Pensionbee Group PLC

LSE:PBEE

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the PensionBee Group plc Q2 '24 Results Investor Presentation. [Operator Instructions]

And now I'd like to hand over to the management team, Romi; Christoph. Good afternoon.

[Romina Savova, executive]

Good afternoon, and welcome to PensionBee's Q2 2024 Results Presentation, covering trading for the period ending 30 June 2024. I'm Romi Savova, the CEO of PensionBee Group.

And for those of you who are new to the PensionBee story, we are creating a global leader in the consumer retirement market. We exist to help our customers prepare for and enjoy a happy retirement.

We enable our customers to combine their old retirement accounts into a new online plan. We enable them to make contributions to invest in line with their objectives, with money managed by the world's largest asset managers, and ultimately to withdraw and spend their retirement savings.

Our aspiration is to build a lifetime relationship with our customers, generating predictable and scalable revenue for our company and for our investors.

Over the second quarter of 2024, we continued to record strong growth in assets under administration, revenue and invested customers. We also announced the launch of our U.S. business in partnership with State Street, a long-standing asset management partner of ours in the United Kingdom.

As a result of our revenue growth, effective cost control and increasing productivity, we achieved positive adjusted EBITDA for PensionBee Group in Q2 2024 and reaffirm our expectation of achieving adjusted EBITDA profitability in the U.K. for the full year of 2024.

Turning to the United Kingdom. We were pleased to deliver significant growth, with assets under administration of GBP 5.2 billion, representing 40% year-on-year growth; annual run rate revenue of GBP 32 million, representing 39% year-on-year growth; and 252,000 invested customers, representing 19% year-on-year growth.

To continue capturing the market opportunity, we believe it is important to own our customer relationships so that we can fully understand the evolving needs of the consumer base and, ultimately, serve them more effectively. To that end, we have invested GBP 61 million in the PensionBee brand cumulatively, and our prompted brand awareness now stands at 55%.

Our data-led advertising approach, combined with our household brand name, has continued to deliver marketing efficiency. And for each GBP 1 of marketing expenditure, we generated GBP 82 of net flows in the first half of 2024, an increase of 20% year-on-year. At the same time, we continued to reduce our cost per invested customer to GBP 242.

Throughout the quarter, we were proud to serve our customers, particularly during the busy tax year-end, supporting them rapidly and effectively on the phone, over e-mail and over live chat. This quarter, we were also excited to release our fund performance tracker, providing our customers with more investment transparency.

And of course, we continued to invest in our productivity through automation and process simplifications, resulting in a 23% increase in invested customers per FTE over the past year. And so in sum, our U.K. business continues to deliver on our strategic objectives at pace.

Turning now to our U.S. business. We were delighted to announce our strategic agreement with our partners at State Street. As part of this strategic agreement, PensionBee will deploy its award-winning online retirement proposition and technology, enabling U.S. consumers to easily consolidate and roll over their 401(k) plans and individual retirement accounts into 1 new PensionBee individual retirement account.

PensionBee Inc. is registered with the SEC as an investment adviser, enabling the company to operate federally and statewide without additional registrations. PensionBee Inc. offers a range of investment portfolio options with underlying State Street model portfolios. Each investment portfolio is constructed exclusively, with exchange traded funds managed by State Street.

The PensionBee IRA will be offered under an all-inclusive wrap fee program, including the PensionBee advisory service, asset allocation and management fees and custody fees. The overall cost will be 0.85% of assets under management, of which PensionBee will retain approximately 0.55% after asset allocation, investment product and custody costs. And the average account balance is expected to be approximately $50,000.

State Street will provide meaningful marketing support to PensionBee, while PensionBee uses its data-led multichannel customer acquisition approach to acquire new customers. Under the terms of the agreement with State Street, the annual amount of the marketing support is variable based on the achievement of certain net new asset thresholds.

For example, marketing support is anticipated to be $2 million in 2024. And in 2025, the support will be at least $4 million. Marketing support is expected to continue for 5 to 7 years. We expect the U.S. cost per invested customer to be of similar proportions to our U.K. business over time.

