Impax Asset Management Group (LSE:IPX) — Half Year Results

0:00 Good afternoon, and welcome to the IMPAX ASSET MANAGEMENT GROUP PLC half year results investor presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time via the q and a tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself, but the company can view all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll.

0:30 I'd now like to hand you over to founder and CEO, Ian Sim. Good afternoon to you, sir. Good afternoon, everybody, and welcome to the interim results for IMPAX. So I'd like to take you through three sections, just the highlights of the update, followed by financial update, and then an outlook statement at the end. So hopefully about thirty minutes of presentation and then, q and a for as long as you like, really. So just in summary, many of you will have seen us before, but, for those of you that are not aware of what IMPAX does, we've been, specialist investment manager focused on what we call the transition to a more sustainable economy for over a quarter of a century since I started the business in 1998. This idea of the transition to a more sustainable economy is at its heart a capitalist idea around industrial revolution, the switch towards cleaner, more efficient goods and services, which is a worldwide trend, an industrial revolution that's presenting many opportunities to make money.

1:28 IMPAX has been at the forefront of investing in this quite complicated area. There's lots of technology change, lots of regulatory change that leads to complexity, which is quite often not priced into securities, and that's where the investment opportunity lies. So as a brand which is established, over a couple of decades in this area, then we do find that we are at the forefront of the competitive landscape. We're finding that given political pressures in The US against areas like clean energy that a number of our worthwhile competitors have been, pulling out, worried about, political backlash if they've got stances on climate change, for example. And so our competitive position has continued to improve in recent months. And we focused very much on designing and implementing a scalable business model in asset classes that have got the potential to grow quite considerably. So I'll explain about that in more detail as we go through. Next slide, please.

2:27 So business highlights for the six months to the end of March. I think the critical point is that after a period of being behind generic markets, given the very, unusual circumstances around, the magnificent seven stocks and AI in particular, that was a story for 2024, but that's now really, largely behind us for the moment in stock market terms, and our investment performance has improved considerably with, over 70% of our assets under management outperforming calendar year to date. There's positive momentum towards our strategic priorities. For example, in fixed income, we've been building through acquisition and we closed our second recent acquisition of that area on the April 1, so just after this period. We've maintained very tight control of costs and been able to adjust our cost base as flows have been against us in the near term although the most recent past rather.

3:22 And as we look for the prospects for the next six to twelve months or so, we have had a challenging first half to our year, but we do think that things are improving. Next slide, please. Summary of the financials for that half year period. So I won't go through all the numbers here, but broadly speaking, if you look at our, our financials and compare them to previous periods, then revenue and profit down, moderately. The, cash reserves remained pretty, unchanged compared to 12 ago. We are business on an annual cycle. So, when we pay out dividends and bonuses to staff, then, the cash does drop, but year on year, pretty flat.

4:08 And, we've announced an interim dividend of 4p per share. More on that, in a moment. So on the right, we did promise at our AGM in March that we would update investors around our capital allocation policy. So right at the top of the priorities remain investment in the business through seeding new products and also making acquisitions. The dividend policy remains unchanged, so paying out at least 55% of our adjusted profit after tax. And at the moment, we are steering investors to expect a dividend which is down on last year. So, a sort of rebasing of the dividend, if you like. And as a result of that, we're also going to be, paying out proportionately less in final dividend with the ratio between interim and final increasing on previous years. Hence, the relatively small reduction in the interim dividend compared to twelve months ago.

5:01 And the final component of the capital allocation update is the buyback programme, which we've introduced as a one off. So £10,000,000 earmarked for buyback of our own shares with an expectation that will be completed by the end of the calendar year. Next slide, please. So a few slides with some data on following. So what this shows is the waterfall explaining how we've got to our £25,300,000,000 over the last twelve months. So the period we're reporting on is the right hand side of this chart after the green bar if you like. And you'll see there that the SJP outflows, that was the loss of mandate from Saint James Place, which has been widely flagged since it was announced in December and closed in, the end of February.

