景順投信 (IVZ) 2002 Q3 法說會逐字稿

Welcome to AMVESCAP's 2002 Third Quarter Conference Call. Today's conference is being recorded upon request by AMVESCAP. If there are any objections, you may disconnect from the call at this time.

Callers who access the call during the live transmission will be deemed to have solicited access to the call for the purposes of the U.K. Financial Services and Markets Act regime governing real-time financial promotion.

The presentations that follow may include information that, in U.S. practice, constitutes forward-looking statements. These are statements regarding AMVESCAP's goals, beliefs, plans or current expectations, all taking into account information currently available to our management. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. We caution investors not to put undue reliance on forward-looking statements.

Today's speakers are Chairman Charles Brady and Chief Financial Officer Robert McCullough. A question-and-answer session will follow accordingly.

At this time, I would like to turn the call over to Chairman Charles Brady.

Fine. Thank you very much, and good morning, everyone, or good afternoon. The market over the last couple of years has probably been as difficult as it's been in – almost in the history of capital markets, and the third quarter was just about the worst that probably any of us have seen during our business career. And during that period of time, you know, obviously there's very little you can do when you have a business like ours that's tied to those capital markets. Just – all you can really do is keep your head down and cut your expenses as much as possible, and I think that's really what the story of the third quarter is because we have tried to cut our expenses.

Those of you that have followed our company for a long time know that we have put an emphasis on variable costs for a long time. We have tried to change the ratio from the amount of fixed cost to variable cost and increasing the variable cost. And I think the third quarter, in many ways, shows that that strategy has worked over a period of time. Although we're not proud of the third quarter, the truth is, I think it came in better than many people had thought.

Just to give you some sense of what we've accomplished over this period of time, our expenses in the third quarter were 224 million pounds, and that's down 14 percent from the second quarter, so it's a huge increase. Our total expenses have been trending down actually since the first quarter of 2001. To put those in perspective, we had expenses in the first quarter of 2001 of 281 million pounds. Today, that number's 224 million pounds, and that's a 20-percent decline during that period of time. But what's missing even in those numbers is the fact that we bought five businesses, and each of those businesses increased our expense levels, so we not only cut overall expenses by 20 percent, but we offset the new businesses we brought in.

In terms of the headcount, that would mean that at the top we had about 8,900 people; today, we have 7,900 people. And as you noticed in the press release today, we're announcing another round of expense reductions, and that will result, unfortunately, in some additional headcount loss.

Throughout this period, though, we've done this. Our compensation, technology and marketing expense have all been reduced, but the percentage of revenues has stayed the same. So the point is that we have basically just shrunk the size of the business during this time, but it kept the same relative percentage to our revenues.

Operating margins, of course, in this kind of environment is tough, and they have come under some pressure, but they still are high by most standards, and I think we're in a good position to go forward. Clearly, we cannot predict the future; no one can, and I don't think anyone pretends to. But think of it like this. We had a steady drop in the markets over the last two years, and in the third quarter, they just simply tanked. We cut our expenses down during this period of time gradually, and very little of it was visible. We only had two stated redundancy periods, and one was in Canada, where we actually had a change in systems. And one was in Denver, where we had planned for a huge amount of growth, and it obviously did not come about.

So here we are at the end of the third quarter, and the market's down to a level that, by historical standards, would indicate maybe some sort of bottoming. Again, you cannot predict that, so I’m not trying to do that, but it seemed appropriate for us to, even at this low level, to go ahead and make another adjustment, bringing our operations down to that level. And if we can accomplish that, then, clearly, you can see what might happen if the market actually does turn around. So we're announcing that we're looking for another 100 million pounds of cost reductions over the next roughly 15 months. This will bring us back to a margin well above 30 percent, and it should, if the market even stayed the same, give us a very strong base. And if the market did improve, it would certainly give us a boost on the up side.

So with that as a backdrop, I’m going to let Bob McCullough go through the actual financials for this quarter.

Thank you, Charlie, and good morning, good afternoon, to everyone.

Let me, if I can, start with the cost reduction announcement that was in our press release today. I'm sure there'll be a lot of questions, but let me try to anticipate some of those if I can. The activities that we have undertaken here to get to our targeted reduction of 100 million pounds by the end of 2003 – and let me just stop and emphasize the fact that this is by the end of 2003. We will be working as diligently and as quickly as we can, but you'll appreciate to get the full benefit of this, it's going to take a little bit of time.

