Chief Executive's Statement

Overview

It is now six months since I took over as CEO. As I said at my first set of results a few weeks in, HL is a great business, built on a proud heritage, with a trusted brand and great people. We have a large, growing and loyal client base and, with more than 14,000 investment options, we offer our clients a broad choice of investment and savings solutions.

The last six months have been anything but smooth from a global or a UK perspective, with ongoing geo-political volatility, the cost-of-living squeeze in the UK and UK equity markets remaining challenged. Despite this backdrop, we saw growth in the platform, with an additional £1 billion in net new business and we welcomed an additional 20,000 new clients, taking our total client base to 1.82 million.

While the continued growth underlines the fundamental strength of the business, we need to do more to improve our flow performance. Our inflows continue to be strong, but our outflows have increased reflecting both the market backdrop and our product mix. We know that our clients have been impacted by the cost-of-living squeeze, however, we also know we have more to do to improve our service levels to meet our own high expectations and to evolve our digital journeys.

Having undertaken a thorough review of the business, which is largely complete, it is clear that there are areas where we can and must execute better to provide even more value to our clients to help them achieve even better outcomes, in turn, driving stronger client and asset growth.

We are building on strong fundamentals, I am excited by the leadership capability we have put in place and confident we have the strategy and ambition to accelerate our growth. The initial priorities I set out in September last year remain the right ones, and I will outline our progress against them below as well as our granular approach to delivery.

H1 2024 Business performance

Our gross inflows to the platform were up year on year, however, our outflows were up too, meaning that overall, our net new business came in at £1.0 billion compared to £1.6 billion last year. Outflows were highest in the products that our clients use for more transient saving and investing, such as our Fund and Share Account, driven by cash withdrawals to deal with cost-of-living issues and/or to pay down debts. The period also saw an increase in transfers to banks and building societies to take advantage of Cash ISA products. We responded to this by launching a Cash ISA last year and the first Multi-Bank Cash ISA in January 2024, helping clients spread their allowance across multiple banks, and across easy access, limited access and fixed-term Cash ISA products.

Our pension products continued to see the lowest level of outflows, with inflows ahead of last year.

The rally in markets, particularly towards the end of the period delivered a positive market movement of £7.2 billion which, combined with the net new business of £1.0 billion meant our AUA reached a record of £142.2 billion (June 2023: £134.0bn).

The higher AUA, combined with the impact of higher net interest margin this year, delivered a resilient financial performance with revenue up 5% to £368.2 million (H1 2023: £350.0m) and underlying profit before tax also up 5%.

Along with other platforms, we received and responded to the Dear CEO letters regarding platform cash during the period. We consider cash to be an integral part of the way clients use their investment accounts, either holding cash as part of a portfolio or as part of the running of a product, for example, making payments or receiving dividends. We retained 41% of interest during the period and expect this to be c.36% in Q3 FY24 and we do not charge platform fees on cash, the practice known as "double-dipping" and our approach is set out in more detail in the Financial Review on page 8.

Underlying costs were in line with our guidance coming in at £161.0 million (H1 2023: £146.1m) and underlying profit before tax increased 5% to £221.5 million (H1 2023: £211.9m).

Total strategic spend in the period increased to £24.7 million (H1 2023: £23.4m) as we increased the pace of our delivery. As part of my review, we have simplified our technology roadmap by adopting a more modular approach to delivery and rationalised our technology vendors. As a result, we have recognised an impairment charge of £14.4 million against two specific assets previously capitalised. We have also incurred £2.9 million restructuring costs in relation to the reset of the Executive and Digital Leadership teams.

As a result, statutory profit before tax decreased by 8% to £182.5 million (H1 2023: £197.6m).

Our purpose is more relevant than ever

At HL, our purpose - making it easy to save and invest for a better future - is more relevant than ever. Our research shows that currently only 13% of UK households are on track for a comfortable retirement[1] and one third of people (34%) have less than £1,000 in savings. We believe that everyone should be encouraged to build a financially secure future, and even putting a little aside regularly can leverage the power of compounding to make a big difference in the years to come.

From launching a new lifestyling arrangement for our SIPP clients (the Ready-Made Pension Plan) to piloting digital investment masterclasses, we are committed to playing our part in getting people investing for their and their family's future.

We are operating in a large and growing market, estimated to be c. £3.7 trillion by 2026. As we expand our range of products, we open up this market, with HL able to provide one single platform for our clients to save and invest for their future.

Our Strategy - what we are setting out to do

Our strategy is to:

1.             Transform the investing experience;

2.             Leverage our scale to continuously deliver value; and

3.             Combine the best of colleague and digital capability.

Transforming the investing experience - Our research shows that investing can be daunting and difficult for retail investors.