5:50 So that has, really exacerbated a position which in the previous six month period was similar. In other words, outflows worse than inflows, meaning that we've shrunk assets in terms of money coming in and out. And the market movements in the the most recent six months was worse than it was six months prior. So that's taking us down another step in assets under management. Next slide, please. So as I mentioned, the the market has changed considerably since start of this calendar year. The at the end of December last year, about 37% of the S and P 500 by value was in just 10 stocks, which is, pretty exceptional. I think possibly the the highest it's been in, in recent, decades.

6:37 That situation has reversed and the percentage now, I think, is down at close to 30%, compared to more normal levels of between sort of 2025%. So that, very narrow market has meant that it's been very difficult in calendar twenty twenty three and 2024 for active investment managers to outperform the generic index. So that, situation's reversed. And as I've mentioned already, over 70% of our assets forming to the end of April, and I think that outperformance has carried on in May. Next slide, please. So a couple of slides following showing our investment performance. So this first page is our largest listed equity products or strategies.

7:24 And what we're showing here is the calendar performance in the dark blue versus the generic benchmark in the orange. So if we look at the leader strategy on the left, which is our largest thematic equity product in 2021, that was comfortably ahead of the market. But then the last, three years, '24 calendar years rather, '22, '23, and '24 has been behind. And, to the end of March year to date, it's pretty much flat, although outperforming in in February and sorry, in April and May. So this is the illustration of the point I've just made. Global opportunities, which is the largest of the core equity strategies that we've run, a pretty similar story. So ahead of the market in '21, behind the market in '23 and '24, and pretty flat, to the end of March and again ahead in April and May.

8:17 By contrast, on the next slide, then in fixed income, we've had, fairly much the opposite story. In other words, ahead of markets in '22, '23, '24 and pretty much flat or slightly behind to the end of March. So at a glance, this illustrates the diversification benefits to us in terms of the relative popularity of these complementary asset classes. So hence the desire to build up our fixed income capability and assets under management. Next slide, please. So breakdown of our assets under management by different categories is shown here. So I think the not too much to report, but but broadly speaking, if you look at the left hand side, so the assets under management according to the type of product, you can see a drop between the orange and the blue bar into the recent period as ASSET MANAGEMENT dropped away and that in core equities meant a reduction in the relative percentage in core equities with thematic equities proportionally increasing as a result on a smaller base. And that's also reflected in the middle table or middle section with The UK dropping with the Saint James's Place mandate disappearing and the the other parts of the world, certainly, EMEA and North America increasing pro rata. Asia dropped as well because we did lose a couple of first institutional

9:47 accounts in the Asia Pacific region. Next slide, please. So, again, more data to back up the message. So the blue bar again is the most recent period, so six months of net inflows. Anything to the left of the vertical line means outflows. And so Saint James' place there for quite a dramatic loss as that client dropped away. I think the critical message here in terms of the future is that in the middle, our main distribution partner, BNP Paribas, demonstrated quite considerably smaller net outflows period to period. So that's a very positive trend and that's not quite turned around to positive, but even better in the the most recent quarter.

10:39 And so the yeah. The composite here is is a breakdown of our net outflows, but the trend certainly for distribution partners in Europe is positive. Next slide please.

10:54 Strategic priorities here, really a pretty simple business idea. We intend to scale up on investment strategies where we have capacity in listed equities and fixed income where we've been building through acquisition and in our private equity business, which is focused on European renewable energy assets. We are working very hard to enhance and optimize our distribution channels with direct sales, resources in Europe and North America, and distribution partnerships in, many other places, including Japan, Australia, Latin America. We are also focused very quickly on cost and efficiency in the business, and so that's a bit more detail to come on on that in in subsequent slides. But the cost focus has allowed us to protect our profits to some degree against falling revenues in the period just reporting.

11:51 Next slide, please.