The activities are really moving forward on two parallel fronts. The first is that each and every business unit within the group has been and is undertaking a thorough review of each and every one of the activities, and out of that, we have identified savings that comprise a large part of that targeted overall savings. Additionally, we've a group to get -- coming together for technology and operations, looking across the group for group-wide ways that we can be more efficient in these two important areas of our business, and that, too, will contribute to our targeted savings.

Obviously, as Charlie said, compensation is a big part of our cost base, and with that in mind, you know, we expect that these efforts will result in headcount reductions of about 500 people from the level that we see at the end of September. There will obviously be a lot of other savings that will take place beyond headcount, but that obviously is there. The majority of the headcount reductions are expected to take place by the end of the first quarter of 2003, and we would expect to see these savings coming in, where about 60 percent of the savings, hopefully, will be accomplished by the end of the second quarter of next year. And as you will appreciate, on the short term, we may actually have some required increases in costs to get at the full savings over time. There will be an exceptional charge for this effort. It will be taken in the fourth quarter. We are in the process right now of determining what that will be. It's something I can't predict with any precision, but I suspect we will be looking at a charge that will be about double the amount that we took at June 30, which was 20 million pounds. I'd be happy to come back and deal with any questions, but, hopefully, that will add a little bit of flavor to the announcement and Charlie's comments.

Looking then through the financials, for the three months of the third quarter, our revenues were down 21 percent, with an operating profit margin of 27 percent, pre-tax profits down 36, and earnings per share of [6K] per share diluted, pre-exceptional and pre-goodwill, of 35 percent.

The compensation, technology and marketing accounted for about 60 percent of our total revenues at the end of the third quarter and also for the third quarter of last year, with compensation coming in right at 40 – a little bit over 40 percent of that total, so the other two comprising about 17 to 18 percent.

Just to remind you of a couple points, last year's results were re-stated for FRS 19 for tax accounting, so what you're see on the three and the nine months are comparable, but are, for the record, restated. Also, we have a tax rate of 30.6 percent, pre-goodwill, which is the same as we have had before. Last year's results did have some [indiscernible] impact because of acquisitions. And, lastly, on the nine-month basis, our average exchange rate is $1.48 to the – sterling this year compared to $1.44 for the nine months last year. Third quarter is $1.55 to $1.44, so there has been some negative influence, if you will, on a comparable basis of -- brought about by foreign exchange. The – turning to the next page, looking at the nine months, I won't go through all the percentage declines but to say that you will see here the dividend of [5P] per share that was paid – declared in the – and the end of the second quarter – or, I'm sorry, the early part of the third quarter – and was paid out in October of this year.

Expenses are down by 66 million pounds, looking at the nine-month to the nine-month period, pre-exceptional and goodwill, and that, again, takes into account a number of acquisitions during that period. We did have an exceptional charge of the 20 million pounds recorded in the second quarter. You will recall that's for reorganizations and some redundancies that were taken at that time.

Turning to the next page, looking at the third quarter of this year compared to the second quarter of this year, you see revenues were down by 17 percent, which is in line, really, with – all of the major indices in the quarter were down at least 17, if not more, percent, reflecting the very difficult markets that we have seen.

Our margin is at 27 percent in the second – or in the third quarter, down 8 percent from what we saw last quarter, and I would just call attention that even in these challenging periods, we had EBITDA of just short of 100 million pounds, so we are generating still a substantial amount of cash – cash flow from the business.

The headcount is down 2 percent. You'll recall at the end of June, Denver had completed a redundancy program, and that was reflected in the June figures. So what you're seeing coming through in the third quarter is, to a large measure, reductions due to attrition.

Average funds under management are down 10 percent, and there we will talk some more about that in a couple of minutes.

Looking at the third quarter of this year versus the prior year, just – information is here for your taking – I would just call your attention to the fact that last year's figures are influenced somewhat by acquisitions, so just take that into account, and those acquisitions are reflected in the full year for the current – from 2002.

Turning to page seven, the operating profits for the nine months, I'd just make a couple of comments here if I can. I know that, to anticipate a question, the institutional business margin in the third quarter of this year was at about 32, almost 33 percent, and they're actually quarter to quarter showing a nice increase in operating profit in money terms. That is due to two different areas. One is their expenses are down by about 5 million pounds, quarter on quarter. But, secondly, they had a large performance fee of about $10 million that we earned in the third quarter of this year on a real estate transaction. And while performance fees are not a large part of our business, when you do have them in an area like real estate, just lumped together in just one quarter, it does, obviously, have a very positive impact on the margin.

