景順投信 (IVZ) 2003 Q1 法說會逐字稿

Welcome to AMVESCAPs 2003 Q1 Conference Call. Today's conference is being recorded upon request by AMVESCAP. If you have any objections you may disconnect from the call at this time. Callers who access the call during a live transmission will be deemed to have solicited access to the call for the purposes of the UK Financial Services and Markets Act Regime governing real time financial promotion.

The presentation that follows may include information that in the US practices constitutes forward-looking statements. These are statements regarding AMVESCAPs 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 risk, uncertainties and assumptions. We caution investors not to put undue reliance on forward-looking statements.

Today's speakers are Chairman Charles Brady, AIM's CEO Mark Williamson 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.

Good afternoon everyone, especially to our participants here in London and good morning to those in the US. I'm in London today along with Mark Williamson who is the CEO of our new AIM Division and Bob McCullough is joining us from Atlanta.

The Q1 this year was another tough quarter on the back of a lot of other tough quarters. I feel actually pretty good about a lot of things that we've accomplished in this quarter. The equity market has continued a 3-year decline and we're really volatile but when we got into our planning we didn't think about things like a War in Iraq and so those things did really affect the Q1.

Year over year our revenues were actually down about 20% in dollar terms. But this was against a backdrop of the SEP down 25 and NASDAQ down 29 so we did a little bit better than the markets on that basis.

Just for your information, about 80% of the drop in our revenues is really due to the markets. And the 20% is due to fund flows. Investment performance continues to improve, the asset flow stabilized. It has been somewhat negative over the last year, it stabilized in March and actually it has gone [indecipherable] in the early part of this quarter and if it continues in this way I think we may be turning the corner.

In spite of the markets AMVESCAP has successfully lodged a series of strategic changes, these are things that we've discussed about in previous meetings to increase our competitiveness, enhance our opportunities for growth in the future.

We began in 2003 with a new organizational structure that better aligns our major divisions, AIM and INVESCO. And this is done really from evolution to meet our client's needs and intermediaries; they are the ones, which insist on this type of change. Traditional lines between retail institute where channels continued to erode and we feel like that this 2 brand but multi-service companies are better situated to deal with these client needs.

A March announcement also was the creation of a single sales force for all of our mutual funds. This should result in major savings in the future but it also will bring us greater focus to our performing funds in both product lines. I think Mark Williamson who is here today will talk a little bit about that later in the broadcast.

Investment performance at AIM and INVESCO has both have continued to improve. For the whole we have 52% of all of assets above the peer group, that's about $260b that's for 1 year. We have 69% of the same assets in the top half of the peer group for 3 years. Within our INVESCO Division, which is the institutional part of the business, I think we've pointed to turnarounds for some period of time. Well it looks like it's finally happened. We have over, we are close to $1b in positive flows in the last quarter and the pipeline of new business looks extremely good.

So investment performance at INVESCO Funds has continued to improve along with AIM but with this new line up of our mutual funds we feel like the sales force will be able to bring the best product from each of these to the market place.

Our business in Continental Europe had positive flows, the UK business had positive flows other than one large account which unfortunately we did lose, but that's on the back of a FTSE that's trading at a 7 year low. So I think that the fact that we've got positive flows in our retail business here is a strong point.

Atlantic Trust continued to grow. We've completed the acquisition of Whitehall Asset Management with some key hirers in both Houston and the North East region and that business looks like it's poised to grow into the future.

As previously announced our retirement system changed its name to AMVESCAP Retirement on April 1st. They started off the year very strongly. They had over $1.3b of new business planned to be converted later in the year.

As I said, Mark Williamson is here today. As you recall last quarter we had John Rogers talk about the institutional business or the INVESCO part of the business, Mark is now going to talk about the AIM Division. Mark?

Okay. Thank you Charlie. Good afternoon to all of you or good morning depending I guess on where you are.

I wanted to take a few minutes to describe briefly our progress in the AIM Division really around 4 topics. I just want to briefly review the golden strategy we have for the business, the current state of the firm, our major initiatives and then I want to talk in particular about the integration of Distribution between INVESCO Funds and AIM Funds that Charlie eluded to a minute ago.

As you know in the AIM Division we have 2 major businesses, they are similarly situated on both sides of the border. They are locally managed in order to keep us close to our customers and there are many similarities in these business in the market that they operate in, with some differences. But the goal for both these businesses is to be the preferred provider of investment solutions to our partners who distribute our products. That really is the key goal that we have for both of our businesses.

