Hargreaves Lansdown plc

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00:22 Thank you, [indiscernible]. Good morning, everyone.

Welcome to Hargreaves Lansdown's 2022 Half Year Results Call. Thank you for joining us this morning.

I am Chris Hill, Chief Executive. As previously announced, we've now welcomed a New Chief Financial Officer, Amy Stirling.

Amy started yesterday. So, as she’s only joined us in the second half of the year today, I'm joined on the call by James Found, Head of Investor Relations, and James will take you through our financial performance over the first half period.

00:56 So, you already have seen this morning, we continue to grow through the period falling in line with expectations and driving revenue to headwinds you would all be familiar with. And over the half, we welcomed 48,000 new active clients, we added net new business of 2.3 billion with assets hitting a record 141 billion, and as we continue to build our position as the UK's leading digital wealth management service.

We now look after nearly 1.7 million clients and we hit a new market share high of 43.3% of the D2C market. 01:34 In the summer, we outlined that we expected some normalization of share trading levels, but to levels ahead of those pre-pandemic and we expected the impact of lower interest rates.

With these revenue headwinds are being offset by strong growth in platforms fees driving flat revenue overall and highlighting the continued importance of our diversified revenue streams. 01:58 Later on today, we'll be hosting a Capital Markets Day to outline our plans to how we'll drive future growth from here through a strategy to redefine wealth management.

To capture this opportunity, we'll be investing 175 million over the next five years. We will explain this full strategic investment of the session later on, but we've already started some of this investment in H1 to begin executing on our key growth priorities, and this is reflected in our cost figures for the period.

02:30 We’re clear that the market opportunity is large and growing. The wealth management industry has hit an inflection point, it's right for disruption, and HL with this unparalleled understanding of client needs and a strong track record of leadership is well positioned to capitalize on the opportunity.

02:49 I'm really excited about sharing more about our plans later on. We'll talk about the investment we're making and how this is going to deliver strong and sustainable returns to shareholders later on this morning.

But in this session, we're going to focus on our most recent period of performance. 03:04 So, I'll now hand over to James to outline more detail on this and then we'll take questions on our first half.

We will not be taking questions on future great plans, strategy, or financial guidance as we'll be addressing those points in the Capital Markets Day and associated Q&A later on. So, with that, James, over to you.

03:25 Thanks Chris, and good morning, everyone. Over the past two years, Hargreaves Lansdown has seen the most extraordinary period in its entire history.

Our staff have worked relentlessly in remote and socially distance ways and we have experienced fairly imaginable levels of client growth and activity. 03:43 Throughout this period, we have maintained a relentless focus on the clients, and hence we emerge from the pandemic as a stronger, larger, and more robust business.

This unique period makes meaningful short-term comparatives are to draw. I would therefore focus today on how HL has performed against our internal expectations via the 2022 guidance we provided for a post-pandemic environment.

And I will provide you with greater insight into the core operational performance of our business for a set of underlying profit measures. 04:19 As Chris has just outlined, we are looking forward to talking to you later today about the exciting future we see ahead for HL.

His CEO statements released this morning contains a number of forward-looking goals and targets, which will be fully explained along with our strategy later this morning in the CMD. So, please do not expect us to go into detailed Q&A mode.

After this morning’s results session, you have more than enough time for that later. 04:46 So looking at the first half of our financial year, you can see the financial summary on this page.

Revenue has been in-line with our guidance, so with the expected drop in share dealing volumes, and the impact of the 2020 base rate changes, overall revenue is slightly down on last year. 05:06 Profit before tax is down year-on-year by 20%, but I want to focus on the underlying profits, which were in-line with the board's expectations and are down 13% year-on-year.

[To provide] [ph] the underlying EBT, we have added back the initial costs of our strategic investment program of £12.3 million, but more of that later. And finally, our interim dividend has been increased by 3% and again, I will touch upon the dividend policy at the end.

05:37 So, dropping into more detail, starting with revenue. As we’ve predicted, share dealing volumes normalized and the 2020 interest rate cuts was through the P&L to have their maximum impact.