If you looked at the global, where we have seen some decline in margins for the third quarter, you know, what we've had for nine months is a 50-million-pound reduction in revenue with a 27-million-pound reduction in operating profit. You know, this is an area where the leverage of the business is quite strong on the up side, but the infrastructure – cost of the infrastructure in the number of countries that we're in also have an impact when we're in market conditions, as we are right now. The business is solid and sound. We'll talk more about flows, but just in terms of where we are profitability-wise, it probably is giving a little bit of a misleading picture. We continue under the new business category to invest. Some of the change from one year and one quarter to the next is due to timing, and also that withhold for the corporate, where we had some timing items that occurred in the second quarter. The run rate for corporate should be about 9 million pounds per quarter.

Looking at the next page on fund flows, we had a 9-percent decline for markets in the third quarter, 1 percent profit because of new business. And while we had declines in the managed products of about 3.1 billion, that lost business in the quarter, I think actually those figures are lower than many people had predicted to be the case. And when you look at our performance, it is certainly stabilized and improving in the short term, and so we feel – we feel encouraged there.

We did, at the suggestion of several of you, go back and take a look at ways that our equity portfolio splits at the end of September. Thirty-seven percent for the group of our business is in core investments; 28 percent in value, and 35 percent in growth. Those percentages are comparable to what we saw at the end of June of this year, so, hopefully, that will give you a perspective that our portfolio of equity securities is not nearly so heavily oriented toward growth, as I think, perhaps, had been in the minds of some. At the end of June, our equity-to-fixed income split is 50/50. It was 55/45 at the end of June, and, again, I think that's a – reflected -- reflective more than anything else of the sharp decline that we saw in the markets.

Average funds under management dropped by 6 percent from the -- on a year-to-date basis from last year and were down about 10 percent from the second quarter. I would just say that the gross sales figures for the second to the third quarter of this year of about $20.5 billion are in line with what we saw in the second quarter of this year and in line with what we saw in the third quarter of last year. Now, keep in mind, last year's third quarter did have in it 9/11. But, nevertheless, you know, while there has been some tailing off of gross sales, it's not been as precipitous as I think some might have suspected. Also, we have seen our institutional business, the RFP activity is increasing dramatically recently, and our closing rate has been quite good, and the RFP activity in Europe has also been quite strong.

If you look at the nine-month change in portfolio, I would just call your attention to the fact that we've had a 15-percent decline brought about by markets, which, far and away, outweighs the less-than-2-percent profit we've had in net flows over that period of time.

Turning to the balance sheet, I don't think there's really anything here that I would call your attention to, with perhaps one item, and that is, creditors have jumped considerably from 640 million pounds to 805 million pounds at the end of September. There's one prime reason for that, and that is, as we will see when we get to the debt schedule, we've got two maturities coming due in the next 12 months for senior notes and [ESB]s, and so we have moved those into the current creditor caption.

Looking at the cash flow statement, you will see a sharp reduction from this year to last in capital expenditures, and I think we will see a trend – of certainly a reduction this year to last year in capital expenditures. For the full year, I suspect that we'll see somewhere between 15 to 20 million pounds of capital spend in the fourth quarter because we've got a couple of – we're moving our London office, and we will have costs associated with that as well. You'll see the debt repayment of 115 million pounds in the nine months, which is consistent with our pattern in the past.

Turning to page 16 on the net debt, just to make the point again that the senior notes of $250 million that you see on the top are coming due in May of next year, and the equity subordinated debentures that we issued at the time of the Trimark acquisition in Canada mature in August. We've had a large amount of those in the past that have converted themselves into equity, but given where our share price is right now, it seems unrealistic that we'll have to do anything but satisfy that remaining obligation of roughly $100 million in cash when they come due next August.

The cash at the end of September is a bit higher than what we've seen in the past. There's one reason for that, and that is that we had cash at the end of September sitting available for the dividend payment that we made on the second day of October – second business day of October.

There've been some questions about where we stand on our covenants, and I'd just like to say that, you know, we've got the modifier with capacity in our credit facility, and we're well in line with our – with all of the covenants of our credit – credit estimates, just to make that point for the record for everyone here.

