benefit from AI. We are doing some interesting stuff. We have our own proprietary offerings utilizing AI that are kind of at the pilot stage at the moment that are starting to show some really interesting potential benefits. And so that might be something that we talk about a little bit more in the future. Our SIP business had a great year, benefiting from making it onto the St.

Operator

James Place panel a little while ago, and that's driving still record levels of new business. And that combined with the increase in the bank base rate where we get some we share in some of the interest on customer cash deposits, that drove the growth that you can see. The future looks much more of the same really. Again, those new business volumes are very healthy and continuing, particularly from the St. James Place source now.

Operator

But in the background, again, to administration, we had legacy systems, particularly after our acquisition of Michael J. Field a couple of years ago, but we've now completed that integration. We're on one common platform. And again, we expect that to drive more efficiency into the future at the same time. Got a very strong brand.

Operator

It's another area, where we're proud of the awards that we win, winning a few more just in the last few weeks. So again, well set with a strong reputation for for good new business.

Speaker 2

Now one of our objectives, as Paul alluded to, is to be the best place in our industry to work. And our simple ethos is that happy motivated people with the right training and technology do a brilliant job for clients. Happy clients, are loyal. They want to take more of your services and recommend you to others as well, and this then creates strong financial outcomes. So our culture and values underpin everything that we do at XPS, and you can see from the bottom, we've won more awards again this year for our culture.

Speaker 2

Now we run an employee survey each year, and we've shown some of the results here from the 2024 survey. And these demonstrate that the overwhelming majority of people at XPS think XPS is a good place to work, that we're a forward thinking and innovative organization, and that people of all backgrounds can thrive at XPS. Our attrition rate continues to be low. And to give an example, our partner retention rate over the last four years has been 100% if you take out retirements and nonregretted levers. It's also worth mentioning that a key part of our culture is celebrating success.

Speaker 2

So earlier this year, we gave everyone in XPS a £250 Virgin Experience Voucher to celebrate our entry into the FTSE two fifty back last June and to thank them for the part they've played in reaching this milestone. And this has created a real buzz in the firm, and it really sets us up well for the year ahead. Now we also ask our clients how they think we're getting on. And one way we do this is by running a formal client survey every two years to get their feedback. And these are some of the results from the survey we did in 2024.

Speaker 2

So you can see that nine out of 10 of our clients said that they would recommend XPS, which is great. And the seven out of 10 stat in the middle is really interesting. So this was a question directed to clients who've got experience of other providers. So they might be an independent trustee with a different actuary or administrator on some of their other schemes that they work on, and they were asked how XPS compares. Are they better?

Speaker 2

Are we about the same? Or are we worse? And seven out of 10 thought that we were better, and hardly anyone actually thought that the other people they use were better than XPS. So that's a really great validation of how our service stacks up versus our competitors. We also get feedback directly from the members themselves.

Speaker 2

The best place to find this is Trustpilot. Our rating is 4.6, which is in the excellent category, and that's the highest by a bit of a margin, actually, versus our, the other competitors we have in our market. And you can see on the bottom there some of the lovely things that members have written about the members of our administration team who provided them with help.

Operator

So just to come back to this broadening of our horizons. The world of pensions and insurance overlap in the area of bulk purchase annuities. But of course, insurers do a huge amount more than just writing bulk purchase annuities. They've got whole other areas of their business, all sorts of different products and offering into the market. And of course, they've been in those markets for decades, many of the bigger insurers.

Operator

Now they face a lot of challenges across the piece, not dissimilar to some of the challenges that pension schemes face. There's a huge amount of regulatory change, things like changes in solvency rules, changes in accounting standards, recently IFRS 17 coming in, changes in the way the FCA wants them to deal with customers and so on and so forth. So they've got to constantly adapt and change as the world moves around them. And of course, they're doing that against a backdrop where often they've got perhaps legacy IT systems, they've got data challenges and so on. And more positively, they want to be on the front foot.

Operator

They want to be using new technology. They want to be introducing AI and all that it can bring and so on to really differentiate and be commercially successful. So the insurers need a lot of help and support. And a year or so ago, we were just at the tip of the iceberg. We could help them with this stuff because it's what we do.