As previously stated, PensionBee Group will capitalize PensionBee Inc. with an injection from the existing resources of the Group balance sheet, and that will be approximately $4 million over 36 months. As we said before about the U.S. DC market, it represents approximately 80% of the global total and $22.5 trillion in assets.

As a result, we expect our U.S. business to grow rapidly, aiming to manage $20 billion to $25 billion in U.S. DC assets over the next decade. And over time, we expect the U.S. business to become of equal importance to our growing U.K. business. PensionBee Inc. is targeting profitability in the medium term.

And I would now like to hand over to Christoph Martin, PensionBee Group's Chief Financial Officer, who will cover the financial update.

[Christoph Martin, executive]

Thank you very much, Romi. Hello and a warm welcome to everyone. I'm pleased to cover the financial section of the Q2 trading update.

We continued to grow strongly as we have reached an asset base of approximately GBP 5.2 billion at the end of June, having added over GBP 0.8 billion of AUA in the first half of the year. I would now like to highlight the asset growth drivers in more detail.

First of all, we have driven growth through new customer acquisition, adding more than 22,000 new invested customers, representing GBP 355 million of asset growth for the period. The average age of customers joining our platform was approximately 40. And the average account size of each new invested customer was approximately GBP 16,000, representing an increase of more than 20% compared to H1 2023. The average pension pot size at PensionBee now stands at GBP 21,000.

Second, we have driven asset growth through existing customers who have continued to accumulate pension savings with PensionBee. Growth from existing customers over the first half represented GBP 127 million of AUA, an increase of around 22% over the same period last year. Net flows from existing and new customers contributed GBP 482 million of asset growth over the period.

Third, as it is customary in the market, pension assets are invested in capital markets, and we benefited from market appreciation over H1, which represented GBP 364 million of asset growth. In summary, we have grown our asset base efficiently with strong net flows, leaving us well-placed to deliver on our objective of profitable growth this year.

We are pleased to report continuous high customer and AUA retention rate of 96%, with positive underlying growth across all cohorts in H1 2024. This serves as a good reminder of our long-duration compounding nature of the asset base.

Next, we converted the compounding growth of our asset base into predictable annual run rate revenue of GBP 32 million, representing a year-on-year growth rate of 39%. In summary, we continue to deliver consistent predictable revenue growth, thanks to the compounding nature of our AUA base, high retention rate, continuous net flow generation across cohorts, and stable revenue margin.

Zooming in on the second quarter. We delivered revenue growth of 40% in Q2 compared to last year. The cost pace for Q2 was reduced overall by 8% compared to the same time period last year. This was achieved with the combination of stable money manager and technology platform costs declining at 8% year-on-year, as well as a more efficient deployment of marketing costs for Q2, reducing by 6%.

At the same time, we continued to increase our net flow in absolute terms compared to 2023. The combination of strong predictable revenue growth combined with strict cost discipline allowed us to grow strongly and achieve a profitable quarter for the Group.

We are pleased to reiterate our guidance for the U.K., confirming that we aim to deliver sustained high revenue growth. While we have demonstrated significant growth to date, we remain of the view that our focus on the mass market of pension savers will enable us to deliver substantial further growth as we pursue a market share of around 2% of the GBP 1.2 trillion transferable pension markets over the next 5 to 10 years. We are preparing to onboard approximately 1 million invested customers with GBP 20,000 to GBP 25,000 in their pensions, creating a revenue opportunity of about GBP 150 million in the long term.

At the same time, having invested in our brand and technology over many years, we are poised to continue delivering increasingly profitable growth over the medium to long term. Our primary financial goal for 2024 is to deliver full year financial profitability, being also clear, as stated in the previous quarters, that we will consider this goal on a full year basis rather than on a quarterly basis.

As we look forward to the next few years after 2024, we expect to grow our marketing investment and invest in our growth, always maintaining our focus on profitability as an underpin.