The next page shows shares. It's for your edification. There's nothing really that I can add, as really with the next page on headcount. So – and then, also, the last two slides show the comparison of U.K. to U.S. accounting for both the income for nine months, as well as for shareholders' equity. Again, nothing unusual there. The big change in the – between the U.K. and the U.S. is now in the U.S. we have no longer the amortization of goodwill, but that does, nevertheless, continue in the U.K.

So that's a quick run-through. I'm sure there are questions, but, hopefully, that will give you something to start with. Charlie?

Let me wrap it up by saying I don't have to reemphasize that the third quarter was extremely difficult for everyone in this industry. At that level, we're not satisfied with our profitability or our profit margin, but we think the new cost-reduction program that we're putting in as of that level will actually bring those back in line to where we think they should be. But even though we've had a period where we've had to cut costs, the truth is, we continue to invest in the business. Our private wealth business is being expanded. We have some things we'll do in the future, which I don't feel like I should talk about today. We've developed a next level of management, our international DC business. And, in particular, that in the U.K. is going extremely well. We're investing in that. We're putting in new products, and we're trying to broaden our product line to all other products for all of our various operating units. So there's a large amount of investment going back into the business, and that continues to make us the full company that we like to be.

We've re-examined our strategy, obviously based on the light of what's been going on the last couple of years, and we still feel strongly about it. We think it's really the right strategy. We think that the demand for our services will continue to be there. There's nothing about the declining market that's going to change the need for people to put aside money for retirement. It seems to me like, if anything, it enhances the demand for our services, so we believe we do still continue to have the right strategy. And at this level in the capital markets, I think one would have to be at least somewhat more optimistic about the future. We have gone through a period that's almost unprecedented in history. We may go even lower. But the truth is that it seems to me like that we can build a pretty good case, and we're probably bottoming now, and if that's the case, we feel like our company will be lean and profitable and well positioned for the future.

With that, I want to just open it up for questions, please.

At this time, we'll begin the question-and-answer session. If you'd like to ask a question, please press star one on your touchtone phone. I will announce you prior to your question. Again, please press star one now if you'd like to ask a question. And we'll take just a moment for our questions to register in our queue, so one moment, please.

Our first question comes from [Glen Shore] with Deutsche Bank. Your line is open, sir.

Thanks very much. Good morning, good afternoon.

Good afternoon.

A couple of quickies. One, you mentioned RFPs are up strong in the institutional business. Wondering if you could provide a little color on what asset classes, what products, there seems to be interest in and what you're having success in. Then maybe I'll follow up after that.

Yeah, Glen, good morning to you.

Hi, Bob.

The three areas basically that we've seen, particular areas of activity, have been in the international products, our structured products, and also the growth products out of [NAM].

And this is all U.S. clients with each of those products when [indiscernible]?

Yes, in that area it is, but as I mentioned briefly, the RFP activity in Europe is also quite strong, and, you know, that's really a whole host of different areas, and, honestly, we see the same trend in the U.K. as well.

Great. And on the gross sales numbers that you provide for us on the quarter and on the year, are those – those include money markets? Do you have long-term-only growth sales that we'd be able to do quarter over quarter just to see trends?

Glen, the – that excludes anything dealing with the institutional money market funds.

Right.

It does include – it's really just long-term retail funds, but I would caution you, the one sort of caveat to that is, you know, if a person switches from Fund A to Fund B and it shows as a purchase and a sale, there's just no way we can split that apart.

Understood, understood. Two bigger-picture questions. One –

Mr. [Shore], your line accidentally went back into the main conference. Please press star one again to get back in our queue.

While we're waiting for Mr. [Shore], our next question comes from [Hugh Hensteiness] with Morgan Stanley. Your line is open, sir.

Good morning, Bob and Charlie. Two quick ones, too. I think on the cost-cutting program, clearly, it's going to be a somewhat painful transaction. Is it possible to give us a little bit more color on the mix of cost cutting between the front and the back office?

And, also, to what extent do you think there may be any impact on revenues if you may be closing some of the more marginal funds?

And then, secondly, just in terms of investment performance, I see your – the Morningstar ratings have been sort of stable at the [foot] of 14, 15 percent for the last couple of months, and I was just wondering if you could again give us a little bit of color on the progress and performance and sort of what sort of new products or initiatives are out there to improve that number. Thanks as much.

