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Edited Transcript of BRW.L earnings conference call or presentation 10-May-19 8:30am GMT

Half Year 2019 Brewin Dolphin Holdings PLC Earnings Presentation

London May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Brewin Dolphin Holdings PLC earnings conference call or presentation Friday, May 10, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Richardson Nicol

Brewin Dolphin Holdings PLC - CEO & Executive Director

* Siobhan Geraldine Boylan

Brewin Dolphin Holdings PLC - Finance Director & Director

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Conference Call Participants

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* Benedict Guy Williams

Liberum Capital Limited, Research Division - Research Analyst

* Paul McGinnis

Shore Capital Group Ltd., Research Division - Research Analyst

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Presentation

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David Richardson Nicol, Brewin Dolphin Holdings PLC - CEO & Executive Director [1]

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Thank you. Good morning, everyone. And thank you for joining the call this morning at such short notice on a Friday morning. As you would have seen, we've made 3 important announcements today. First, we're undertaking this morning an equity placing of approximately GBP 60 million. Second, we have announced this morning acquisition of Investec Capital & Investments in Ireland. And thirdly, we brought forth the announcement of our half year results, which were originally scheduled for 15th of May. Given the short notice, we felt that this webinar call will be more accessible for everyone than our normal face-to-face meeting.

However, before we start, I would like to take the opportunity of introducing Siobhan Boylan, who joined Brewin Dolphin as Finance Director on the 4th of March. I'm delighted to have her onboard particularly at this very exciting time in the group's development. Her previous experience particularly as CFO of Legal and General Investment Management and before that Aviva will be particularly valuable as we continue to grow and move forward. If you have not already met her in person, she will endeavor to do so over the next few weeks.

The terms of today's agenda, I'll start with an overview of the placing and acquisition, followed by the highlights from half year results. I'll then hand over to Siobhan to take you through the results in more detail, returning to provide you with an update on our broader strategic progress. After that I'll conclude and we'll open the call to questions.

Turning now to today's placing and acquisition announcement. In line with our stated strategy, the group has in its last 12 months committed to investing circa GBP 70 million in 5 acquisitions and new internal strategic initiatives such as 1762 and WealthPilot. The gross proceeds of equity placing, approximately GBP 60 million, are intended to maintain a strong group regulatory capital level, thus providing the group with continued financial flexibility to take advantage of expected further opportunities in the market. Post the acquisition and placing, our pro forma regulatory capital ratio will be circa 196%.

I'm delighted to announce that we've reached an agreement to acquire Investec's wealth management business in Ireland. By combining our already successful business in Dublin, we are building scale as a top 3 wealth manager in Ireland. A significant portion of the funds raised from the placing would be used to acquire the business for net consideration after adjustment of surplus capital of EUR 44 million. Their business complements our existing presence in the country adding EUR 2.9 billion of assets under management advice and approximately 5,000 clients.

In terms of financial contribution, it's expected to generate annual revenues of EUR 17 million with a pretax profit of EUR 4.5 million. Most importantly, the acquisition meets our disciplined acquisition criteria of cultural, strategic and financial fit. We expect the transaction to be enhancing to adjusted earnings per share on a pro forma basis from the date of completion with a pro forma P/E multiple of 11x. I'll come back later to give you a bit more detail in the business.

Let me turn -- now turn to our results. This half year has been a strong period for Brewin Dolphin, the group has continued to deliver strong and resilient organic growth. The fact that this has been achieved in the context of significant market volatility and political uncertainty is all the more impressive. The growth has been underpinned by our discretionary net new fund flows, which increased to GBP 400 million compared with GBP 100 million in the first half of 2018. Our strategy of focusing on our advice-led wealth management services in the direct market is now very much delivering results.

I'm pleased with the considerable inorganic progress we're making that complements our organic success, not just relating to this morning's announcement but also the acquisition of the Bath-based IFA Epoch Wealth Management, which we announced last week. And of course, these complement 2 exact acquisitions that we announced earlier this year, which were IFA firm, Aylwin and Mathieson Consulting. Taken together, we have committed an investment of circa GBP 70 million over the last 12 months in inorganic growth and in our newer propositions, WealthPilot and 1762. Added to this investment in our new core custody and settlement system, plus our new offices, this will all support a long-term growth and help us win a larger share of the growing demand for advice-led wealth management in the U.K. and Ireland.