Now what I'd like to do is maybe spend a few minutes talking about AIM's prime market, in particular in Canada. This is a very strong story. We are the market leader in Canada. This has been a difficult sales environment up there. The RSP season was very weak this year. However, the team up there headed by Phil Taylor has done a very good job producing very strong results for us against an industry that was in net redemptions overall, we did have positive sales, we were number 1 in net sales for the quarter and in fact had been for more than a year. This has helped along; our healthy business has helped along on the back of some very very strong investment performance.

To give you just a few statistics about our investment performance up there to help you get a sense of how strong it has been. We have 16 funds that are 4 or 5 star rated. 81% of our assets are in the first quartile over a 3-year period, which is about as good as an investment firm can hope for. So with this kind of results what we're really focusing in Canada on is the strengthening and reinforcing of our market leader position up there. To that end the team has embarked on a number of initiatives to reinforce that leadership position, doing things continuing in the custom of value enhancing initiatives with our partners. We've increased our marketing initiatives up there to reinforce the AIM Trimark brand and it's recognition in the market place and it's relevance [indecipherable]. We've continued to enhance the product line.

Finally, I guess the one measure that I would like to point to give you a sense of what a good job the team has done in Canada is one statistic here that I think is really telling. 48% of the advisors in Canada rate AIM Trimark as the best overall fund management company. So there are very strong results in Canada.

Turning to AIM investments in the United States were busy with a lot of initiatives to reinforce our historic position as a market leader in the United States. The first thing we have done that I want to point to is a roll out of comprehensive communications and training plan that is designed to reinforce the strength of our investment processes and help restore investor confidence which, we recognize as an industry issue has been eroded over the last 3 years in the bear market. Of course this goal is really tied to trying to improve our flows by reducing our redemptions. Now this initiative coupled with improving investment performance and a little bit more constructive markets that we've seen here lately is beginning to show some early signs of success. It's a little early to declare victory but while we did see net outflows for the full quarter, they were mostly at the beginning of the quarter, moderated in March and we actually have positive flows now going into April. So again it's early but we're very heartened by these early results.

We'll continue to broaden the reach of our distribution capabilities in the States, which is really a distinctive strength of the firm. To that end we've adapted our brand strategy to better describe what it is the value we bring for our customers. Just a little history on this. Historically the business AIM had in the United States was built on the ability to expand into new areas with goals meeting change to customer needs. For many years that came with expressed primarily through broadening mutual fund product lines. In recent years, however, AIM has moved from a traditional mutual fund company to an integrated asset management company that offers a much more diverse line of products and services. Things like a light array of retirement plans, college savings plans, annuities, separately managed accounts, cash management and also products in alternative assets. To reflect this we changed our name from AIM Funds to AIM Investments. So we really thing that this brand initiative is going to help broaden the way that people think about our firm as well.

Just a couple of other points about our current business. We continue to see good diversification in our sales. As we've told you before, we worked hard to get a more diversified asset base and we have major capabilities in value for and growth styles whereas historically people probably recognize the firm principally as growth management. Our top selling funds still reside in all 3 of those asset classes, which gives you some sense of the success that we're beginning to see in getting a more diversified view of our firm.

Performance is improving and if you look back around the middle of last year it was a major turning point in performance for the firm. We're heartened by that we think that if we look forward and we see some of the historic numbers that may roll-off we think that we have a good opportunity to begin to make major improvement in our long term numbers as well. So a lot of good things happening in those regards.

In our cash management business the industry has gone through a little bit of a soft spot here but we continue to build new relationships and accounts in with the more favorable interest rate environment that is in cash management terms, a slightly higher interest rates, we think we can continue to grow that business very well also.

Turning to the infrastructure of the firm, for a couple of years we have been working towards the ability to combine our transfer agency services between INVESCO and AIM and one major initiative that was required to do that was to get onto the DST system for both firms. We completed one of the largest conversions ever in history of the fund business in the States during the quarter and that went very successfully.

That probably leads me to the final thing I wanted to talk to you about which is the integration of INVESCO Funds Distribution into AIM Distributors. That work is scheduled to be completed by the middle of June and then we have the opportunity towards the middle to the end of Q4 to get additional productivity through some product rationalization. As I mentioned, about moving onto a common transfer agency system. Those things in combination we think will not only make us more productive but will make us fairly uniquely positioned versus our competitors in the market place. So we will have as a single point of contact we can say to a very broad and deep distribution capability, we can take AIM managed, INVESCO managed and Trimark managed products business to our customers which we think is going to be a very desirable offering to them.