Operator

So that was obvious and easy. But often, we were actually even turning away work where we had great relationships if you went any lower than that because that's where our expertise would run out. So to address that, we started to professionalize what we do in the insurance consulting space and really put some infrastructure around it. We hired David Honor, a PWC partner, to come and lead and grow the team in that space, and David made a number of senior hires during the year. Now that team, of course, has got a great opportunity, but we always wanted to accelerate and go a little bit quicker.

Operator

And that's why we did the acquisition of Polaris then in February, which is a real step forward for us into the insurance consulting market. So Polaris, of course, there's quite a bit about it in our Capital Markets Day. You want to take a look, Roger Houlihan, the founder of Polaris and David did a really great presentation for about twenty minutes or so about what they do. So if you haven't seen that, it's of course on our website. Do go and have a look.

Operator

But in brief, how is it going so far? Well, the business that we bought had great relationships with a wide range of insurers, did about 18,000,000 or so of revenue in their last full year before our acquisition. And in joining with us, they now have the benefit of all that XPS infrastructure to help them grow and merging in with David's team and so on creates a very, very strong combination. Now it is early days, but a couple of brief anecdotes for you about how it's going. One very large insurer that that everybody in this room would be familiar with had liked Polaris and wanted to use them in the past, but it struggled actually because they were a little bit too small and struggled to get through their procurement team and processes and so on.

Operator

But I'm pleased to say that insurer was delighted to hear of this partnership with XPS and has got in touch and we've immediately won a decent sized strategic project to provide help to them because it's not a small firm that struggles to get through procurement now. It's part of the FTSE two fifty group that is XPS. So that's fantastic breaking down those barriers that Polaris had before and winning new work where they had a good relationship. Another simple anecdote, we've also won for different insurers and worked to help them with some of their financial modeling around longevity, quite a big project. Initially, we're sending in a team of six people, and three of them are from XBS heritage, three of them are from Polaris heritage.

Operator

And I think in all honesty, we would not have won that mandate purely as XPS and neither would Polaris. But actually, the combination of experience and offering that we've got is powerful, and and we have won it. Now those are just little anecdotes. This is a multiyear play for sure, and it's still very much in our investment phase, but we are off to a good start. And those little anecdotes illustrate exactly what we were hoping would happen when we made the acquisition.

Operator

So in terms of M and A more widely, you've seen a slide like this before. To briefly repeat what the way we look at M and A, big consolidation opportunities are coming together in our industry still potentially exist, But the honest truth is we feel like we're very capable in everything that the world needs in the pensions market. And so there aren't really many skills gaps, etcetera, to fill. And on that basis, coming together with another firm would need to be financially driven. It would need to produce very good EPS and so on.

Operator

Of course, would probably come with quite a lot of distraction potentially. Integration of two very large firms is definitely a challenge. And at the moment, we're producing fantastic returns organically ourselves. And as you've heard, we've arguably got the best opportunity we might have for the next few years to just keep growing in that organic basis. So we'd be a little bit reticent about distracting ourselves from that path, but we're not saying never.

Operator

But yes, we'd be very cautious about such an opportunity. Alternatively, market expansion opportunities, we are always actively scanning for. So smaller bolt on transactions that enable us to infill the capability or go further and expand our addressable market exactly as Polaris has done, we are interested in. And that is likely to potentially be part of our future. But I guess we're signaling it's more likely that, that would be in an area like insurance consulting or perhaps data science, etcetera, that would be compatible with that.

Speaker 2

So, we've covered an awful lot. But just to sum up, it's been another really good year for XPS, both in terms of our financial performance, but also setting us up for the future as we've continued to invest in technology, our services, and we've also now got a much bigger footprint in the life consulting market, which really expands the addressable market we provide services into. Looking ahead, we expect strong client demand to continue driving growth, albeit as Snehal has mentioned, FY 2026 will obviously be impacted by the MacLeod revenues washing out as they were delivered on a highly automated basis. We expect to see good new business opportunities both across the private and public sector pension scheme market, but also with insurance as well given our increased presence in that market. But most importantly, we'll continue to focus on our culture and client service, which is ultimately what's driven the strong performance over many years now and is the foundation for our strong future.

Speaker 2

So thank you very much for listening. That's the end of our presentation. We'll go in a moment to q and a. Before we do, just in case people aren't here at the end, I did want to publicly thank Alan because it was announced this morning that Alan won't be standing for reelection as our chair at the forthcoming AGM. So just a huge thank you to embarrass Alan for everything that he's done over almost nine years now with us since we listed.