Okay, I – on the performance levels, as you know, the rating services are all over the lot. The numbers I have, the closest ones I’m looking at are from [Lipon], and they show that probably in the first quarter we had about 7 percent of our funds in the first quartile – or excuse me, at June 30, we had about 7 percent, which is obviously low. That number's moved all the way up to 24 percent by September 30, so there's been a huge shift in the relative performance. And in the top two quartiles, the top half, if you will, it's moved 39 percent to 45 percent, so we see a definite shift. These are just managed products, I might add. That's the easiest way for you to get those kind of rankings. So I think we feel like that we've had a very major move in the – in the performance side.

What was the other question about --?

I think in terms of cost cutting between the front office and the back office, and any impact on revenues.

Well, what you would hope is that you could skew that towards the back office. That's clearly what you would do. Bob mentioned that we have two initiatives going on. One initiative is effectively kind of a short term, which is the one that's really being announced. And the longer-term initiative is the one where we have groups working on the whole infrastructure of the Company, and that's a very much longer-term thing. And so they actually kind of break down that way. The longer-term structure is the back office, and the shorter-term one probably is the front office. But so far as impact on revenues from this, I'll think it'd be zero. I don't think [there'll] be any loss of funds.

Thanks.

And our next question comes from [Glen Shore]. Your line is open again, sir.

Oh, thanks. Sorry, I got bumped out. Two quickie follow-ups are – one, I wanted to see if you had any comment on your initial experience with your long/short portfolio. As I see, you announced another one, the global portfolio, during the quarter. Just both in terms of performance and demands from both retail and institutional clients.

Well, we've seen continuing demand for the product, and I don't actually have the performance numbers at hand. But obviously the fact that we are seeing increased demand for it shows that the numbers are holding up well. I did look at some yesterday, and they were slightly above the benchmark, but I just don’t it in my head exactly what those numbers were.

Not a problem. But as a general tone, there's demand both on retail and institutional, and maybe you'll be doing a little bit more going forward as well?

There's been a – there's no question there's a shift going on in the assets that we manage, and more of it's going to some sort of predictable and stable type of return. But as Bob gave you the numbers on actually the breakdown on equity accounts, and it's really more balanced than people realize, with only about a third of it really being in growth.

Right. And then maybe just one last one on the big picture, Charlie. There's been a decent amount of coverage on the issue of under-funded pension plans. Just curious, from an asset management standpoint, how big of an opportunity is this in terms of new flows coming into managed product and equities, particularly, and maybe just timing magnitude and which asset classes? Is it stable value, as well?

Well, let me just say it's a huge, huge opportunity. For younger people, they don't realize that this actual story was around in the '70s, and this is almost what funded the massive growth in the pension funds over the last 30 years. And it's come full circle back to the people and saying, "Gee, these funds – these funds are under-funded. We're going to have to do something." It's a massive opportunity for us, and we think we're well positioned to take advantage of it.

Is the institutional group actively in conversation with current plan managers? How do you – how do you view the timing of it? Because that's the part that's been in some debate lately.

Well, the timing is ongoing always. It's obviously [indiscernible] very much on the ability of companies to fund these programs. And at the time, everybody realizes they're under-funded. And they – by the way, they're always under-funded. But at the time they feel like they're under-funded is the time the corporations are in the worst shape to actually make those fundings. But it would be my view that as the economy improves, you will see increased cash flows in these funds.

But I might just add that I think that, you know, we sort of anticipated a real ramp-up in asset allocation studies by the consultants earlier this year, which just was a little bit slow getting out of the starting blocks. But I think some of the recent activity that we've seen really underscores what – you know, the point you're making, and I think, you know, will bode well for us in the future.

Great. Thanks, Bob. Thanks, Charlie.

Our next question comes from [Robert Mundy] with HSBC. Your line is open, sir.

Thank you. Yes, good morning.

Good morning.

Another question, I'm afraid, about the cost restructuring. You look to have – still have pretty good margins in the managed products division and certainly for this quarter on the institutional division. So it would suggest that the larger area, the scope across savings, is in the global division and in the new business span in the [indiscernible] ahead. Could you give a little more detail on how you're going to cut costs in those divisions, and particularly, given some earlier comment that the global division comprises a high, fixed – [pave-ahead] high-fixed infrastructure because of the costs in operating in so many different countries? Will you be scaling back in some countries? And will you be reprioritizing some of the so-called sort of investment spend?