Despite this, revenue for the first half was just 3% down at £291 million, benefiting from the diverse asset classes that our clients hold under different revenue dynamics. And note, every individual line was within the margin guidance we gave in August.

06:12 I'll cover the [panel] [ph] aspects of each line first and then return to margins. Funds revenue rose 21% to £133 million as higher market levels and client investments in net new business raised average AUA.

Shares revenue was £102 million as dealing volume settled back to new higher sustainable levels. As context, this might be lower than 2021, but it is still more than double the pre-pandemic contribution from the shares.

06:48 Cash revenue was £11 million as guided following the 2020 interest rate cuts and yield curve reductions. HL funds revenue rose to £31 million as higher asset levels were partially offset by the targeted price reductions we first spoke about last January.

07:08 And the other income lines saw strong AUA growth from active savings, but revenues were similar, because at current interest rate levels we continue to price this business line for growth. 07:20 So, looking at stock broking in more detail.

The chart on the left shows average daily dealing levels over the past six calendar years, and how this compares to our post-pandemic guidance of around 40,000 deals a day. 07:37 We've given out the same guidance at our last three sets of results and since the UK exits all lockdown, volumes have been consistently around this level.

This consistency is encouraging despite the last six months being a relatively mundane one for market excitement. This lack of volatility probably explains why overseas volumes, which are more lucrative fell back and hence margins win the lower half of the guided range.

08:07 Turning to margins on the other asset classes. This slide you have seen many times before, but rather than go through each asset class in detail and waste your time, I shall stress again, your key takeaway should be that all of these margins are in-line with our expectations and the margin guidance we gave in August.

08:30 The only line where 2022 guidance needs updating is cash. Returns have ticked up slightly since December and February’s rate raises, and hence we now expect to earn 20 basis points to 25 basis points this year and 40 basis points to 45 basis points in FY 2023, that's assuming base rates and the yield curve remains [they are now] [ph].

08:56 Note, the impact of the recent rate rises in the current year is relatively limited. As we only see the full benefit of a rate rise after thirteen months, given the profile of term deposits we use.

Whereas, we increased the rates we paid to clients immediately, rate rises occur. In addition, many banks are still washed with liquidity and hence they still paying nothing or very little on easy access cash.

09:24 Moving on costs. Whilst this was a period of post-pandemic normalization on the revenue side, on the cost side, we have had to continue investing in Hargreaves Lansdown to thrive with the scale of growth we have experienced and to capture the size of the opportunity in front of us.

09:43 I said upfront, the last two years have been an extraordinary period and those things remain evident here. As you may have already seen from the results announcement this morning, later today at our Capital Markets Day presentation, we will be setting out a clear plan for HL’s next phase of growth to redefine wealth management in the UK.

This gives rise to a strategic investment spend some of which we have already incurred in the first half of the year. As such, we will be reporting the cost base and profit before tax on an underlying basis, as well as a statutory basis going forward for the next few years.

10:24 I have two slides here: One which reconciles from the full statutory cost base, which includes the initial stages of our strategic investment program to the underlying cost base. And the other with the underlying cost [broken] [ph] so that you can clearly assess the operational performance of the business.

10:44 So firstly, we can see that to reconcile from statutory to underlying costs, we have separated out £12.3 million. This relates to staff costs and professional fees for the planning and commencement of the digital technology strategy and strategic growth initiatives along with associated compliance, infrastructure, and support costs.

11:09 Looking ahead, we will continue to separately identify the strategic spend, plus the cost of running dual technology systems in parallel during the period of transformation. Guidance on the scale of these costs will be given later at the CMD.

Secondly, underlying operating costs for the first half were £127.6 million, up 14% on last year. This is broadly in line with the client growth, where the average number of clients across the period was 15% higher than in the first half of last year.

11:47 The drivers of cost this period have primarily been staff costs, where average staff members have increased by 14% and we have experienced salary inflation, a circa 4%. The additional has mainly been in help desk and operations, plus smaller increases in various support functions such as risk and compliance as the business grows and we position ourselves for the next phase of our growth plans.

12:17 Marketing costs were down as we were more targeted with our client acquisition spend. In addition, we did no cash back transfer incentive in the period, whereas we did last year.