Speaker 2

So a big thank you and a big welcome to Martin, who will be taking on the baton, and we're very excited about working with him. So thank you for that, and we will now go to Q and A.

Speaker 1

Thank you. If in terms of Q and A, there will be a roving mic, so if people can wait for that, for especially for everyone online can hear. And then please introduce yourself when you ask the question. So should we go Jacob here first?

Speaker 3

Yes. Good morning, guys. Jacob Armstrong from Stifel. A couple of questions from me. Firstly, in terms of the market, we recently saw the acquisition of Barnett Waddingham from Howden.

Speaker 3

What's your views on kind of the insurance firms coming into the pension market, if that's a potential trend? We have seen quite a lot of M and A activity. Obviously, Redington has been part of Gallagher for a little bit of time now. Have you seen any increase in competition from those guys and just the general kind of competitive landscape? And then secondly, in terms of your people, kind of what utilization rates are you running at the moment?

Speaker 3

How is the hiring environment? You very much.

Speaker 1

I'll Paul, do want take the

Speaker 2

first one?

Operator

Yes, I'll take the first one. Thanks, Jacob. So yes, M and A activity in our market is generally quite positive for us. You single out Barnett Waddingham being acquired by Howden. Barnett's a firm that's not dissimilar to us.

Operator

They were partnership before this recent acquisition by Howden. And similar kind of scale and in similar markets to us. No, so we did see that with some interest. I guess it's difficult to speculate, but other insurance consulting, broking firms, etcetera, it's more the broking side of things I think coming into the market to acquire businesses like that probably validates a bit the business model that a firm like Barnett's, ourselves, will have very high repeat recurring revenues, etcetera, which is a very good bedrock against perhaps a slightly more cyclical business in insurance broking and so on. And it's not dissimilar to the models at Aon, Willis Towers, Watson, Mercer, the so called big three in our market that are all part of those bigger, wider kind of broking groups.

Operator

So it's sort of a mini version in a sense of a transaction like that. So it's nothing new, that's for sure. The transaction may go well, I'm not here to say anything negative about any of our competition, but we do just observe that culture there's often quite a challenge when any firm is acquired, especially a firm that's got very strong DNA itself as a long standing independent partnership. Inevitably, that's a it's a challenge, I suspect, to then integrate into something that's wider and that could potentially create opportunities for us. Of course, it may go swimmingly well, but it may be a little bit difficult and there might be some opportunities.

Operator

We do see that with other deals that have happened in the industry as well. One of the bigger deals that happened in administration was this complete carve out of a firm called Aptia, just administration arm of what was part of Mercer. And again, transactions like that, they can be quite difficult. I'm sure there are some stellar successes that they would tell you about if they were sat where I am. But sometimes it's quite hard to break open an infrastructure like that and move things forward and so on.

Operator

So in general, when there's transactions in our market, it's more likely to create opportunity for us in the short and medium term as those things happen. And as I say, we look a little askance at whether we'd want to do a very big transaction such as that because we've got such a strong culture and identity now and are doing really, really well. So it's we're cautious about the level of distraction that such a thing might cause. Ben, do you

Speaker 1

want to take the utilization? Yes.

Speaker 2

So your question about utilization. So it's currently running about 70%, which is very consistent with previous years. And I don't think we view that as something that we really want to push up. There's always areas of the business that are a bit higher and the challenge is moving work around, but we think it's probably at about around the right place. In terms of the hiring market, we generally now hire from school leavers and graduates, and that's a really good market.

Speaker 2

It's quite rare that we would look to recruit at higher levels. Where that happens, it's often because we want to bring in some expertise like we did in live consulting with David Honor. And there, actually, I think we've got a really good story to tell versus some of the bigger firms in our market about our culture and the excitement here. So, no, we don't see the hiring market as being something that can stop us achieving what we want.

Speaker 1

Okay, great. Mandeep?

Speaker 4

Hey, good morning. Thank you for the presentation and taking my questions. Mandeep Jagpal, RBC. And three from me, please. First one is how should we think about the EBITDA margin progression from here?

Speaker 4

Clearly, you have efficiency gains coming through from Aurora as you migrate more clients. And how does this play through with investment elsewhere, such as insurance consulting? Second one is what is your order of capital allocation from here? Your dividend payout ratio has edged down in recent years, and you've spoken about investing in the business and potential M and A. But is there room for additional shareholder capital returns in the absence of M and A?