That may be the conclusion we'd reach from looking at the numbers, but that's actually not the way we go about it. We will do the cost-cuts version across the board. It will be everywhere, and even the ones that have very high margins, there's still ample opportunity for cutting. The real issue that Bob was trying to make before is this. We have, over the last few years, followed the strategy of building a global enterprise. Everyone knows that. We've been on record all the time. That was a young infrastructure. We had offices around; they were not up to the full potential of what they could be. When you start from a basis of having a low margin and then you have a decline in assets, of course, it hits the bottom line much harder than it would a more mature business with a larger profit margin. So that's the reason that the global business has been suffering the most.

That doesn't take from the opportunity in the future, though. The future is still just as bright, especially in pension funds in Europe. All of us realize that they're grossly under-funded, much more so than even the U.S., and the opportunities in Asia, I think, are staggering, also. The recovery there is a bit farther along than people realize, and it's a bit ahead of maybe what we're doing here in the States, even. So we don't intend to cut out our global business in any way. It will just be across-the-board-type of cutback, and when you get any kind of recoveries, you're going to get the same leverage on the other side. So I don't – would we close any offices? Well, I’m going to say we won't close any office, but it's not likely that we would certainly not close any of the major offices, and I don't really think that we have anything particular on the drawing board for any office. So it will be across-the-board cuts. The ones that are very [profitable] now will participate just as much as the [local] group.

Okay, thank you.

Our next question comes from [Mike Flipper] with [Flipper Advisor Services]. Your line is open.

Good morning.

Good morning.

Two questions. First, you mentioned the – how well you're doing in defined contribution in the U.K. You must be doing something different than others because a number of the others are not. And part of that is cutting back on the back office. Will that have any impact on the growth there?

And then an unrelated question is, in the States there's been a collapse on the variable insurance-related products. Does this create any new opportunity for you over the competition?

Well, Mike, in the U.K., we have had exceptional success. We have 20 new clients, I believe, this year, with over 700 million in new funds. And that's – that's just starting, you know. That would be an ongoing program. Are we doing anything different than anyone else? I think what we did is we took the expertise out of the U.S. and brought it over to the U.K. to supplement what they already had. And that gave us a little bit of a leg up because we had an experienced team in place. It wasn't just people just starting from zero. And I think that's what happened. When we have a superb flat list in the DC business in the U.K., I think that will be a big success.

The variable annuity program, I think all of these things clearly go into open architecture. And to the extent that that is a trend that will continue, and I truly believe it will totally continue, then that's a huge opportunity for us. The fact that we're independent, not assigned, not aligned with any other institution, gives us an open field to run in any direction, and people don't feel like we're a threat to them. So they can offer their own products and our products side by side and give the clients basically two choices. That's been our strategy, and that will continue to be our strategy. I think I missed the middle question, Mike. What was the middle one?

Well, you talked about cutting back the back office.

Yeah, let –

You know, will that have any impact on the DC business? Actually, not only in the U.K. but also in the U.S.?

No, think about it this way. We've gone through a series of acquisitions over the past five years. I've stated a number of times that I thought that trend was probably coming to a conclusion. Each of those acquisitions had some form of an operational unit to it, and each one of them was different than the rest of the Company. We've gone through and tried to rationalize those in terms of mood and to a common type of platform. The next logical step is then to combine some of those platforms together, so it should be invisible to the service level. As a matter of fact, it should be an increase in the service level, but it is a decrease in costs. That would be sort of the plan we would have. It should not affect the level of service at all.

Thank you, and keep up the hard work.

Thank you very much.

Our next question comes from [Phillip Middleton] with Merrill Lynch. Your line is open, sir.

Thanks. If I could just get back to costs again for a second, I wondered – you're talking about 100 million in total. Is that meaning basically – what does that mean for the run rate of Q3 – of Q4 '03 compared to where we are now?

And, secondly, I just wondered if you could comment a bit on trends within European distribution. In particular, we've seen some signs of increasing open architecture provision in Europe. I wondered if that's your experience. And if that's the case, what do you say about fee levels? – because I know that fee levels vary from country to country, and how are you dealing with that?

Well, what I -- and Bob did point out that this cost reduction will be over the course of the year and will be all the way through to the end of the year, so I don't think you should look to the next quarter as being where we're going to accomplish the most of it. But take the Company as a total. We have a revenue base that was – we just annualized the third quarter of about a million nine dollars, and we have a cost basis of about a billion five, rough numbers, right, Bob?

Yeah.

Take 10 percent out of that – 150 is 10 percent. That gets you down to about a billion 350. That would be where we would be headed over the course of next year. And so it would probably be the run rate in the fourth quarter next year, as opposed to the run rate in the fourth quarter this year. But that's the direction we'd be going in.