For the remainder of FY 2022, we expect underlying cost growth to remain at levels similar to the first half of the year, such that FY 2022 as a whole will be circa 13% up year-on-year. As we execute on the strategy, this growth rate will then come down, but more of that in the CMD.

12:53 Turning to profits. The two tables here, show you profit before tax and earnings per share.

On the left, on a statutory basis; and on the right, on the underlying basis. Going forward, we plan to focus primarily on the underlying measure, but I've have included both for completeness today.

13:15 The underlying profit before tax for the first half was £163.5 million, 13% below the prior year. This is in-line with the board's expectations at the start of the year for the reasons I've given during my presentation.

13:31 Finally, let's finish with the interim dividend. As you know, HL has a clear dividend policy with a progressive ordinary dividend centered around a 65% payout across the market cycle, and the potential for special dividends, payout of excess cash generated from earnings.

13:54 The Board intends to maintain this policy going forward, but has issued additional guidance today about how it intends to operate this policy to join our strategic program. The group has a robust balance sheet with a healthier amount to serve this capital built up over the past five years.

14:13 The board is confident that this will allow HL to undertake a strategic program whilst maintaining a progressive ordinary dividend through FY 2022 and 2023 with 3% per annum growth. 14:28 Therefore, our interim dividend has been lifted by 3% from 11.9 pence to 12.26 pence per share.

And you can expect similar in terms of the final ordinary dividends. In the short-term, plan, for FY 2022 and 2023, the special dividend will be suspended, but we expect to reinstate it from FY 2024 onwards.

This will in-part from the planned investment we will take you through later today at the CMD. 15:00 So that ends our presentation and we can now move on to Q&A, and as a final reminder, please keep your questions to the financial performance of the business and leave strategic questions and the medium-term guidance until the CMD session later.

16:12 Yes. Good morning, Chris.

Can you hear me, alright?

16:17 Yes. Good morning, Nick.

16:21 Good morning. [Indiscernible] I am to ask questions on the medium-term, I have three questions, please, regarding the financials and just general assumptions.

Firstly, deposit [beaters] [ph], what deposit [beaters] [ph] are you assuming for FY 2022 and FY 2023 please? I know that you've mentioned in your interim report that the extent of the benefit will depend on [to what extent] [ph] banks pass on the rate hikes?

That’s question one. 16:50 Question two, apologies if I missed in the presentation, but did you have a comment – did you comment on share activities so far this year, and if not, could you do so please?

And then, finally, just what is the regulatory capital position at the first half – at the end of the first half, I think you’re at 190 million at the end of FY 2021? Thank you.

17:11 James, do you want take the cash and the rig capital ones?

17:16 Okay, so in terms of the cash, it’s difficult to say what the sort of deposit beta is. What we have seen is that banks are reluctant to pass on any of these base rate increases at the moment, particularly on the short-end, they say overnight easy access cash is still largely [attractive zero] [ph].

I think there's one bank that we would partner with is paying anything in the rest, still paying zero. And even on the three-month or 95 day terms that we use, it's largely still earning zero, and that's just a fact of life with the banks being [so washed] [ph] with liquidity.

17:53 The other factor that we need to be aware of and you guys, as well as, we move back up in terms of base rate is what we actually pay to our clients. Now, we are paying term deposits to all our clients, now both in the step and [indiscernible], and the fund and share code.

18:10 As the base rates keep going up, we would look to share more of that with our clients, but, yeah, we don't know exactly what we will pay to clients, we'll have a look and what the competition of doing it, did they competitive landscape to decide on assets is quite difficult to say Nick, exactly what the, sort of deposit beater will be, but it is clearly upside here in the next rate increase – there will be something for clients, there will be something for HL. 18:39 If we get two free rate increases out, it might be that all of that goes to the clients, but, yeah, we'll give you more color as and when.

In terms of the capital position, yeah, we had a significant surplus to 180, 190 at the year-end. We haven't put that together in a slide at the half year, but typically, because of the payment of the dividends, yes, it is still a very healthy surface.

It will be much the same within about 190, give or take 10 million probably.

19:09 And then the last question, we’re just about to share active this year. So, there's no change to the guidance we're giving.