I will now hand back to Romi to cover further updates.

[Romina Savova, executive]

Thank you very much, Christoph. We are pleased with the results of the second quarter and with the start of the third quarter. We continue to work at pace to deliver on our strategic objectives in the U.K. and in the U.S.

In addition to our scheduled reporting, we will be holding a Capital Markets Day on 1 October in New York, London and virtually with details to follow soon. Thank you for taking the time. We look forward to engaging with you further.

[Romina Savova, executive]

And we will now take questions from the attendees. The questions are written questions coming through on the Q&A.

I'll begin with the question from John S., which says, considering the recent launch in the U.S., how do you plan to navigate the competitive landscape there? And what are the key milestones you aim to achieve in the next 12 to 24 months?

This is an excellent question about the competitive landscape in the mass market. And we see some similar dynamics in the U.S. as we historically have in the United Kingdom.

What we've observed through a lot of research and a lot of customer interviews is that the mass market consumer, so, individuals who generally have the median amount of savings rather than the average amount of savings, tend to be quite underserved by the existing incumbents within the industry.

From a strategic perspective, the mass market tends to be quite underpenetrated because, A, it is more difficult to get their attention. There are substantial amounts of inertia. The background and the availability of offerings are perceived as being incredibly complicated. And as a result of that, little action tends to be taken and little investment is made in this part of the market because the incremental customer doesn't necessarily move the needle for the asset gatherers that already have hundreds or 200s or more in terms of the billions when it comes to their asset profiles.

And so our goal is really to focus on that underserved mass market. And in the U.K., we have defined that as customers who have GBP 20,000 to GBP 25,000 in their pension pots. And in the U.S., we have defined that as customers who have, on average, around $50,000 in their retirement accounts, which compares to an average within that market of around $100,000. So we are focused on a part of the market that is substantially less penetrated from a competitor standpoint.

And over the next 12 to 24 months, we will be very much in our kind of rapid growth setup phase. We've given today a little bit of guidance around anticipated marketing expenditure. So to confirm, we expect to spend around $2 million this year, and we expect to spend around -- or at least, rather, $4 million next year in order to acquire customers.

And so with the cost per invested customer that we are expecting, which we think will be very similar to that in our U.K. business, so somewhere around the GBP 250 mark but translated in dollars, we'll be looking very closely at growing our customer base in line with that expenditure, in line with that CPIC, and in line with those pension pot sizes. And I hope that answers the question.

I will move to the second question, which comes from Christopher T. I see you have invested significantly in your platform, resulting in a 23% productivity improvement. Can you provide more details on the specific technological advancements made, and their expected impact on future scalability and profitability?

Thank you very much for this question, which is about our technology platform and how we have continued to increase our productivity, which indeed has been a trend over the last kind of number of years and, in fact, of course, since the inception of the business.

We have continued to invest in automations, in particular, with the focus on ensuring that any pensions that our customers request to transfer require as little manual intervention as possible. And for that, we track the life cycle of a pension, if you will, ensuring that each step in the transfer process, from the moment that the customer signs up to the moment that the pension has been transferred to us, is kind of done in an automated fashion as possible.

What, of course, makes that challenging is that we are dealing with thousands of different pension providers. And so we have to create customized journeys for those pension providers. And so the focus on productivity is really around creating automations around those very specific and customized pension provider journeys. And we have made significant strides in that work over the past year, as you've noticed.

A second component of that productivity improvement is, of course, the increasing functionality that we offer our customers to be able to find information for themselves, to be able to self-serve within our app and within the website, because at the end of the day, we don't believe that customers always want to be calling their pension provider. They want to be able to do things as simply and as efficiently in their own time.

And yes, we do believe that this is important for ongoing scalability and ongoing profitability, and it remains an important focus area of ours. I hope that answers your question.

We have a question from David S. around what steps are being taken to enhance shareholder value in the short and long term. Are there any plans for dividends or share buybacks?