Europe, without any question, has a trend towards open architecture. You may have missed it, but we signed an agreement – we're the first people to sign an agreement with Deutsche Bank to offer our funds through them. They were the – almost the epitome of the proprietary funds business in Europe, and they've opened that pocket up. It'd be my guess that most all the other European institutions will have to follow suit pretty soon. And I don't know that I see any new pressure on fees. But part of everything we do takes into consideration that probably these will always be under pressure. And if we – if we can continue driving our costs down per unit, then we'll be competitive with anybody. And so the point is that that's where we – that's the reason we don't have any problem instituting a new cost-reduction plan even as of the September 30 levels because we know that we'll have to always be very efficient.

Thanks. Thank you.

Our next question comes from [Bruce Bruintin] with [Putnam Lovell]. Your line is open.

Hi, good afternoon. A quick follow-up to that last question on European distribution. Looking at your sales levels on INVESCO Global, how is the Deutsche Bank relationship working out? Are you starting to get some traction there? And where are the positive sales in terms of what's happening in Europe and the U.K., France and Italy? Can you give us some color on what's going on there?

Bob, do you happen to have some of those? I didn't get a report yesterday, and I’m sorry that I cannot recall it, but the Deutsche thing is taking traction for sure.

Yeah, it was a little slow out of the gates, but we're very pleased with the progress that's been made. Deutsche Bank itself, I think, had a realignment of some of its own management, and that sort of stopped the thing a little bit in the tracks. But we're over $100 million at this point in time in new business, and, you know, that's within, what, four months after the business has actually gotten started. So, you know, I think we're very – continue to be very positive in that regard. You know, one of the things about Europe I might just say more broadly is that contrary to what I think, I personally would've guessed to be the case, and I think many, is the fact that people are returning to the equity markets faster than might have been – might have been anticipated. You know, our gross sales have been, you know, have been quite good. We've had three large new mandates, so we picked up on the institutional side of the business there. So, you know, during the first nine months of this year, and I think, you know, we're quite encouraged by this, and I know, you know, the presentation that is being prepared for the analysts' meeting will touch more deeply on these trends. I think the Europeans have been more resilient than perhaps many of us can be given credit for.

The flows in Europe [have] been positive for the year, by the way, and for the third quarter.

Great. Thank you.

Our next question comes from [Mark Croft] with [Heather and Greenwood]. Your line is open, sir.

Thank you. Bob, Charlie, good morning, good afternoon. Really a question for Bob, a numbers question. I mean we've seen the proportion of equity versus fixed income come down over the last couple of years from, as I recall, something like 65/35 to 50/50. And to some extent, we've seen, therefore, the revenues as a percentage of funds under management dropping in response to that. Unless my spreadsheet's really deficient, it doesn't seem – nothing much seems to have happened through 2002 so far. It seems to have settled down. So my question really is, leaving aside whether my spreadsheet's right or not, has that settled down now? -- assuming there was no further change in that 50/50 percentage. Bob, would you think that – or is there a momentum here now and that there's still further decline in that revenue margin to come?

No, I think it's – I think it has been fairly stable. It's come down by, what, three or four basis points. I think gradually over the last – if you do just a simple averaging over the last nine months, but as you and I have talked and with others on the call, it's – when you have a group as – with as many different types of revenue streams as we have, you know, sort of taking simple averages, it can tend to be a little – tend to be a little difficult. But I think, you know, the average basis points, just looking on an aggregated basis, has changed by only, I think, one basis point between the first – or between the third and the second quarter of this year on – on total revenues. So I don't think that there's anything that, in the way of momentum, that one should be – should be thinking about.

Costing them – costing them right back – I mean have you been able to price up a little to counteract this tendency?

Yeah, I mean if you looked at the – you know, if you just go back to the institutional business, for example, a point that we've made before, but it applies to the current quarter as well, and that is that while we have had outflows in that business, you know, the business that has come in has been at a higher fee level than that which has exited to the point that the impact on our revenue is neutral. And, you know, that's been a trend that we have seen over and over again, and so – so there have been some – the shift to the nature of the products is really driving it. Obviously, the fixed income continues to be in a lower fee rate than the equities, but just nothing I would point to that's going to, you know, sort of say, you know, toss that current level out and start over again.

Could I just have one, please, one supplementary? Just a quick one. Are your noses clean in the U.K. in the [Sargurst] with the capital investment trusts?

Yes, we think we are.

Happily so, I might add.