Let's now focus on the momentum in our organic fund growth. This slide shows the fund performance over the last 3 half years. Total funds are up 7% to GBP 42.4 billion. Discretionary funds are up 9% to GBP 37.5 billion and discretionary net flows represent an annualized growth rate of 4.3%. We're particularly pleased with this latter 4.3% given the environment we've gone through in the last 6 months, and these are drivers behind the resilient financial results, the highlights of which are shown on the next slide.

Total income was GBP 162.3 million compared with GBP 161.8 million in the first half of 2018. Adjusted profit before tax declined by 8% to GBP 35.6 million over the same period. This is largely due to a 3% rise in cost, which mainly related to the investments in growth initiatives and infrastructure projects that you will recall we highlighted at the full year. Even with investment in the company's future growth, I'm pleased to confirm that we've been able to maintain interim dividend unchanged from 2018 at 4.4p.

Let me now hand over to Siobhan to review the results in more detail. Thank you.

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Siobhan Geraldine Boylan, Brewin Dolphin Holdings PLC - Finance Director & Director [2]

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Thank you, David, and it's great to be joining Brewin Dolphin at such an exciting time and to be hitting the ground running. Let me take you through the numbers in some more detail.

Looking at our fund's performance. Total funds grew by 7% to GBP 42.4 billion from the first half of last year and are broadly in line with the full year 2018 of GBP 42.8 billion. We've seen a rebound in the second quarter driven by more positive market movements and continued good organic growth has led to net new discretionary fund flows in the first half of GBP 1 billion.

Total income is marginally up year-on-year at GBP 162.3 million, which is in line with the movement in average funds over the period. As we outlined at the full year presentation, we're investing in our business in a disciplined way, which is the main driver of the increase in our operation costs and I'll go into this in more detail shortly.

Together, this has meant a decrease in PBT and adjusted items of 8% to GBP 35.6 million, chiefly as a result of the investments we're making. Our operation margin is 21.9% and reflects the impact of this investment. Without this, the margin would have been closer to 25%.

The statutory PBT was low at GBP 29.7 million driven primarily by one-off past service costs for pension as a result of the recent high court ruling for guaranteed minimum pensions.

Finally on this slide, our total cash position was GBP 138.8 million and our capital adequacy ratio was 205% and in line with last year, and I'll come back to this shortly.

Now let me take you through our direct flows. Looking at our fund growth in some depth, total discretionary funds were GBP 37.5 billion at 31st of March and this comprises the net new inflows of GBP 1 billion in the first half and the impact of market movements in the period.

Discretionary net fund flows GBP 0.8 billion including transfers represents a 4.3% annualized growth rate, which is just below our target of 5%. The market recovery in the second quarter added GBP 2.5 billion to investment performance offsetting the negative investment performance in the first quarter.

Direct net inflows increased to GBP 400 million from GBP 100 million last year. This has been driven by our strategy of developing advice-led integrated wealth management service. Fund inflows into this offering were approximately 40% of the total, up from 30% last year. Benefits are also starting to come through from our newer initiatives such as 1762 and our relationship with Camelot. We've also experienced lower direct outflows in the period of only GBP 200 million.

Intermediary net inflows were low at GBP 300 million, mainly as a result of a low level of activity in the market due to fewer DB pension transfers and subdued client activity due to market uncertainty.

Finally, our MPS proposition continues to grow and we've seen a sustained performance with GBP 300 million of net flows, the same level as last year. As part of growing this proposition, we've entered into 3 new partnerships in different target segments to broaden our distribution capability.

Turning to look at revenues. Our total average funds over the period have remained largely in line due to the impact of volatile market conditions, particularly during the first quarter where investment markets fell almost 8%, which is followed by recovery in the second quarter of approximately 7%. Overall investment markets are down 2% during the first half of 2019.

Our total income is marginally higher than last year at GBP 162.3 million. Income from our direct business has remained stable at GBP 103.5 million in line with the average funds during the period. Direct fee margin was stable at 62.4 bps with overall direct revenue margins being impacted by flat commissions year-on-year.