So with that maybe I'll turn it back to you Charlie.

Thank you Mark. As you can tell even though the market was really difficult in the first quarter we've actually accomplished a lot and we've been busy doing a number of things all aimed towards our long term strategy of producing an integrated platform on a global basis.

Now as we get to the numbers I'll ask Bob McCullough to run through those.

Thank you Charlie. Good morning, good afternoon to everybody. You've hopefully got the Presentation. I'll run through the pages just hitting a few of the high points if I can. You'll note at the back of the Presentation an Appendix. We have provided you a quarterly break down under the new reporting structure for each of the 1st, 2nd, 3rd, and 4th quarters of 2002 so for comparative purposes you will have that information. A number of you had asked for it.

Charlie mentioned the fact that the markets were down throughout the quarter and in fact let me just emphasize that, you'll see it in the revenues. Also let me give you a brief status on where we are in our cost production program.

You will recall that we said our goal was to achieve $150m reduction in our expense run rate by the end of 2003 and we expected in that context that there would be 500 positions eliminated from the firm. We also indicated that we had achieved about $55m of that figure in Q4 of last year. We anticipated $130m of that by the end of June and the other $20m coming in the second half of this year.

A further status on that on the head count front. We had reduced the head count by 412 people in Q4 and you'll see in the figures in the Presentation that we had a further reduction of 261 people in Q1 of this year, so we've obviously well exceeded the 500 head count target that we had. With that I think you can easily see that we feel we're very much on track to achieving that $150m or perhaps exceeding it by some margin as the year progresses.

We do continue to have some group [inaudible] that are underway that will produce some savings in some of the areas that Mark talked about that will obviously have some impact on those savings as well.

Now let me just turn to the Summary P&L for a moment if I can. I'm not going to run through the figures but let me just make a couple of points if I can. First of all starting with the Q1 itself as a quarter. It's the same point that we had last year. The first quarter is unusual compared to the second, third and fourth for two reasons. One is with the short month of February and with our revenues in the retail business being determined on a daily basis. Losing the 3 days or 2 days in the month of February we calculate have cost us about 15m pounds of revenue in the first quarter of this year, compared to what would be in other quarters. Again the first quarter this to last year would be comparable but compared to the fourth quarter you would have that loss.

The second thing is in most of the country where we operate the new calendar year requires us to start again by calculating the implied benefit costs and those are heavily skewed towards the first quarter. That by our calculation attributed about an additional 3.8m pounds of expenses. So our operating profit in the Q1 of this year compared to the Q4 will be done almost 19m pounds or about 1p per share as a result of those 2 factors.

Secondly our foreign exchange rates have had a great deal of volatility. The average rate for us in the Q1 of this year was $1.60 to the pound. That compared to $1.43 for the same quarter last year and $1.58 for Q4 last year. In EPS terms what that means is about a 0.04p per share negative influence comparing the Q1 this year to the same quarter last. 0r 0.1p down from the Q4 of this year.

Our expenses on a quarter-to-quarter basis were down 61m pounds as you can see from this page, or 22%. Obviously that has been reflected; as we go through we'll talk more about that as we go. The tax rate has remained constant at 30.6% before goodwill amortization and as I mentioned, we are on track for the expense savings.

The figures in 2003 include the Whitehall acquisition that Charlie mentioned from February of this year. It's a very small acquisition but they are included in our results from that point on.

I should just mention that this point I think that we will most likely will have in the Q2 a further exceptional charge for some of the costs associated with what Mark Williamson was just talking about. As well as, I think, some of the Group wide initiatives that will be coming to some closure at that point in time as well. But we had not exceptional charge in Q1 of this year.

Turning the page to look at the Q1 to the Q4 of last year. You can see the percent declines along the way. Let me mention just one point on the expense side, which I think is really important. That is that the percent of expenses related to compensation have remained constant from the Q4 last year to Q1 this year at about a little over 60% of total expense, 61% for the current year. Our IT spend and our marketing spend in Q1 of this year compared to last year's Q4 are up by about 1% each. In the case of marketing, the first quarter is always a heavier marketing period because of the respective retirement selling seasons and IT is just wrapping up, that's more timing than it is anything else. The point here is that the main element of our expense-based compensation has remained constant from one period to the next.