11:55 So a bit more detail on some of those slides now. So in the distribution area, we have set up distribution now with direct service in Scandinavia. We've opened an office in Denmark. We have established a new product on our usage range in emerging markets. And with fixed income funds and accounts broadening considerably, we've got much greater capabilities there. And I think I've mentioned the all these points now apart from the last one, which is that in Canada, we've seen quite attractive and encouraging inflows through our distribution partners in what is quite a well established market for us with a couple of billion dollars under management already and strong prospects for the future. Next slide, please.

12:42 So the cost reduction that we've put through, which has led to about £11,000,000 of, run rate cost savings on a on a, run rate basis is the result of, removing some of the inefficiencies that had inevitably been introduced as we built up the business quite rapidly in the twenty nineteen to twenty twenty two period as our revenues increased dramatically. That's come about in terms of efficiency through some moderate restructuring, but also removing some of the suboptimal performers across the firm. So we've reduced our roles by about 10%. So the number of first staff positions has gone down by about 30 compared to end of the previous financial year in September last year.

13:34 Next slide, please. In fixed income, the Sky Harbor acquisition added a third group of funds and teams to assets or capabilities that we bought in or brought into the business in 2018 with the Paxworld acquisition in The US, and then more recently, last year, 2024, with the acquisition in Denmark of Epsilon Corporate Credit. So the £1,100,000,000 that Sky Harbor's managing is now included, across our firm, but was not included in our March AUM update because it closed in April. What we've been able to do is add yet more capabilities this time in short duration, short maturity, fixed income products with European product structures, use of structures, and a nice diversified client base. And that adds to our product range, which had the two was investment grade or core core plus in The US and high yields and emerging markets corporate debt in in Europe with our Danish team.

14:46 So in in fixed income, we are expecting to build this business organically, but also open to other acquisitions and opportunities. Alright. Next slide, please. In private markets, our focus at the moment is on private equity. Our investment strategy is focused on investing with developers of new assets who have got the opportunity to develop and build assets, which we then, sell, with a view to making a capital gain. So that's a strategy we've run successfully since 2005. We are on the investment of fund four at the moment as it says on that chart. And with fund three, we are making good progress in, exiting the investments in order to return capital and, gains to our LPs.

15:41 So based on the outlook for this area and the expansion plan, then there's, preparation underway for for new products. Next slide, please. So moving now to the financials, I'm just gonna go through this reasonably high level and happy to come back in the q and a if you want the the details. So I think the the financials in terms of p and l have reflected in the AUM change that I've just demonstrated. I gave you the highlights at the start of the the period. So op adjusted operating profit and EPS down as a result of revenues dropping in spite of cost savings and interim dividend and a share buyback program was announced earlier.

16:28 Next slide, please. So this is the the breakdown of the revenue performance on the left, which effectively reflects the AUM waterfall that I was showing earlier. And you can see there the marginalized annual run rate of 100 and sorry. The annualized marginal run rate of 126,300,000, which will be the, like, the full year effect at the end of of the period. 76.5 being the the revenue for the the half year. With the loss of the St James' place mandate at very low fee, that's actually pushed up our run rate margin from just less than 45 basis points to just over 47 basis points for the period. And as it says on the bottom right there, nearly 50 basis points run rate at the end of March.

17:25 Next slide, please. So operating expenses shown here on the left. This is the effect of operating cost reductions cumulatively in the half year rather than looking at the the run rate, which is in the circle at the bottom there. So you can see £55,900,000 of operating expenses for the half year, but of of run rate of 98.5 annualized, so quite considerably less than double the the first half. The personnel changes broken down a little bit more detail on the top right. We haven't yet, by the end of March, terminated all positions, so there's a little bit of a lag effect there from the 30 redundancies that I referred to earlier. And then, a bit more detail on the the breakdown of the the cost reductions in the bottom bottom right. So, we are continuing to maintain a healthy spend on IT and communications as part of our outsourcing and digitalization programs.