Our indirect business has had a stronger performance with income up 7% to GBP 37.1 million driven by the higher average indirect funds, which grew by 10%. Revenue margins to intermediaries remained broadly stable but with some continued impact from tiering as MPS revenue margins were in line with prior years. Financial planning income has increased by 3% to GBP 12.6 million. Finally, the reduction in other income is largely due to low advisory income following the substantial transfer of advisory managed funds into discretionary last year, offset by high-interest income as a result of base rate changes.

Turning now to look at costs. As we previously indicated, we're investing in a selected and disciplined way to ensure that we build the business for the future to achieve growth, reduce risk and operate more efficiently. Total costs were up 3% to GBP 127.6 million. Our fixed operation costs have increased by GBP 7 million to GBP 101 million. Of this GBP 101 million total fixed cost, GBP 8.6 million relates to growth initiatives and infrastructure projects, which is up from around GBP 5 million last year. Last year's project costs included the cost of MiFID II compliance. The BAU costs increased by GBP 3.5 million largely due to salary inflation, hiring momentum and non-staff costs. Non-staff cost increases are primarily due to higher IT costs, a larger office footprint such as (inaudible) based in our Winchester office and also some legal and professional fees related to infrastructure projects.

Over the period, we've added 122 staffs, most of which were client facing and in line with the guidance on head count growth we've previously given. The recent inorganic acquisitions we've announced in the U.K. will add around 55 additional staff within our branch network by September 2019, and this will include the start of Epoch when it completes.

We'll continue to maintain a disciplined approach to our cost base. However, we have a number of growth initiatives and infrastructure projects that we're committed to deliver and this is in line with our strategy.

Going into the investments in further detail. We've commenced program of change that will build on the foundations we've put in place and ensure we're well placed to capture market and growth opportunities. As part of preparing for this, over the last 12 months, we've hired experienced individuals to ensure that these types of change programs are delivered.

As we previously explained, we're implementing a new CMS system, Client Engage. To date, we've spent GBP 2.9 million and this project is now in delivery phase. We expect this to fully complete -- to be fully implemented by the end of 2019 and it will be depreciated over 4 years. This system will be used by staff in our branches and by our operations teams, and we expect it to provide scale benefits.

We recently announced that we've signed an agreement with Avalog to replace our core custody and settlement system. This program will take around 2 years to deliver and in total will cost GBP 35 million, which is a mix of internal and external costs. The majority of these costs are internal and are under our control. We'll create an intangible asset on the balance sheet, which will be amortized over 10 years in line with the lifetime of the contract. As a core part of the operational infrastructure, we expect to see benefits both from operational improvements, which will enable us to scale more easily, and also to reduce operational risk inherent in our processes.

Lastly, we're in final negotiations to sign an agreement to lease new offices, which will be our new headquarters. This new building is in a central location and allows us room to expand. The ongoing cost of the new lease will be approximately in line with the cost of our current headquarters in the future. This lease is not expected to start until August 2021 and we expect to move by July 2022. There is a potential owner's lease cost of between GBP 6 million to GBP 10 million. However, timing of recognition is dependent on a number of factors and, therefore, as a result, is likely to be recognized between the date the lease commences and the relocation date.

I'd now like to move to our cash flow. Our business is highly cash generative although it has some cyclicality. The first half of the year typically has greater level of cash outflows as the final dividend and annual profit share, plus employment taxes, shown here in working capital, are paid between December and February. Second half is typically much more cash generative with the interim dividend being the only major cash outflow.

CapEx of GBP 5.6 million has been incurred this half on systems and premises and is similar to the same amount last year. Our CapEx is in line with previous stated guidance and we still expect this to be around mid-teens by the end of 2019.

Finally, I'd like to take you through the balance sheet. We continue to maintain a strong balance sheet with total regulatory capital of GBP 163.7 million, which is the combination of regulatory capital resources of GBP 146.2 million and the unaudited reserves of GBP 17.5 million, which as of today, become verified and, therefore, can be included.