So that probably gives you more or less an indication. And we have got a significant share of the retail share trading market.

So, you can see trading will be in-line with I think what you'd expect. We’ve had a number of volatile days.

We've had a number quite days. 19:41 That's how the client base will trade.

And it's, you know, HL does have that diversified business. We've got the cash in a rising interest environment.

We’ve got the funds that build and grow over time. And then according to ways of activity, you've got the impact of the share trading, but in terms of activity, it is in line with the guidance that we're talking about.

20:06 Thank you. That's helpful.

I mean, just to come back to the cash question, I mean is there anything you can say in terms of how that might flex, how the burn depending on how much of that, how much does rates will get passed on – would you get a little bit more to expand on that answer please? [Indiscernible]

20:29 Well to say Nick, and also, yeah, we’ve given the guidance for FY 2023, our initial guidance at 40 basis points to 45 basis points, but until we get the next actual base rate rises it is difficult to say because we make a call on that day. So, if we get a rate rise today, we have a committee that meets and will look and we will make an assessment of what we are going to pay our clients.

20:54 And we aim to be one of the top payers for interest rates to clients, so you got to see what the, sort of key take rate [for doing that] [ph].

21:04 I think Nick also, when it comes to longer-term guidance, particularly about revenue margins, you'll get more on the call later on this morning.

21:16 Thank you both.

21:31 Good morning all. Couple of questions.

Perhaps, I could ask about active savings as – I think the forward base rate markets has got base rates, it's about 1.5% by the halfway through this year, could you tell us what level of base rates you'll start charging a meaningful amount for active savings? I think you talked initially about up to 25 basis points.

And are you able to give cash margin guidance for 2023 based on the forward rates, which currently exist rather than on the current rates?

22:12 So, I’ll take active savings James, and you take cash margin guidance. It’s going to be subject.

You are going to an expert on by the end of the day, given the questions on that. But Andrew on active savings, not going specifically into exactly when the margin starts ticking up, but I think and particularly when we talk about it later on today, we’ve grown to about 100,000 clients using active savings, there’s about 4 billion of assets and we’ve don’t that in a falling interest rate environment.

22:51 We're now moving into a rising interest rate environment. That service is in good state and we see some significant opportunities going on the front, which we're going to talk about that later on.

And with that, we would expect to see a steady pickup in the margin. I'm not going to go any further than that.

23:13 Andrew, on the cash margin, I mean, just reiterate the point, until we see these rate rises, we don't know what the banks are going to do, what they're going to pass on, and how we will pass on some that rate rise to our clients. It is really difficult to answer that.

When we were at 75 basis points previously, got back a number of years, we were in mid-70’s, I think one six-month period, we've got just over 80 basis points. 23:42 If we look back post the financial crisis, we had a six-month period, where I think we were just over 2%, but that was quite unusual times, obviously, and the banks were chasing after the money and we're giving very good rates.

Would we return to anything like, you know, 200 basis points? Arguably not.

I'm sure the regulator and the press and media might have a view on the things if you had taken that much revenue margin from cash. 24:13 So, yeah, there will be a ceiling at some point, but we can't tell you where that would be at the moment.

24:21 Thank you.

24:33 Hi, there. Good morning guys.

And thanks for taking the question. Just on the, sort of net new business, I guess, I mean, you're running below 3% in a quarter that was actually a pretty good quarter, if I look at broader sort of risk appetite and fund flows for, sort of traditional asset managers say, [indiscernible] is smaller, saw net new money growth at around 16%.

So, I mean what gives you confidence you're going to get back to high single digit percent and how quickly do you think you can do that, and how important will active savings be within that? Thank you.

25:11 Good morning, Bruce. I think a couple of things.

So, I would – first thing I’d point to is the increase in market share to 43.3%. And James also made a comment about us not seeing a cash back, which we’ve done previously in the second quarter of the year.

25:31 And James would probably also talk to the different splits that we've had first half, second half in terms of how net new business can flow. Certainly when you're looking against the comparatives, you know we've obviously not got a vaccine Monday type event in there and all of that activity.