Our first strategic goal is to transform the investing experience, helping people engage with their financial security by making investing understandable, simple and accessible for all. This is nothing new for HL; it is the foundation on which Peter Hargreaves and Stephen Lansdown started the company over 40 years ago. We have proven that giving people confidence by providing relevant, timely and digestible investment information and then making it easy to act helps our clients invest and get positive outcomes.

Leveraging our scale to drive client value - Leveraging our scale is the renewed focus of our strategy; and enables us to continuously improve our client value proposition.

We are driving efficiencies in everything we do, in our operations through process improvement, simplification, automation and standardisation, and across all areas of our spend to return those benefits back to clients by reinvesting in the platform and to shareholders through stronger returns. This is the fundamental flywheel of our company and a discipline we must embrace.

Combining the best of colleague and digital capability - This means offering a great digital experience and having knowledgeable colleagues available whenever clients want to talk to us.

There is much more we will do to improve our digital journeys, and much more we are automating to drive greater efficiency, but our core value proposition will always provide our clients the option to interact with us in their preferred channel - web, app, via our expert Helpdesk or through our financial advisers.

Combining the best of our colleague and digital capability by empowering colleagues with the right tools will allow HL to scale efficiently while giving our clients the support and experience they want and deserve.     

Progress against our priorities

The initial priorities I laid out in September are still the right ones to drive the business forward:

·     Delight clients, drive growth - continue to evolve our value proposition to delight our clients and through that, drive our growth;

·     Save to invest - always strive to be a fitter and leaner business;

·     Increase execution pace - deliver for our clients everyday, improving our proposition on an ongoing basis;

·    Right people, right roles - make HL great for colleagues; the right culture, with the right people in the right   roles, focused on the right priorities to deliver the strategy.

We have made tangible progress against all four areas, and while there is much more to do, we are confident in our ability to execute against these priorities.

Delight clients, drive growth

We know our clients are daunted by saving and investing, the terminology can be confusing and execution difficult and once they start, they want everything in one place. This is why helping our clients build their confidence, making it easy and providing a broad choice is at the heart of our value proposition.  

To start with we are focussing on three areas:

1.     Continue to deliver strong inflows, by building investing confidence through targeted content and making it easy through frictionless flows, to drive new client acquisition and AUA growth.

          HL's research and insights are often what bring clients to HL in the first place. We are focused on improving content driven inflows, providing clients with relevant investment ideas, in the right way, at the right time.

Last September we outlined how we are building people's confidence in investing in the UK gilt market. Our efforts to make gilts easy to understand and invest in for the right audience resulted in £1.8 billion of inflows over the period. HL's research team's annual "5 to watch campaign", has driven over £100m of flows in its first month.

          Making it easy for clients to add money to the platform is crucial. Last year we launched Easy Bank Transfer and it recently reached an important milestone with over £1 billion payments now made this way.

2.       Enhancing the client experience, by resetting our Client Service levels and enhancing the digital experience to "make it easy" to execute with HL, driving client retention.  

          We are resetting and transforming our client service for those clients who want to speak to us directly, and enhancing and extending our digital experience. We've invested in our Helpdesks, resulting in an 11pp increase in the number of calls answered within 20 seconds.

In terms of the digital experience, we are embedding analytics to improve client journeys. Our refreshed web navigation has delivered a 20% higher conversion of "transfers in" journeys. And simply making our "ready-made investments" more visible in the app has increased purchases by 51%.

3.     Evolving our product mix, by expanding our proposition and digital features to drive client retention and acquisition and ultimately AUA growth, especially in Active Savings and Pensions.

          Our product mix needs to evolve. We have grown our SIPP AUA more slowly as a proportion of total AUA than some of our competitors and that is naturally resulting in higher client and asset churn. Greater focus is being given to extending our proposition across all our product lines.

Analysis showed our ISA outflows were being driven by clients moving to Cash ISAs. We have recently extended Active Savings to add a first-of-its-kind Multi-Bank Cash ISA, providing clients with the full suite of Cash ISA products (fixed-term, easy access and limited access) from multiple banks.

Save to invest

During the first half of the year, we have introduced more disciplined management of third party spend across all areas of the business, such as IT licences, recruitment agencies and contractor spend.

To drive process improvements across our operations, we have established internal process automation teams with an initial focus on six processes that currently require a significant amount of manual work. Our first automated process is now launched and the other five are on track to be automated by the end of April.

Additionally, we are rationalising the operating model and optimising our organisational structure to sharpen accountabilities.

Taken together, these actions start to create capacity for us to invest in our clients through our proposition and platform, and in turn generate stronger returns for shareholders, as we make further progress with the execution of our strategy. 

Increase execution pace

Over the last six months, we have successfully piloted new ways of working with the aim of increasing the pace of delivery of both small incremental change within our day-to-day activities and the larger innovation and change being delivered as part of our strategic projects. We have created efficient cross-functional teams aligned with each product line and building the organisational muscle to rapidly create ring-fenced project teams to deliver the overall strategic investment programme. 