We carry 205% of our capital requirement at approximately 20% of our capital surplus above our group risk appetite statement. This surplus allows us to meet future CapEx requirements and maintain financial flexibility. That said, we have a number of acquisitions, Epoch and Investec's Wealth Management business in Ireland, which fits our strategy and therefore, present attractive growth opportunities for the business. The placing we're doing today is to support these transactions, maintain a strong balance sheet and ensure that we retain financial flexibility.

And with that, I would like to hand you back to David.

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David Richardson Nicol, Brewin Dolphin Holdings PLC - CEO & Executive Director [3]

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Thank you, Siobhan. I'll now talk about the progress we're making to deliver against our strategy.

We have shared this slide with you a number of times before, so I won't dwell on it. But suffice to say that the strategy is founded on a simple but successful process delivering results we've discussed earlier. We make sure we understand who our clients are, we make sure we understand what they want and we build our propositions based on those needs. Nothing else. This is supported by a diligent focus and continuing improving our brand awareness and our client promise while continuing enhancing our service to deliver that promise successfully. And as you can see from the above results and our recent announcements, we're broadening our distribution and leveraging our scale to support this promise. These in turn are driving and will continue to drive our strong organic growth.

I now want to turn to the progress we have made on delivering the key programs that underpin our strategy. There are 3 strengths: We continue developing and refining propositions, broadening our distribution and making further operational improvements. Let's look at what we've completed in our first half.

Propositions that are very encouraging to see inflows to our Brewin Portfolio Service, BPS, is on track. When we last met, I said that future expansion of WealthPilot would require the support of technology. We have now selected a technology provider and we're in the process of implementing a platform that will help us improve operations and to scale the service. This year, we are pursuing new avenues to extract volume from award-winning investment expertise by licensing our investment IP to other businesses under the powered by Brewin Dolphin brand. For example, in January, we announced an agreement with Guinness Asset Management who are using both our asset allocation and fund selection expertise for their new multi-asset funds. Since then, we have concluded 2 similar agreements with consolidator Fairstone and regional IFA, Eden Park.

Turning to distribution. In September, we announced that we've moved our Bournemouth office to our new office in Winchester and in December, we had announced our acquisition of the Basingstoke firm Aylwin, which has merged into an enlarged Winchester office.

We also purchased Mathieson Consulting. It is a highly regarded provider of financial settlement reports for family lawyers. The firm is a powerful introducer of our services to lawyers' clients who need financial advice and as such, it opens up a valuable additional route to market.

The acquisition of Bath IFA firm Epoch last week significantly strengthens our coverage in the Southwest as financial planning capabilities gives us a potential way to further develop our proposition in the Southwest. In London, we've made a number of key hires to our West End office, who are helping to build a promising pipeline of new business for our 1762 service. Certainly, in terms of operational excellence, as Siobhan has highlighted, we continue to invest in systems with a goal of improving both efficiency of client delivery and risk management.

Now looking towards the second half of the year, our focus is to complete and integrate our acquisitions. On the operational side, we will focus on completing the first phases of a number of our technology projects, and we have dedicated project teams working on each of the acquisitions and very strong change teams working on the technology programs.

On the proposition side, we are adding a new liquidity management service for 1762 and that will be a natural addition to this proposition and something that is expected by many high net-worth individuals.

Finally, looking again at our office footprint, we see opportunity for further planned expansion, particularly South of London. With a disciplined growth strategy, I'm confident about the outlook for the business.

I've put all that progress together in a time line on this slide, you can see the extent and impact of our achievements. Looking at the top chart, we've added a lot to our distribution capabilities as well as significantly developing and refining our products and propositions. You can see how the sum of all of these individual decisions creates a richer and deeper private client proposition. Looking at the bottom chart, you can see how all this comes together in a resulting strong growth direct inflows over the period.

I've put on next slide all the inorganic developments that I've just talked about. Showing this way, you get a sense of how they fit in strategically. It's important to note that these have been higher targeted investments, broadening our client proposition and expanding our regional presence particularly in the South of England. And with the acquisition of Investec's business in Ireland, we have significantly improved our position there. So let me talk a little bit more about this acquisition.

I talked earlier about the strategic benefits of the acquisition, and you can see the addition of Investec's wealth management business in Ireland adds significant scale to our existing operations in the Republic of Ireland. It will an additional EUR 2.9 billion in assets under management and advice, 5,000 clients and deliver approximately EUR 17 billion in incremental revenues served by 52 members of staff.

