Phoenix Group plc – Investor Day 2013 Thursday 16 May 2013 Clive Bannister, Group Chief Executive Good afternoon ladies and gentlemen and welcome to the Phoenix Group Investor Day. Thank you all very much for joining us at this very special venue, the London Museum, for our presentation on ‘Cash generation, management actions and opportunities for growth.’ I’m joined today on the podium by our Group Finance Director, Jim McConville, Mike Merrick, the CEO of our Life Division, and Fiona Clutterbuck, the Head of Strategy, Corporate Development and Communications. Several of our Phoenix Life colleagues are also in the audience, and will be presenting to you on their respective areas later on this afternoon. I don’t know about you, but in my household each of my three children are doing exams: A- level, GCSEs and entry into senior school, so there is not much that I don’t know about glacial erosion, rift valleys and exam practice. Today, the Phoenix Group has two exam questions to answer. First, how do we generate cashflow and its future sustainability? And second, where and how can we generate future capital growth? At the end of today, I trust we will have answered these exam questions. Without a doubt, the best way for the Phoenix Group to continue to generate value for its shareholders is to focus on management actions which accelerate cash from, and enhance the value of our existing embedded value. As a reminder, we set out here a summary of the Group, showing the various components of our capital structure, and the way in which cash generated from the operating companies - principally the Lifeco - flows up through the regulated group to the holding company or Holdco on top. Jim and Mike will address cash generation and management actions for the future, and Fiona will take you through our current thinking on the potential to grow our business through M&A. I would now like to hand you over to Jim. Jim. Jim McConville, Group Finance Director Thank you, Clive. Good afternoon everybody. The key metric which we use to measure performance, and which we think is the most useful for investors in understanding the business, is cash generation. This is cash which is distributed from the operating companies to the holding companies, which is used solely to pay for group operating expenses, pension scheme contributions, debt interest, amortisation, and shareholder dividends. 1
I’d like to spend the next 15 minutes or so talking you through the cash generation profile of the business, and giving you a sense of the shape of the cashflows and outflows over the longer term. I’ll also try and give you some colour around the sensitivity of the cash generation to various stresses at the end. In the last three and a quarter years, so between January 2010 and March this year, we have generated £2.6 billion of cash, through both the natural emerging surplus and unwind of capital, and through management actions. Here we set out the £2.6 billion of cash generation over the period since 2010, and the various uses of that cash. The most significant uses of cash during that time have been debt interest and amortisation, which totalled £382 million and £908 billion respectively. This includes the external cost of the Tier 1 coupon of £26 million per annum. The £908 million of amortisation includes the £450 million prepayment made during the first quarter as part of the debt reterming. This was partly funded by the £211 million net proceeds of the capital raising. We started 2010 with just over £200 million of cash within the holding companies. Over the last three years, cash generation has been significantly greater than outflows at the holding companies. This has enabled us to increase holding company cash by £1 billion to £1.2 billion as at 31 March. Clearly, any distributions from the regulated group must take into account the capital position at that time. At 31 March, of the two group capital calculations, the IGD was the most onerous test and we had headroom above the group’s capital policy of £400 million. You may recall that in March last year, we talked about the £9 billion of cash expected to emerge from the existing book of business. This slide sets out how we expect the cash to emerge over the life of the book. We have a long term cash generation target of £3.5 billion from 2011 to 2016, of which £1.5 billion was delivered in 2011 and 2012. Over the course of the following six years, from 2017 to 2022, we expect a further £2 billion to be generated. The remaining £3.5 billion is expected to emerge in 2023 and beyond, and this is based on our internal models which look at the 30-year cash generation profile out to 2042. Importantly, although we have included the benefit of management actions within the target to 2016, there is no allowance in the cash generation profile beyond 2016 for the benefit of management actions. This is simply a function of our focus of accelerating cash and enhancing the profile over the period to 2016, and we have not yet turned our attention to actions which we can undertake to enhance the profile beyond that. Now turning to look in slightly more detail at the cash generation profile. The strong organic cash generation we’ve seen in the past is expected to continue for many years. We have set a target for 2013 of £650 to £750 million, and so show the midpoint of this range on the chart here. And then for illustrative purposes, show the remaining £1.3 billion split over the remaining three years of the target period from 2014 to 2016. We have talked in the past about current organic cash generation being in the region of £400 million per annum, and this is expected to trend down to around £350 million per annum between 2017 and 2019, and is expected to be around £300 million per annum between 2020 and 2022. This represents the natural rate of emerging surplus and capital 2
unwind expected from the business over that time, and in the absence of management actions. You will hear from Mike and his Phoenix Life colleagues, shortly about the various management actions we have undertaken in the past, and can look to undertake in the future to enhance this cash generation profile. One of the current uses of cash generation is amortisation of the senior debt facilities, which are one component of the G roup’s gearing calculation. On this slide, we set out the outstanding balance of senior facilities at the end each year, taking into account the £450 million prepayment made in Q1, and assuming we meet the mandatory and target amortisation only. This is of course purely illustrative to show the potential profile of senior bank debt. To the extent we are able to, and choose to make additional debt repayments, this will reduce the bank debt and gearing more quickly. The Pearl facility of £375 million has annual amortisation of £25 million and a £300 million bullet in 2016, which we expect to repay from existing cash resources at that time. Following the reterming and the £450 million prepayment in the first quarter, the remaining Impala facility totals £1.4 billion, and we have target amortisation of £120 billion per annum. Based on this illustrative amortisation profile, at the end of 2016 we would expect to have outstanding senior debt of around £900 million. We have set a target to achieve a gearing ratio of 40% or below by 2016, which we expect to achieve from the organic cash generation from the existing business. The target was set because we believe, at this level, we would be able to seek an investment grade rating and gain access to debt capital markets, providing more flexibility for our capital structure. Clearly, this is just one option. We actively consider all financing available to us, and there may be alternatives: raising debt in the high-yield markets prior to getting an investment grade rating, for example, or achieving investment grades sooner than 2016, which we could also pursue if we felt it made sense in the context of our overall capital structure. So turning now to look at the other uses of cash at the holding companies. This is a slide which we presented at the time of the 2012 results in March. We show the average cash generation between 2013 and 2016 of £500 million, based on the long-term target, including management actions of £3.5 billion between 2011 and 2016. And we then show the various uses of that average cash generation each year, leaving an average of £135 million available for additional debt repayments, dividends and reinvestment. The £827 million of holding company cash reflects the proforma year-end position. That is adjusting the year-end position for the debt reterming and capital raising. During Q1 we generated £410 million of cash, and therefore the holding company cash position at the end of March had increased to £1.2 billion. And when considering the amount of cash which can leave the Group, we must also bear in mind the Group capital position and ensure we continue to meet our capital requirements under both the IGD and PLHL ICA calculations. Now moving on to look at the period beyond 2016. Here we set out holding company cashflows between 2017 and 2022. Clearly this is purely illustrative to give some indication of the direction of travel. It obviously comes with the caveat that this is a number of years away and is based on a set of assumptions which may or may not be borne out. 3
Recommend
More recommend