Speaker 4

And finally, the pensions bill introduced multiple significant changes across DC Private Sector DB and LGPS. You spoke about the surplus extraction implications, but is there opportunities in the DC Master Trust and LGPC LGPS consolidation announcements? Or on the reverse side, could you have any contracts which could be at risk?

Speaker 1

So if I take the first two and then Maury is going take the pensions bill. So on the EBITDA margins, clearly, there is a big one off benefit this year from MacLeod Remedy. We said that 30% margin would have been 29%, absent MacLeod. Consensus for next year is 28.5 so going from 29 to 28.5%. This is with the inclusion of investment in insurance consulting, headwind from National Insurance increase as well.

Speaker 1

So underlying, the margins are improving. And beyond FY 2026, we're guiding to 2005 percentage point improvement each year as some of those efficiencies that you just said start to come through. In terms of the order of capital allocation, I think that the first and foremost is there is a big organic opportunity, especially that we entered an addressable market of 1,500,000,000 in insurance. And that is the prime focus of the allocation of firepower here. Progressive dividend policy I think will continue.

Speaker 1

We're not going to be wedded to a payout ratio. All I can say is that in the last every year since we've listed, we've paid a dividend and has grown quite healthily. In terms of return to shareholders, think if we in our view, I think that's a path of least imagination given the track record of how we've allocated capital previously. Before the Polaris acquisition, the five bolt ons that we did, it was £27,000,000 of capital deployed for an IRR of in excess of 20%. So we know that we've got a track record of delivering strong returns and that's what we would be looking to do.

Speaker 1

Do want to take the pension schemes?

Speaker 2

Pension schemes, Bill. So in terms of so this was laid before parliament last week. And it did contain quite a lot, so surplus extraction was probably the biggest thing we're interested in. But on DB, it also talked about a super fund regime and levies. And on DC, talked about value for money being a new requirement effectively for DC schemes or boosted requirement.

Speaker 2

All DC schemes now need to offer a retirement option, and there are things around small part consolidators and the like in local government. In terms of then directly your question, I don't think any of that would put any of what we're doing at risk. We don't have any contracts that will be impacted by that. It's probably fair to say a lot of this was trailed, so it was nice to see it being written down, but there was nothing in there that was perhaps unexpected. In terms of opportunities, probably the main one is that this is all just DC schemes becoming increasingly regulated, So the new value for money effectively criteria and tests and requirement around retirement effectively vehicles needed being provided just means that DC trust will need a bit more support.

Speaker 2

So it's not a big part of our business, so it's not going to particularly major impact, but I don't think that side of things is going to be major one way or the other. And the same is true for local government. We do very little for local government. It might be it might create opportunities, but it's not one that I'd call out as being one that we're very focused on today.

Speaker 1

Just a reminder for everyone online, you can submit a written question, and we will come to those as well. Rohim here sorry, Portia.

Speaker 3

You. Portia from Canaccord. Can I just clarify, Sonal, on the gearing? You mentioned in the statement a target range of one to 1.5 times, but you're obviously significantly below that even having drawn the debt for Polaris. So should we think of that range more like a limit range?

Speaker 3

Should you undertake further M and A rather than a target so to speak?

Speaker 1

Absolutely, yes. So we often get asked the question that if there was suitable M and A opportunity what would you be comfortable going up to? And I think that's more what we are answering there. So up to 1.5 times as long as we can see a path to sort of de gearing whether it be through revenue or cost synergies, etcetera, to sort of below 1x, that's what our aim would be. But it's not something that we're guiding that we were going to gear up to in the near future.

Speaker 1

Rahim?

Speaker 5

Good morning. It's Rahim Karim from Investec. Three questions if I may. The first was just around McLeod. I understand that you did your job very well, but others did not.

Speaker 5

Does that mean that there is potential for you to win new business in 2026 and your assumption around revenues from that source being quite conservative as a result? The second was just around the retail pensions market. I mean, obviously, the SiP business is small in the context of that industry. How do you see that business longer term? Is it one that you want to grow?

Speaker 5

Or is it one that you might potentially exit given your capital discipline that you've demonstrated in recent years? And then the third question was just around exchange. Think, Paul, you mentioned that it has potential longer term. Just maybe talk a little bit about the revenue model there and what that potential might look like.

Speaker 1

Ben, do you want to take the MacLeod?