Of those assets under management and advice, over half of the combined business will be discretionary and we expect in line with the trend already shown in the business that the percentage of discretionary assets in the business will increase further over time. Integration risk is low not only based on our strong track record of integrating businesses since we first acquired Tilman in 2011, but importantly, because our businesses are highly compatible in terms of culture, values, investment philosophy and our shared client-centric approach. Based on this, we look forward to smooth and successful integration post completion.

So let me conclude. Supported by our announcements today and our track record to date, Brewin Dolphin has an exciting future. We have strong relationships with our clients, which is why we are continuing to grow our discretionary funds. We have a strong national footprint that we've added to through expansion and acquisition. We have a diversified business mix, which makes our revenues resilient and provides new avenues for growth.

Our growth is well founded on sound investment in inorganic growth and through acquisition. All our growth and infrastructure initiatives are on track. We are, therefore, confident in our outlook, our strategy and our ability to deliver it.

Thank you for listening. And Siobhan and I will be delighted to take your questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from the line of Paul McGinnis.

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [2]

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A couple of questions, please. Just, first of all, just take you back to Slide 10 in terms of the discretionary net flows. You pointed out a very handy increase in direct there. Just wondering with respect to intermediaries, without having fallen, I mean, it's more a question going forward, do you expect going forward, the intermediaries will start now start to represent sort of a less significant that -- it's been a big generator of growth in recent years, but would you expect what we've seen in H1 to be more representative going forward in terms of the mix that you would expect in terms of discretionary net flows? That's question 1. And then question 2 is directly related to the acquisition. In terms of the EUR 4.5 million of profit, pretax profit from the Irish business there. Just want -- I presume that's based on sort of a historic pro forma and that, therefore, if you're successful in increasing the proportion of the clients there that are on a full discretionary basis, you would expect the revenue yield by ways -- or revenue synergies to increase over time?

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David Richardson Nicol, Brewin Dolphin Holdings PLC - CEO & Executive Director [3]

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Okay. I'll start with the first one and then Siobhan can add in. The intermediary business is incredibly important to us. We rather look at it as the intermediary business continues to grow and develop, MPS is very strong. We've seen a little bit of reduction in bespoke, but that's really the market to be honest. We've got 1,700 IFAs around the country. We're very, very focused in them, there's been no reduction in interest in our services around, I think it's just really the broader marketplace. And I think that -- you see that around many other firms.

So what this is about more is that the direct business, which you talked about a lot, if you remember, Paul, you've been with us for a few years now, in the past as coming off is more -- we are focused on all the investments we made in the direct side are coming out towards intermediary. The intermediary business will continue to be very strong for us. I've got Robin Beer in the room with me here and I think he would concur with that, I think. It's no doubt that in the last 6, 9 months, the intermediaries have seen a slowdown in activity and that's pretty well everywhere. So I think I view more as direct coming out towards being a little bit more in equilibrium, hopefully, both can go forward in a very positive way, which we think is the case.

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [4]

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Okay. But based on mix, that's roughly 1/3, 1/3, 1/3, as it shows on there, is that sort of -- you're totally comfortable with that?

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David Richardson Nicol, Brewin Dolphin Holdings PLC - CEO & Executive Director [5]

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We're comfortable with that, but we think all of them will continue to grow and, hopefully, be 1/3, 1/3, 1/3 of a bigger number. But yes, we're not complacent, but we're very comfortable where we're at. I mean in the last couple of years were obviously very strong as you know, but we were not disappointed at all about this.

I think in terms of the -- let me have a go at it and then Siobhan can add in. If the business we are acquiring, revenues of EUR 17 million, the way it works is we are actually taking not all of the staff, so we're taking all the client-facing staff, we're taking a subset of the support staff. And then we are adding the business into our Per -- we run our business there on Pershing, which you may well be familiar with, it's a subsidiary of Bank of New York. And when you net all that out, that is the profit net contribution number we start with, the EUR 4.5 million, you see there.