While still only a few months in, we are already seeing an increased pace of execution and tangible benefits being delivered. For example, our rollout of Amazon Connect was accelerated and delivered in half the time originally estimated. This allowed us to decommission the legacy telephony system ahead of plan and save on dual running costs. Our initial implementation of Salesforce within our Complaints and Client Service team will be achieved in four months, meaning these tools will now be in place for colleagues over tax year end.

We also continue to progress our investment in the evolution and modernisation of our technology estate which aims to:

1.     Deliver a state-of-the-art digital client experience

2.     Decouple our cost to serve and client growth through automation

3.     Deliver a highly resilient and linearly scalable platform

We have been able to simplify the technology roadmap by adopting a more modular approach, leveraging standards or through the rationalisation of vendors. This does not impact our ability to achieve what we have set out to do and builds our confidence in our ability to deliver within the financial parameters set out.

In terms of data and relevancy, our focus has been on setting the right foundations, implementing our AI Workbench tooling and Machine Learning Operations pipeline and we are progressing our new BI platform based on Snowflake which will be launched over the coming months.

We now have in place the foundations on which to build and increasingly automate our business processes whilst giving our colleagues the tools they need to provide great client service efficiently. This is how we will decouple people and cost growth from our client growth.

Leveraging Cloud infrastructure creates a highly resilient and linearly scalable platform and we have made progress in this area.

Right people, right roles

I have prioritised building my executive leadership team and I am pleased to have appointed:

·      Richard Hebdon as Chief Digital and Technology Officer - Richard has joined HL from RELX, the global information services provider, where he was Chief Technology Officer for a division of LexisNexis.

·      Afonso Nascimento as Chief Strategy Officer - Afonso has been with us as interim CSO for the last three months driving our strategic agenda and digital transformation initiatives forward. Afonso brings extensive strategy and financial services experience from Boston Consulting Group.

·      Lucy Thomas as Corporate Affairs Director - Lucy is currently Director of Corporate and Regulatory Affairs at TalkTalk, and prior to this she held senior roles at Edelman and at the BBC where she was a producer on programmes such as Newsnight and the World at One. She will join HL in March.

We have also significantly strengthened the technology leadership team with the addition of new talent leading our client-facing solution development teams and our digital automation and transformation teams.

Board changes

I am delighted that Alison Platt joined us as Chair of the Board and Non-Executive Director on 6 February 2024. Alison brings a wealth of relevant experience. She was, until recently, Chair of Dechra Pharmaceuticals plc. She is also a Non-Executive Director of Tesco plc and Chair of general insurer Ageas UK. I very much look forward to working with her. 

I would like to thank Penny James for acting as Interim Chair since 8 December 2023. She has now reverted to her previous Board position as Senior Independent Director. The Board benefits greatly from her insight and expertise.

Dividend and Capital Management Framework

The Board has declared an interim dividend of 13.2 pence per share in line with our guidance of a 4% increase on H1 2023.

As stated last September, the Board has now set out our capital management framework and more detail on this can be found in the financial review on page 11.

FY24 Guidance and medium term outlook

As we begin the second half of the year, we have the all-important tax year end season ahead and whilst the current uncertain economic environment is likely to remain and weigh on investor confidence, we will do all that we can to support our clients to make the most of their tax allowances, improve their financial resilience and achieve their financial goals.

In terms of revenue margin, given our H1 performance we now expect to be at the top end of guidance on NIM and Active Savings margin, and at the lower end of the range on Shares given continued muted dealing volumes. Funds margin guidance is unchanged.

With regard to asset mix, we closed the period with cash at 8.5% of AUA, as clients continue to make active decisions to invest, put their cash to work as savings or withdraw from the platform. We expect to see this trend continue in the second half and see platform cash on a glide path to c.£11.5 billion with different profiles in Q3 and Q4 given the expected step up over tax year end driven by inflows.

We are now expecting underlying cost growth at the lower end of our 9-11% guidance range driven by our latest view on the FSCS levy which indicates that we will not see the uplift we had anticipated this year.

Given our increased momentum, full year Strategic Opex spend is now expected to be at the top end of our guidance for the year at c.£45m.

We are re-iterating our guidance of 4% growth in our ordinary dividend for the full year.

Looking further forward, we will measure our success in the delivery of our strategy through seeing a step up in AUA growth, increasing our client satisfaction and retention, driving operating leverage through a different cost trajectory for the business and enabling sustainable operating margins over the medium term.

In addition, combining the best of colleague and digital capability means that improving the engagement of our colleagues is a fundamental enabler of our future success.

HL is a financially robust business with a great heritage, and we are now on the right course to execute on our strategy, capitalise on the significant growth opportunities that lie ahead and create value for all our stakeholders.

Dan Olley

Chief Executive Officer