Speaker 2

You take MacLeod and I'll be in Retail. So

Operator

McLeod, yes, we're I mean, we're very, very proud of what we achieved in McLeod. It's a really tough project. The complexity of McLeod is quite a thing. It's one thing to say that you need to sort of put somebody back where they would have been for these changes. Had they not been made, you need about ten years' worth of salary data.

Operator

You need all sorts of complex calculations to be coded up and done. And then when you've worked out how much somebody should be being paid going forward, you work out that they're owed four years of back pay. When you give them four years of back pay, it might change their tax bracket. How do you work out the interest on what they should have received over the time? It's phenomenally complex.

Operator

It's involved HMRC. It's involved the government actuaries department. It's involved all the all of our clients and so on. And it's been a very, very big project. So I we're very, very proud that we made it.

Operator

And how did we make it? Why did we make it when others didn't? We designed Aurora specifically to be a tech enabled, scalable solution to be able to deliver this project. Where other administrators are using technology that's old, it's quite hard to patch it and make it do these things. And indeed, some of the technology providers failed and let their clients down in that front, but we didn't because we could see this coming a few years ago and made Aurora capable of delivering.

Operator

Still needed a lot of hard work and a lot of human involvement, that's fundamentally how we got there. So where does that leave us? It leaves us in a good place because as I said, just directly in our own markets, some other police forces fire blue light services have not managed to miss the deadline. And there is a cord that they can pull and extend that deadline and that's happened. So there are opportunities to talk to some of them and help them potentially.

Operator

More widely, a number of blue light schemes have talked to us about whether actually having intervened and helped with MacLeod, which we've done for some that are not ongoing administration clients that they'd like us to just do the ongoing administration now that we're through that, which is a good exciting opportunity and that's then annuity income for us for the very long term, which is good. But outside of Blue Light and in wider public sector, it doesn't directly immediately read across, but we obviously see opportunities we'd like to run at. So to your question about whether we're being sort of too cautious a little bit, in fairness, it's untested. Being brilliant at McLeod work in the police, etcetera, doesn't buy you the right to go and talk to the NHS immediately. There are frameworks and things you need to be on to go and get involved in those conversations.

Operator

So it's unproven as to just how far we'll be able to go with that. Hopefully, we'll have good stories to tell you in a year or two, but it's there are still barriers to entry into some of those other places we might go. So we're optimistic, but cautiously optimistic is probably the best way to describe, I think, where we might go with it all.

Speaker 2

In terms of the question about retail markets, so our SIP business. So I guess the SIP business, in the same way that we talk about insurance consulting, which is leveraging a lot of our core skills into a slightly different market of end users, that's probably how I'd articulate the SIP business. It's lots of administration, great member service, helping schemes of members navigate quite complex kind of regulatory regimes. So it's effectively deploying our transferable skills into a slightly different set of end users. In terms of the growth opportunities, we are positive about them.

Speaker 2

We have a relatively small market share in the bespoke SiP market. It's below 10%, we think, based on the figures that we see. When we're on IFA panels, the feedback we get is our service compares really favorably to some of the other providers on those panels. So we see there to be good opportunities to grow our market share by writing more set new business, and it is something in the past that we've grown through acquisitions. So perhaps those opportunities will come up, too.

Speaker 2

But we effectively see it as deploying our core skills to a slightly different set of end users in the same way we talk about insurance consulting.

Operator

And your third question was about exchange, this sort of interesting emerging market, which, yes, has got multiple stakeholders in. As I said, pension schemes that want to be insurance ready often need to remodel their asset portfolios, and that might involve selling assets. And bear in mind, they might have bought in a liquid asset they thought they'd hold for ten years because they thought they were more than ten years away from being able to do an insurance transaction and suddenly they're two years away, in which case they need to sell something that hasn't run its course. And selling an illiquid asset midstream can be quite difficult. The buyers on the other side, there's opportunities then.

Operator

If they're forced sellers, there's opportunities to pick up assets that are relatively cheap, including in some cases insurers, maybe for different bits of their business. So the insurers are very interested in this market too, and it's a great example of where pensions and insurance overlap and being able to connect buyers at insurers with sellers at pension schemes and so on is very, very valuable. And there probably aren't many firms in the world that can join things up in that manner, which is again part of what we're excited about with the broadening of our horizons. In terms of the revenue model, we do, do things in different ways in that market. It's good margin work when we add a lot of value to a client.