Going forward, we are -- the very business is a nice mix, the revenue, the business is well priced, it's very similar to our own. And we will expect to grow the discretionary, we're not going to -- we're very comfortable with advisory, it's a slightly different market there and we'll see over time how that migrates, but we're not going to suddenly shut this off or do anything dramatic. We'll work with the new team to work through that. And the revenue yield and the revenues and the profitability from all aspects of that business are strong. So we're not getting into detail of breaking it down right now in terms of the different yields. We don't do that for existing Irish business so we're not going to do that here. But rest assured, we're very comfortable with the profile there.

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [6]

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But the question was, is it already quite a high margin business already, it was more a case of is there scope for those margins to be sort of higher and if revenue mix was going to be one of the reasons why you could get that, that's what I was getting at?

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David Richardson Nicol, Brewin Dolphin Holdings PLC - CEO & Executive Director [7]

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I think having scale there will give us opportunities to continue to grow the business, and we're quite comfortable with the margin which is in place there.

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Siobhan Geraldine Boylan, Brewin Dolphin Holdings PLC - Finance Director & Director [8]

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They have been moving their book from towards discretionary, they moved from 21% to 36% over the last couple of years. So that is part of the direction of travel. But the aim is to work with the client base and in the Irish market, that -- those services are all valued.

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Operator [9]

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(Operator Instructions) The next question is from the line of [Justin Bates].

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Unidentified Analyst, [10]

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Just a couple questions, please. Could you just clarify, when you're seeing the EUR 4.5 million of PBT that you quoted, it was essentially an adjusted number, so after you have moved on to a new platform, you get off this.

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David Richardson Nicol, Brewin Dolphin Holdings PLC - CEO & Executive Director [11]

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Yes. As if we have done -- as if we had owned the business -- we had owned it for the whole of the year to March 2019.

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Unidentified Analyst, [12]

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Okay. And can you just remind me the tax rate and is this applicable in the Republic of Ireland?

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Siobhan Geraldine Boylan, Brewin Dolphin Holdings PLC - Finance Director & Director [13]

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12.5%.

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David Richardson Nicol, Brewin Dolphin Holdings PLC - CEO & Executive Director [14]

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12.5%.

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Operator [15]

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The next question is from the line of Ben Williams.

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Benedict Guy Williams, Liberum Capital Limited, Research Division - Research Analyst [16]

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Do you think -- it will be really helpful to make a comment on, if you like the balance of growth going forward because obviously it's been coming back. You've been a business which has been paying at of the top end of your payout ratio. And I guess that somebody has been talking about Brewin Dolphin a couple of years ago. They wouldn't have seen inorganic growth. The kind of sort of accretive acquisitions that you've been making have been a big part of the way forward and actually obviously not just this deal, but if you say Epoch and Mathieson, yes, it's pretty significant. Could we just maybe address the -- what you might think to be the balance of -- balance between paying out both in yield and the inorganic growth and obviously the organic CapEx and the new propositions as we sort of go forward? I'm not just talking to the 6 months but in next 2, 3 years, please.

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David Richardson Nicol, Brewin Dolphin Holdings PLC - CEO & Executive Director [17]

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Okay. Well, clearly, you're seeing us growing the business, that's for sure organically and inorganically. The dividend policy, which you're referring to, we stated is 60% to 80%. Over time, as we continue to grow the profitability of the firm, you could see an absolute increase in dividends over time, but it may slow down in relation to -- percentage may come down a little bit over time. We've talked about this in the past, there's good reasons for that relationship, that policy, and we're sticking with it, it serve us well. But as we turn more towards growth, that may change over time. But in the short term, I think we can do both basically.

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Operator [18]

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(Operator Instructions) And there are no further questions at this time. I would like to hand the conference back over to David Nichol.

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David Richardson Nicol, Brewin Dolphin Holdings PLC - CEO & Executive Director [19]

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Okay. First of all, again, thank you very much for changing your schedule this morning. And we obviously -- I think David and Siobhan are available -- David Orford and Siobhan are available. I think some of you've already talked to them this morning. But I think they will be trying to get to see you in person as Siobhan will obviously like to meet you all in person.

I appreciate you listening today, and I know there's quite a lot to take in, but that's why we did a call in 1 day. So thank you very much, and we'll see you again soon and we'll get in touch, okay? Thank you for listening.