Thank you very much for the question. Our primary focus, as we have explained around how we will deploy any incremental cash arising from profitability, is to focus on growth and investing in growth given the significant opportunity in front of us in the United Kingdom, but also in the United States.

We have very ambitious growth plans around our invested customer [ target ] markets, around the average pot sizes that we expect the typical customer to have. And therefore, over the next couple of years, we will be significantly focused on growing our customer base, growing our assets, growing our revenue, while always maintaining that bedrock of underlying profitability.

I will now move on to the next question, which comes from James A. And these appear to be a number of financial questions, which I will read out and hand over to Christoph. So the first one is tax assumptions on U.S. business once profitable. Christoph, would you like to comment on tax assumptions on the U.S. business once profitable?

[Christoph Martin, executive]

Yes, very happy to. So it's the official corporate tax rates of 21% that you can probably assume for it once profitable. Once that ramp-up and rapid growth phase swings into profitability, I think that's a reasonable assumption to use.

[Romina Savova, executive]

The second question, is 50% EBITDA margin still the target for the combined Group, including both U.S. and U.K.? If not, what should we assume for the U.S. business?

[Christoph Martin, executive]

So specifically on the guidance, so far we focused the guidance, including the one in the Q2 trading update, on the U.K. business where indeed we target a 50% plus EBITDA margin, and that we reiterated and confirmed today.

With regards to the U.S. business, I think we provided a few critical assumptions in the trading update as well. And I think in terms of Group guidance, it would not be unreasonable to expect there is more information coming from us on our upcoming Capital Markets Day on 1 October, where we can dive a little bit deeper into the projections and outlook for the Group entity.

[Romina Savova, executive]

And the third question is, after 5 to 7 years, does the 0.55% that goes to PensionBee increase when marketing support from State Street is withdrawn?

I'm very happy to take that one. As you have seen over the past decade or so of PensionBee's operation, we remain very cost focused. And so yes, we would be expecting to continuously optimize around margins. And we believe that that becomes more and more feasible as the U.S. business grows and achieves its own scale. And I hope that answers your questions, James.

I will now move to the next question, which is from Carl B. Who has control over the U.S. marketing budget: PensionBee or State Street? And what channels do you envisage using to acquire new customers?

Thank you very much for the question. State Street will be providing meaningful marketing support to PensionBee. And we have outlined some of the parameters that we expect for this year, that is $2 million, and for next year, it is expected to be at least $4 million.

In terms of the deployment of the marketing budget, it will be PensionBee that is deploying the marketing expenditure. And we will be using our tried and tested approach, our diversified marketing channel approach, in order to reach a mass market audience in the U.S. We've been working very closely with some of our larger marketing partners, including Google, to devise the optimal strategies.

And so in sum, we will be employing our tried and tested marketing capability and leveraging that in order to acquire customers in line with the cost objectives that we have set out for the U.S. I hope that answers your question.

The next question is from Alex B. Please, can you confirm whether the $4 million from PensionBee includes both the cost of the U.S. team as well as any marketing contribution from PensionBee itself?

I'm happy to take that first one. The $4 million from PensionBee is the capital injection that we will be making over the next 36 months into PensionBee Inc., and that is focused on the operations. You can expect the marketing budget to be in line with the figures that we have stated in terms of the support coming from State Street with regards to marketing expenditure.

And can you confirm if the product will be co-branded with State Street?

So the product is trading under the PensionBee Inc. brand, so under PensionBee. And we, of course, make good reference to the State Street asset management expertise and the State Street ETFs throughout the site and throughout various marketing materials where necessary and appropriate. I hope that answers your question.

The next question comes from Paul B. And it says, could you explain how much involvement State Street will have in the U.S. outside of providing the investment portfolios? For example, are they involved in marketing, sales and operations? Do they have staff dedicated to the partnership? And how many people will you employ in the U.S. over year 1, 2, 3? Thanks.