18:31 Next slide. So put those two together and you get the picture for profit and margin. So the the operating margin for the period, 26.8% down from 32% for the the prior six month period, and you can see the trend there on the the right of the chart. Next slide, please. Capital allocation policy, I went through the highlights of this at the start, but essentially the core priority here is to invest in our potential as a firm. There's lots of scope to grow both organically, getting new products seeded and ready for our sales teams to promote and also, to potentially buy additional businesses and boutiques as we've done successfully over the last, six or seven years.

19:30 The dividend is a key part of IMPAX's proposition to shareholders, and we are not changing our policy. 55% or more of adjusted profit after tax is the policy. We're looking for a a sustainable level, and we're guiding to the lower end of this range for financial year 2025 and also rebalancing the split, so the interim is a higher percentage of

19:53 the total. And then with the share buyback program, we've picked £10,000,000 for share buyback, amount because we felt that was, large enough to be meaningful, double digit millions if you like, but, not so large that it would constrain our investment, opportunities. So that is a one off and should be concluded by calendar year end. Next slide, please. So dividend history for the last five years or so is shown here. We've been paying a dividend actually since 2008, and four point naught pence per share is a bit down on the 4.7 from the interim of last year.

20:37 And we've guided that the the full year, final year, will mean that our total dividend for the year will be at the lower end of the 55 plus, range. Next slide, please.

20:54 So meanwhile, our equity position remains very strong. So we've got a capital surplus of just over £60,000,000 at the end of period in March, and, that's well, well resourced to facilitate our, our buyback program within the £60,000,000, we've got about £16,000,000 of investments in our own funds, which is all capital that's earning a return. And in the case of all the listed equity, seed investments is readily, turned into to cash if we need it. Next slide, please. And then finally, the outlook statement.

21:42 So I think the impacts business, which has been around for a quarter of a century, has really started to prove itself as a set of investment opportunities, which asset owners around the world can can commit to to generate attractive medium to long term investment outperformance. There have been quite significant headwinds in market structures for the last year to or two years, but those do seem to be behind us and our outperformance has returned, which is generally a leading indicator of flows in our experience. So we are indicating that there will be new accounts landing with us with institutional investors before the end of the financial year on the September 30.

22:29 Those are are being contracted at the moment. Meanwhile, we are looking looking around for attractive investment opportunities around acquisitions and focusing on our cost base and efficiency. We're a little bit more we can do there, but it's a nice nice way of sort of consolidating the expansion in the the last five or six years or so. So the summary is that the global leader in this area of investing, which is increasingly showing great signs of medium to long term investment outperformance that impacts us in a strong competitive position. We're in a strong financial health and, with a capital allocation policy that reconfirms our historical dividend policy and also answer buyback program. We think we're trying very hard to use our capital resources as a firm for the best interest of shareholders.

23:25 So I think that's where I'd like to pause and happy to go to questions now. So just go to the format that I can actually see questions as they come in. Yeah, that's great, Ian. Thanks very much for your presentation. Ladies and gentlemen, please do continue submit your questions and you can do so just by using the q and a tab that's situated on the top right hand corner of your screen. But just while Ian takes a few moments to review the questions that have been submitted today, I'd like to remind you the recording of this presentation along with a copy of the slides and the published q and a can be accessed via investor dashboards. Ian, as you should now be able to see, you have we have received questions throughout today's presentation, and thank you to the investors for submitting those. Ian, at this point, what I'll do is I'll just hand back to you to run through the q and a, and I'll pick up from you at the end. Great. Okay. So first question, which is put in before the the presentation today. So this is directed at me. Think you mentioned at the AGM that you hoped to win new mandates in the fourth quarter before the end of September. Is this still the case? Well, yes. As I mentioned, that is still the case. We have confirmed in the results just now or the last week that the mandates would be landing. So we're not giving any details beyond that, but, there will be new business landing before the end of September.