And all of these things do have an impact on client behavior. 25:52 What I would say though is, we are primed and ready for the tax year-end, which is always our busiest time of the year.

We're going into that with more clients than we’ve ever had before. If you haven't seen the latest put your money on campaign, we're going to show it to you this morning anyway, but we've got the, you know the marketing is up and running and we are pushing into that.

And clients, you know, they do have to and they do use their allowances as they go on. 26:20 So, we expect a busy tax year-end season.

Obviously, you've got the impact of whatever is happening in the Ukraine. You've got the cost of living in inflationary impacts on that, but we’re are primed and ready and confident as we go into the tax year-end, which is always the busiest part of the year.

26:41 Just to check that 43% market share, that, I don't think includes in the market, either [AJ Bell] [ph] Vanguard, Europe who are growing quite fast, does it?

26:52 No. [That does] [ph] include those.

So, the platform group has quite a wide, their coverage in that market share. So, it definitely includes Vanguard, the [AJ Bell] [ph], interactive investor, Barclays Fidelity [indiscernible].

27:13 Got it. Okay.

Thank you.

27:33 Hi, good morning. Thank for the presentation.

Just a few from my side. The first is, could you provide an update on the asset retention rates?

I think it was 91.4% for the full-year 2021 stage. And I think I only saw the client retention rates for the release, which did move up.

That was the first. Second one on the share dealing side, can you give any color on the proportion of activity that is overseas in nature currently?

And what range has been, you mentioned there's been a bit of a shift in there? And then just the last one is, do you have any idea on the kind of FSCS costs you're going to budgeting for the full-year and any, kind of indication from [the team] [ph] at this stage?

Thank you.

28:19 On the overseas share dealing, Greg, it represented about 20% of our deal volumes. So, that's lower than we saw in H2 of the last financial year, where it got up to about 27%.

So, you can remember, January and February of 2021, that's when we had all the [indiscernible], and it really shot up. And obviously because we get the FX margins on overseas deals, it improves the revenue line against shares, but it settled that down to 20%, which is again significantly higher than we were seeing pre-pandemic, but it's not at the, sort of the peak that we've seen in some [crazy months] [ph].

29:08 And then, you talked about the asset retention. Asset retention, I can’t remember off the top of my head, but if it's 91.4% for the financial year, it is very close to the client retention rate had gone up, that moved to 92.7% from 92.3% in FY 2021 and the asset retention was very, very similar year-on-year.

29:37 And on the final question, I’m sorry Greg, the FSCS, we haven't got any indication at present. We wait for the online calculated to [appear] [ph] from the FSCS and then we can plug in our revenue numbers and get an initial idea of what our fee will be, given our revenues go up, I'd imagine, based on last year’s revenues, it will be a little bit higher, but I'm not aware of them seeking to raise a huge increase this year.

So, hopefully it will be fairly similar to we saw last year.

30:15 Great. Thank you.

30:28 Good morning, Chris. Good morning, James.

Hopefully this doesn't bid into future territory. Just a quick question on your fee margins.

You've given us the guidance of 2023 on cash of 40 basis points to 45 basis points, I appreciate that's initial guidance. And I'm just trying to square this with the 42 to 44 you talk about as a blended revenue margin from FY 2023 for the whole group given we know HL funds is above that, is that an expectation [implicitly] [ph], therefore the shared margin is going down significantly, just trying to [indiscernible]?

Thank you.

31:01 Hey, good morning, and I don't want to talk about that now. We're definitely going to address this on the call later on, and it's much easier to address that in the context of our plans and how we're investing.

31:17 Understood. Thank you.

31:39 Right. [Indiscernible], thank you very much.

Thank you, everybody. Thanks to your questions.

I can tell you as much as I was asking you to hold back on questions about what comes next, I'm itching to get up and start talking about it. I’m hoping to see as many of you as possible in the room, and you'll get to meet large numbers of the team, and that's really important.

I think it's really exciting what we've laid out today, and I'm really looking forward to talking to you later on. 32:07 In the meantime, if you've got any, obviously, if you’ve got any other questions on the numbers that we put out, James and I are available throughout the day.

Great. Thank you very much everybody.

Thank you, [indiscernible].