I'm very happy to take these. State Street is, of course, very dedicated to our partnership. We've been working closely with them over more than a year now to bring the project to the launch phase. We collaborate with them already extensively in the United Kingdom through our decade-long partnership here, and we would expect a similar level of collaboration with one another in the United States.

We won't be commenting specifically on staff dedications around State Street. I think you would have to ask them questions around their staff in particular. But we are very pleased with the partnership and the work that all of the teams around kind of PensionBee and State Street have been doing together over the past 1.5 years on the U.S. and then over the past 10 years in the U.K.

And how many people will we employ in the U.S. over years 1, 2 and 3?

We'll be offering more in the way of Group guidance a little bit later this year. Some of what we have already stated in the public domain is that we have around 10 employees in our New York office at the moment. I was actually with them over the course of last week.

And we will, of course, continue to grow our employee base in the United States as the business grows. And the areas that we are focused on in particular, our operations, which will be localized; our marketing, which will be localized; and areas around legal and compliance, which will be localized as well.

The next question is from Alex B. Do you have a more specific date in 2024 for the launch of the U.S. product?

The U.S. product is currently available to friends and family on an invitation-only basis, and we will provide more updates on when it will be available to the general public. We have previously guided towards late 2024. In my book, that begins in July and ends in December. So you could expect to hear from us with regards to a more public launch as soon as we have completed the friends and family onboarding stage. I hope that answers your question.

And the next question is from William. And it says, $2 million plus $4 million of U.S. marketing spend feels low versus the GBP 60 million invested in the U.K. How do you expect to make an impact with these sums?

So that is an excellent question. And I think I would refer you back to the original kind of growth assumptions and growth trajectory that PensionBee had in the United Kingdom in the early days. And I can assure you that a $2 million and a $4 million budget for a new business will be sufficient for us to begin making a dent.

One of the important aspects around the U.S. business is that the average incremental customer that joins us, we expect, will have around $50,000 in assets, whereas the incremental customer in the United Kingdom had around GBP 20,000 in assets. And so we believe that with the marketing expenditure that we have slated, we will already be able to onboard a kind of appropriate number of customers for that spend with a substantial amount of assets for that spend as well.

You said that the U.S. marketing spend is contingent on AUA. Isn't that the wrong way around?

Well, it would depend on the lens that you apply to it. But essentially, we would expect that, of course, the more AUA we generate, kind of the faster we grow. The more revenue there is, then, of course, kind of the more marketing budget there will be.

And then the third question is, what do you see as the long-term U.S. margin potential versus the U.K.'s 50%? Will it be lower because you have a partner in SSG, or higher because your charges are higher, please?

We have provided a little bit of information today around the expected margin. We have stated that we expect the revenue margin to be around 85 basis points, and that 55 basis points will be retained by PensionBee after paying variable costs, including money management, asset allocation and custody fees. With respect to kind of going further below the line, we will be offering some more Group level guidance a little bit later this year.

And the next question is, and just to clarify, are you live in the market today already? If not, when do you actually go live from a customer's perspective, please?

So at the moment, we are accepting friends and family on an invitation basis, and we will open up to the general public, as we have said before, in late 2024, which in my book begins from July and kind of ends in December. So we will update you as soon as possible when the service is available to customers who we will be acquiring through the direct marketing channels.

[Operator]

That's great. Romi, Christoph, you've actually taken all the questions from investors. So thank you once again to everybody for your engagement this afternoon. Romi, Christoph, if any further questions do come through in the meantime, I'll obviously make those available to you post today's call.

I know investor feedback will be particularly important to you both, and I'll shortly redirect those on the call to give you their thoughts and expectations. But before doing so, Romi, if I may just come back to you for a couple of closing comments.

[Romina Savova, executive]

Absolutely. Thank you very much, and thank you all for attending today's call. We're always very pleased to engage with the investor and analyst community. And so we look forward to having more conversations with you over the next couple of days. Thank you very much.

[Operator]

That's great. Romi, Christoph, thank you once again for updating investors. [Operator Instructions]

On behalf of the management team at PensionBee Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.