24:41 Assuming the contracts get signed, which we're very confident that they will. Second question also directed at me. So, what are you going to do to get back on the front foot regard to asset gathering to replace SJP and BNP Paribas, AUM losses? Well, we are always on the front foot. We have a 100 people in our sales and marketing teams and a number of distribution partners around the world who are promoting our services, if you like. The reason that we've had outflows is because of the very unusual, if not unprecedented, market concentration for the last couple of years, which now does appear to be behind us. So I think the main thing to do to attract new capital is just to, point out the buying opportunity that there is now in in our portfolios that are trading at pretty attractive multiples in terms of value to demonstrate that the tailwinds around the growth of the areas that we're investing in are pretty strong. There's, there's there are some headwinds, for example, on the Trump policies in The US about, offshore wind, mean that we're having to steer away from, exposure to the offshore wind sector at the moment, but there's plenty of other things to to invest in.

25:56 And then, looking also at new areas for expansion, so the fixed income expansion that I mentioned, the new products, for example, our social media strategy, which we launched just over a year ago, and our emerging markets product, which we launched at the back end of last calendar year that I referred to in slides. So that's the the third element, the the new products. So I need to scroll down so I can read the next question. The following question, with the significant slide in AUM, were the exits for a particular thematic investor or type of investor type of exposure geographically? Sorry. I'm just trying to get my head around that one. So I think the question is just to give a bit more color about the breakdown of the AUM fall, whether it was thematic investor clients leaving, and where was the geographic exposure. So I think the slides to some degree covered this.

27:07 So we the the big standout drop in the AUM was St James' Place. There was some drop noticeable drop in Asia from a couple of accounts leaving the Asia Pacific region, which were just part of the natural cycle of of institutions coming and going. Although there was one particularly large client that was paying a very low fee that made the number was meant the number was quite high. The wholesale accounts that we run, for example, for BNP Paribas are ultimately driven in terms of flows by combination of, in some cases, gatekeepers recommending different asset allocation, or individual decisions by by, family groups or individual investors without any steer, so advisory rather than discretionary.

27:55 So, I would say that the period that we've just just been through, there was, less interest in money market funds, to start with, a lot of interest in fixed income. So that meant that, money kept on leaving equity mandates, but at lower rate than than in the previous six and twelve month periods. Asset owners generally don't invest thematically as a kind of as a priority, but some of them are looking at core satellite type structures, in which case, IMPAX's strategies may well fit into a satellite arrangement. And that was the case for both incoming and outgoing institutions during the period.

28:43 So I hope I covered that question adequately. Next question. Can you expand on what you currently find attractive in building a fixed income portfolio going forward, and what are you hoping the portfolio will look like when you've achieved further acquisitions?

29:00 Well, I think the opportunity here from a global perspective, competitive perspective, is to cement and build on our our position as having successfully integrated the sustainable economy thinking into fixed income risk analysis. So, for example, the, analysis of the risk around weather related disruption to supply chains or impacts on, property or or assets, given specific locations, for example, in in, flood prone areas and storm prone areas like, the the coasts of The US. It'd be a good illustration. So this is an area where we've been carefully building up a differentiated story, if you like. And so that's how we're going out to the market at the moment to say that we're doing something that's a bit different to the average fixed income investor.

29:51 That is a story which or an edge which is particularly appropriate and and relevant in the corporate fixed income space. And and so that's the bulk of our assets under management at the moment rather than government bonds. And so that's where we see the growth in the future. And that will both be in investment grade bonds and, sub investment grade bonds, for example, in the high yield, sectors, short duration or or not duration specific. So the foundation that we have at the moment is that we've got investment grade product in North America, but not in Europe. We've got high yield product in both geographies. So there is a medium term plan or or aspiration to have an investment grade product in in focused on Europe.

30:41 We would also be open through acquisition to bringing on board new teams, to bring in new capabilities, for example, in areas like, private credit and or multi asset credit. So, not a specific shopping list at the moment, but, we're we're open to to new ideas and, teams who are perhaps interested in a conversation for for joining up. See there's another question come in. Is IMPAX open to a possible bid or merger? Well, we have a, I think, a distinctive investment idea, and we are seen by our clients as, global leaders in that area. We do believe that we've got strength in the three components of investment management, which is investment skill, distribution, and the plumbing or corporate services that stitch everything together.