You can see that our head count is down by 3% or 260 people from the end of Q4 and our expenses are down 4% reflecting a continuation of our cost reduction initiatives.

The next page shows the quarterly comparison with Q1 this year to Q1 last year. I really don't think that there's much in the way of comparison here to talk about but I would just call your attention to the fact on head count that we've reduced by 950 people in that 12-month period of time.

Page 8 shows the new segmental break down under the new organizational structure as announced in Q4. You can see how the respective businesses stack up if you will.

Let's turn to page 9 where you see the Q4 to Q1 operating profit comparisons. Throughout the area margins were down slightly from Q4 but in all cases we have had expenses that have been reduced. So really what we're looking at here more than anything else I think is an impact of a very precipitous decline in revenue during the periods.

If we turn to page 10 in Funds Under Management, let me make a few points there if I can. The equity the fixed income split was 50/50 at the end of March of this year which is consistent with where it was at the end of last December. Also the spread between core value and growth which was spelt out in the Press Release at about a third /a third /a third. Actually that is not right, 38% core, 26% value and 36% growth, pretty consistent with where we saw our equity portfolios at the end of last year.

Our average assets were $324b for the quarter, that's down from $336b average assets for the Q4 last year. When you look at the average basis points and the like there is a slight decline on a Group basis in the average basis points from Q4 last year to Q1 this year. It's really due to this mix of product there is nothing structural in anything throughout the Group that really has any bearing on how are fees are determined.

Gross sales for Q1 were at $19b this year compared to $21b for Q4 and Charlie mentioned the outflows in the UK. The US is where we had positive flows in our institutional group were off set by negative flows with the INVESCO Funds Group and the retail side there. I'll be happy to come back and address any questions you may have on the funds under management but let's just move along if we can.

The balance sheet as shown, I don't think really there's anything that is unusual here at all from last December or from what we've talked about in the past. You'll see increases in debtors and creditors. That is just due to timing on the settlement of accounts for our unit trusts, but money is coming in and going out as well as the levels of the counter-parties for our banking activities that tend to spike up and down, sorry, that tend to spike up in the first quarter of the year. Otherwise there is nothing throughout here that I think is unusual that I would draw your attention to.

Our cash flow statement, 2 or 3 points there. You will see a large charge for taxation. This was a payment that we've made for taxes payable in Canada. Canada had a net operating loss for a couple of years after we acquired it and we have turned the corner in terms of taxable income there. Mark alluded to the profitability and the success of our Canadian business. So we owed money to the Canadian Authorities.

You will see under acquisitions £10m for Whitehall. The total price here is a little over £13m, the rest of that will be paid a little bit later on during the course of the current year. Otherwise I don't think that there is anything particularly unusual on that front either.

Looking at our net debt position, 2 points that I would make here quickly. One is we launched and successfully completed a $350m senior note offering and all in costs a little bit less than 5.5% due in 2013. We will use those proceeds to take care of the senior notes, $250m of senior notes and the [indecipherable] debentures, both of which are coming due later this year. We took the proceeds of that money, of that offering and actually paid the credit facility down to zero and the rest is sitting in our cash balances at the end of March ready to be used for the repayment of those debt obligations. I should just mention that was a 144A registration. We had pride of place originally with registration rights and we have filed with the SEC, they have accepted the registration. The registration statement was effective early; actually late last week so we will be launching that exchange offer for the debt holders very shortly and we will have that completed by the end of June.

The shares outstanding, I don't think there's really anything here to talk about except to mention that we do show for the first time the amount of shares that are reserved for the long-term incentive plan. This is based upon the shares that vest periodically over the life of that plan.

Then the last page shows the head count reduction and where that falls between the AIM businesses and the INVESCO businesses, $261m.

The last 2 pages show the reconciliation from the UK to the US accounting principles. I will be happy to answer any questions you may have there. I don't think there's anything that is unusual in any of those items. So Charlie I'll turn it back to you but that's a quick back up on where we are financially for the quarter.

Okay. Thank you Bob. As you can see, we had a very active quarter and again I really feel pretty good about the number of things that we did accomplish in the first quarter. I don't feel so good about what happened in the stock market but sometimes these are things you can't control. We are well positioned for the rest of the year and this has always been a long term strategy that we've discussed with you last time we had a group live meeting. This strategy that we're putting in place to really make the company more efficient will take the rest of this year to complete but we have a lot of things going on and when each of these projects are accomplished then we will probably have more businesses and probably some less head count.