Operator

If we're helping somebody to sell £100,000,000 asset or what have you, then if we can get them a really, really good outcome, then we do get paid well-to-do it. But the margins aren't wildly different to the rest of the business. They're perhaps a smidge higher, but they're massively game changing. Again, caution, it's still a nascent small market. There's opportunities beginning to emerge, we're hopeful that we can take a good market share in these things that are going on.

Operator

But you'll imagine there's quite a lot of competition. There's broking firms and so on equally coming into the market trying to help facilitate all of this. But it's a good opportunity for us. And again, let's see in a year or two how we've managed to do with that. But yes, so far, we're something new that we kind of put together this year that's making some nice gentle headway at the moment.

Operator

We'll see how we go.

Speaker 1

Thanks. Sorry. Any other questions here? Otherwise, we've got a couple sorry, yes, just behind you.

Speaker 6

James Fletcher from Berenberg. Just a couple of quick ones. Just on recruitment, going forward, I think Snehal mentioned it was 10% last year. Just given the outlook across the business, just kind of where should we think of that going forward? And then just on run on, just kind of I was just interested to know about kind of client thoughts about how attractive that offer is versus buyout at present and how you think those surpluses might be deployed?

Speaker 6

I saw some pushback last week on So just your initial thoughts on that,

Speaker 4

please. Yes.

Operator

On recruitment first, yes, as we're saying, the recruitment market is a good market. Our strong culture and so on definitely help us. The simplest way to think of our business model, there is some operational gearing in it, but fundamentally, we're a people driven business. And to do twice as much work, we generally need roughly twice as many people. And that will shift and change with deployment of technology, and you've seen that where we could deliver more efficiently.

Operator

And perhaps one area for me to touch on a little bit was the comment I made in the presentation about AI helping us a little bit with efficiency. With regard to AI, we don't we're certainly not at a stage where we think it's going to have a huge wholesale change in our business model. Our clients really love the fact that there is a human being talking to their members, and that's really important. Bear in mind, our members phoning in are often doing so at a challenging moment in their life. It could be a happy occasion like a retirement, but it may well be a bereavement or something like that, that we're dealing with as administrators of a pension scheme.

Operator

And that human connection and warmth and empathy is very, very important. And we've always been onshore with that as well. So conscious decision in our business that, that is all done from The U. K. And the clients that we have really value that and like that.

Operator

But AI can still do really, really good things. It can help our people deliver better for their clients. Some of the simple pilots that we've been running lately that are looking really quite exciting are around, for example, AI taking a transcript of every call that we record into our Member Connect Center, which is the first point of connection for members. The transcription of those calls is interesting because AI can interrogate what the call was about and what happened and produce great data for you, identify any weaknesses in our processes. The really interesting thing that we put to work on that is to use sentiment analysis.

Operator

So we now know in the pilot whether a call starts negative and ends positively or the other way around. And we know it instantly on every call that comes into one of our call centers, or rather we will when we fully deployed it. That kind of innovation and technology is fantastic. And you think about what that enables us to do. Any caller didn't end well can get a callback within five minutes.

Operator

But we can identify if there are weaknesses, what types of call aren't going so well, how do we train people, what's great look like and so on, interrogating all of that information. It's just such a rich source of data and to help us improve this. I could name four or five other pilots in different areas, but our approach is to develop our own proprietary software in those spaces. Generally, by the way, it's like LEGO. You pick a bit of AI from over here, something that transcribes a call.

Operator

You pick a different bit from over here that does sentiment analysis, and you build your own thing with these LEGO blocks. And that's very much what we're doing. We're finding that to be quite cost effective, And we're really excited about some of the things that we might be able to develop. Don't think it massively drastically changes our people model, but it doesn't help those people to do well. And if we win more new business and so on as a consequence of having great services like I'm describing, then actually, yes, we'll continue growing and we'll need more people.

Speaker 2

I think the second question was about run off, client thoughts and how surplus might be deployed. The so I guess it's constantly evolving, but we've talked to a lot of clients, and we get feedback from our kind of consultants about what's going on. The I think the general view is that, you know, you do need a certain size and economies of scale to make run on worthwhile. So small schemes, you know, perhaps sub 500,000,000, perhaps sub 200,000,000. I think the majority will still think buyout is the right endpoint from that.