You haven't heard from [Klaus Lore] or the FSA or --?

No, we have not.

Okay, thank you.

Our next question comes from [Manad] [audio break].

Thank you. Good morning, Charlie and Bob.

Good morning.

My question is of a [clarificatry] nature on the $10 million of performance fees that you said you booked for – in Q3 in the institutional business. Sounds like a pretty nice large amount. What are the chances? I mean is this a recurring kind of income that one could look forward to? Or is this more of a one-off?

Well, it's – something of this size is one-off, I think. You know, when we – in our real estate business, when we close a big transaction, you know, obviously there is an element of performance fee that goes with it, but, you know, this one was – actually, this has been something that's been in the works for well over 12 months. And it is just of an abnormally large size, and the fact that it all came in one quarter sort of just added to that. So I would not think of this as being something that one would expect to see quarter on quarter.

Right. Thank you.

Our next question comes from [Joanna Nader] with Lehman Brothers. Your line is open.

Hi, Bob and Charlie. I just wanted to ask some questions about the Canadian business. I wonder if you could comment on the restructuring that you've done there and what are the results. Also, the performance in terms of net flows.

The Canadian business is wonderful, and let's start with that. It is absolutely magnificent. I wish everything we have was doing as well. The flows have been positive. Let's see.

I think we had about 1.5 billion of net new business for the nine months, about .2 – 200 million in the – in the third quarter, and, you know, I think I'll probably say this a little bit wrong, but we would be one of only a handful of mutual fund complexes for a unit trust complex in Canada that would be positive on the flows this year.

Um-hmm.

Also, the performance has been spectacular. Just looking for the number, I don't seem to have it in my hand, but I think it's under like 70 percent of their funds in the top quartile, top two quartile.

Okay.

Pretty strong.

Okay. That sounds good. What about the restructuring? I think you mentioned something about, that you've changed systems.

That was a back office move, as I recall.

Okay.

And that was a while ago, Joanna.

Okay, sorry. So that wasn't really intended to save costs; it was just a processing change?

Right.

Okay. Okay, that's great. Thanks.

And our next question is from [Robert Mundy] with HSBC. Your line is open, sir.

Hello, yes. Sorry to come back with another question. This time, just a couple of points, actually, on the figures and on the cash flow statement.

Well, first, on the balance sheet, I see that the amount for provisions has come down, and I wondered whether that is because some money has been spent out of those provisions or whether there's another reason that's come down.

And, secondly, the cash flow, this is a big figure for the banking and institutional flow, about 18 million pounds.

Robert, the come-down in the provisions is included in that, was a fairly – well, not just – let me back up. Included in the provisions are amounts that we put into that category at the time of acquisitions for both [NAM] and for Pell Rudman for earn-out agreements. And [NAM] actually earned their first year earn-out agreement, and that accounted for a large part of the – of that reduction. Also built into that were some retention payments for the employee groups for those two companies. Again, we hit the first anniversary, and that – you know, we made payments against those as well. Those are really the two largest components. The only other major item that's in that provision in this category, honestly, is the deferred tax, and that's just a function of profitability levels and things of that nature. So, hopefully, that answers your question.

I mean that implies the cash flow's even better than it looks, then, if it includes spending out for those payments?

Well, if you look at it – yeah, I mean that's right. I mean you'll see back – if you look at the cash flow, you'll see that, you know, that the change in debtor/creditors up above, you know, actually has that built into it there. So, you know, I think it's covered properly.

Yeah.

In terms of the banking and financing, there's really nothing unusual, I think, there. It's just a matter of timing and, you know, how much we have in cash and on deposits for those activities. The press release actually gives you a more complete, detailed breakdown of all of that in the balance sheet, so I would call your attention to the press release there.

Okay, thank you.

Mr. McCullough and Mr. Brady, we're showing no further questions at this time.

All right. Well, let me thank everybody for participating. We know it was a difficult quarter for everyone, but we think we did the best that you could do under those circumstances. But, particularly, we're going to keep our eye on the future, and we think that this level, with our structure, with our business model, with our strategy, with many of the things that we've talked over the years in place, we really are well positioned for the future. So, hopefully, we're at the bottom of this market decline. If not now, certainly somewhere in this level, and if that's the case, I think you can look forward to improving results in the future, and we would really like to come back and talk to you when the earnings are up, not down. Thank you very much.

This does conclude today's conference call. We thank everyone for their participation. All parties may disconnect at this time.