31:36 So there's no strategic logic in our view to be combining with anything else. But what we have been doing successfully since 2018 is is absorbing other other groups with assets under management starting in The US with the Pax World acquisition in 2018. So I think, rather than being a target ourselves, we see ourselves as, very capable at identifying and and, transacting successfully on acquisitions of of other groups and, building ourselves up that way. So, that's the the plan going forward. We've got a balance sheet which is, big enough to do that at, the scale that we think is appropriate. We don't wanna be integrating with anything that's too big because otherwise, it's a very good risk that that the cultural mix won't work and we'll we'll lose staff.

32:26 Incidentally, large scale m and a is also frowned on in in our client circles, and so we've been very careful to reassure current clients that when we've been making these acquisitions that there is a very clear focus on stability and corporate culture and making sure that we've got remuneration right just to make sure that clients don't get unnerved. If we were to be absorbed by another firm, then I think there would be a high risk that key staff would leave and that would mean that clients would leave and destroy value. So that's another dynamic. Think I've come to the end of the list of the questions that have been posted. So happy to hang on for a bit if there's anything else that you'd like to ask. Well, Ian, as as you said, I think you have answered all the questions.

33:20 And, of course, the company can review any further questions that get submitted today, and we can publish those responses on the investment company platform. But just before redirecting investors, provide you with their feedback, you know, it's particularly important to yourself and the company. Ian, could I just ask you maybe for a few closing comments? Yeah. Sure. Actually, I've just seen this one, hopefully oh, sorry. Hopefully, but, there's one final question which I've just noticed. So, I'll just do that, and then I'll summarize the, closing remarks. So, AUM flow AUM inflows are projected to return in 2026. That's on a net basis. What gives you confidence that this will happen? Well, I think, the experience of running this business over a long period of time through, through the growth trajectory is that the asset community asset owner community does respond to turnaround in investment performance relative to generic benchmarks.

34:16 And so as I've said a couple of times already, the the fact that we have we're now, nicely ahead of generic benchmarks to the end of April and into, pretty much the end of May means that, that that's a, strong indication to prospective investors and and clients that the investment area that we're in is is, like, turning the corner and although there's no guarantees that that will continue, this is historically been a good sign that that investment, alpha is returning. So that's the most, solid indicator of why inflow should become net inflows, over the next, period. We're not indicating or signaling exactly when that's gonna happen, but I think the, the analysts who cover our stock are expecting that to, materialize in the next financial year starting the October 1.

35:13 Okay. So just to conclude, thank you very much for for listening, but, hopefully, you've been able to give an update to those of you who've seen us before as to how the firm has been doing. It's been a tricky period for relative investment performance and flows, but our investment thesis remains very, attractive. And with over, 80 institutional accounts and more than 200 institutional investors who are behind us and a countless number of retail investors. There's a very nicely diversified client base at IMPAX. We have strong presence and attractive product in three major asset classes and great medium term growth potential. And with management owning just over 20% of the business, there's a very strong alignment between, management team here and external shareholders.

36:06 We are very focused on shareholder returns and, that's another strong indicator of why we've been looking to see it cost and efficiency, which has meant that we've we've mitigated the to a significant degree, the the pain of of losing assets under management in the last few months. And meanwhile, we've continued to invest in the business with the acquisitions closing and new products launched. So it's been a tricky time for everybody in financial markets in the last few months. We're not out of the woods yet in terms of the uncertainty of US policy, but I think when everything does calm down again, IMPAX will continue to be in an excellent position with a very good track record and a team that's very much focused on delivering shareholder value. So thank you again for for joining, and I look forward to seeing you next time.

36:55 That's great, Ian. Thank you once again for updates in investors today. Can I please ask investors not to close this session? As you know, we automatically redirect to provide your feedback in order the management team can better understand your views and expectations. This won't take a few minutes to complete, but some should be greatly valued by the company. On behalf of the management team of IMPAX ASSET MANAGEMENT GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.