Speaker 2

That won't be the case for all of them. We've got one scheme that runs on, and it's, I think, sub 20,000,000 because they want to run on to provide higher pension increases to the members. But I think the majority will probably decide financially buyout is the better course of action. On the flip side, it there it does make sense, I think, for a lot of of the larger schemes. But, there's lots of different factors that trustees and employers will consider, how strong the employer is, and just their appetite to keep running what ultimately is a financial risk to them.

Speaker 2

And so, you know, the surveys generally say about 60% at the moment of billion pound plus schemes say that run on looks attractive for them, but, you know, I think we'll see that emerge over time, and we'll find the right answer. But that's roughly where things seem to be heading at the moment. In terms of how will the surplus be deployed, you know, again, that's early days. The pensions regulator issued some guidance last week around what trustees should be thinking about when schemes are running on. And I guess a lot of the tone of that guidance is it's really important that run on is good for members, and that means that they're really well protected.

Speaker 2

And fundamentally, we can't have a situation where this jeopardizes all of the work the industry has done to make sure members do get their full benefits. But also that perhaps in some way they do benefit from a surplus, and there's lots of different ways that can happen, whether it's the option terms that they often get within the scheme might be a bit better than within some of the insurers, or it might be through just getting slightly higher increases to benefits or augmentations. But most schemes aren't yet at the point of having to decide that they've got too much money and they want to do something about it. So, again, I think that will we'll see it emerge, but the regulator seems to be quite clear that members should get something, albeit that might end up being a smaller proportion than the the sponsor.

Operator

I might I might just add an anecdote. It's a scheme that I know very well. We calculated for them just last week the level of increase that people who've retired have had in that pension scheme for the last three years and what inflation has been for the last three years. And the increase cumulative increase is around 10%, and their increase in cost of living is about 25%. And that is a pension scheme that is in surplus that is contemplating a buyout with legal in general or whoever else.

Operator

You've kind of asked the question why we could close some of that gap back. We could put people back and restore some of their purchasing power. If we give this to an insurer, they will get the contractual minimum forevermore. If we run it on, maybe we can pay an extra couple of percent each year and give us five years and give us ten years, actually those pensions will be fully restored to where they otherwise might have been. So that's sort of why in a nutshell a trustee would look at it and say, I'd like to do that, but with all the provisors and caveats that Ben talks about, about making sure that's done safely.

Speaker 1

Any other questions? Otherwise, I'll go there's a couple online. First one is there are plenty of issues for trustees to think about near term. How can you mitigate agenda congestion to catalyze organic fee income across all disciplines?

Operator

I guess I'd say that's it's been we always need to have lots of stuff to talk about. And for the last few years, we've just had lots of stuff to talk about. It does mean that some projects can sometimes be pushed back, but only by definition because we're full. We're doing everything we can. And the probably prominent example of that over the years has been GMP, where sometimes when there's so much noise going on and we're dealing with big strategic questions, volatile markets, emerging advice around surplus and so on.

Operator

GMP is the one item on the agenda that doesn't have a statutory time line and can wait a little bit. And we've talked in prior years about GMP being a sort of underpin to demand. So if actually the converse to the question, if the wind dropped and there was nothing to talk about, we've got years' worth of GMP that would leap up the priority order that we deliver. And actually, we've got a really nice balance. We're going through GMP slowly.

Operator

And there was a statistic, I think, on one of the slides that only seventeen percent of our clients have finished GMP. And bear in mind, it's a multiyear project for each of them. So we've got more mid flight, but only 17% have yet finished, which gives you an indication of just how far there is to go with work like that as that kind of underpin to the wider advice and so

Speaker 1

on that we're giving. Thanks, Paul. Another question which I think partially has been answered. What sort of underlying cost growth should we think about this year, particularly staff comp? So how many more employees likely to hire?

Speaker 1

And what sort of compensation inflation? So I'll take that. So in terms of the overnight sort of staff cost growth, is probably about 5% on average. But of course, next year we will have the full year impact of the employees and the team that we're assembling within the Insurance Consulting division. In terms of underlying cost growth, I mean, I think I've already alluded to where the consensus margin is at the moment.

Speaker 1

It has got a tough comparator. But if you sort of strip out the impacts of MacLeod and also the one off, it will be an NII increase for the first time this year, underlying margins are still improving and sort of more longer term from FY 2027 onwards, as I said earlier, half a percentage point improvement each year.

Operator

Any

Speaker 1

other questions? I think we haven't got anything else online, so thank you very much.

Powered by Quartr