I think with that we'll just open it for questions.

Very good sir. At this time we'll begin the question and answer session. If you'd like to ask a question please press '*1' on your touchtone phone, I will announce you prior to your question. So again please press '*1' now if you'd like to ask a question and we'll take just a moment for the questions to register in our queue.

Our first question comes from Ken Worthington with the CIBC World Markets; your line is open sir.

Hello Jim?

Yes sorry about that. Good morning and good afternoon. Your operating margins at 22% are below your peers. Is $150m of previously announced cost savings enough any more or do you think you need to go above and beyond that?

I don't think we need to go beyond that, but we would expect to get some balance in revenues, but the truth is we probably are going to go beyond that. I think we see, it was kind of a ball park number when we put it out there, but as we've got into these initiatives we've still got a lot of things that we're doing. I just feel like that we will exceed those numbers by a rather substantial amount actually. Bob have you got a comment on that?

No Charlie I would agree with that. I think Ken some element of that has to do with just the basic infrastructure that we have on our global platform that's so vital to our business. But I would agree with what Charlie said for sure.

Okay. Second question is, should we look at the integration of the US Mutual Fund Distribution as any sort of prelude to collapsing the INVESCO and AIM retail brand names? Or do you still really think there's a benefit in keeping those separate?

No we definitely think there's a benefit and the answer is no.

And the next question comes from Hayley Tann(ph.) with Bear Stearn, your line is open.

Hello everyone, good morning, good afternoon. I've got a quick question, I notice on your balance sheet that you have negative net tangible assets of £243m and I was wondering if you'd had any reactions to recent press comments that this might trigger regulatory concerns, given the…

Could you just speak up a little bit please I'm afraid we can't hear you?

Hi is that any better. Hello?

Yes go ahead.

I was just saying that it seems from your balance sheet you have negative net tangible assets at the end of 31st March and I was wondering if you had any comments on press reports that the FSA is changing it's proposals for capital adequacy for investment management firms to sort of exclude goodwill and what this might mean for you?

Well we're certainly in touch with the FSA about that subject and they have our views on it. They also know that what's being proposed is really more suitable for banks and other people and lending institutions. So we're in some discussion about trying to get some sort of modifications to their positions. So we are in discussion with them yes.

In discussion with them. So you don't feel that to the investment management holding companies that this is going to be an appropriate regulation in the end?

Well I think even they would say that it's not appropriate but unfortunately as you know in Europe everything is, kind of one brand for everybody, everybody is a bank. Since we're not really a lending institution we fall outside of that, but there are not many people like us. So it's hard to get a crowd to support you. I think that we are getting some attention right now. We've talked to the people in Brussels and talked to the people here in London. I feel like we're making some progress on that point.

Right. Thank you very much.

Thank you.

The next question comes from Hugh Ventadines with Morgan Stanley. Your line is open.

Morning gentlemen. Three quick ones. First I noted in the UK the profits fell 74% Q1 on Q4 and I was just wondering if you could help us understand if there are any specific one offs in Q1? Also I noted that sort of Asia Pacific and also the private Banking Retirement Divisions are both loss making and the UK is now just breaking even. I was just wondering are there any specific measures that you're going to be taking in those divisions to sort of improve profitability, or is it just simply the rolling through of the current plans? Second I was wondering if I could take advantage of Mark being on the line to ask a question about AIM. Within the US Equity Products, historically earnings momentum has been a sort of a key, a dominant strategy. I was just wondering how the performance of those funds had been going in the last 12 months and what proportion of US Equity Assets are now run on an Earnings Momentum Investment Trust [indecipherable] as opposed to an alternative one? Then just lastly just going back to Hayley's question on CP173, does that mean that you've thought through contingency plans of potential divestment if it were implemented as planned or is this something that you think probably will get adjusted on route? Thanks ever so much.

I'll let Mark speak to the performance [indecipherable] first.

All right, I alluded to the fact that for some of our major large funds, many of which do have diversion of their earnings momentum investment process that they adhere to. Things really began to improve around the middle of last year. Some of that's not reflected in failing 1 year numbers yet, but it's continued on and we had a good performance here in Q1 as well. Funds like [indecipherable] Growth and Premier(ph.) Equity and Wine(ph.) Garden and net demographics, just to name a few, where we had some difficulties in being out of style. Over the last couple of years we've seen significant improvement in those products and we have some funds that adhere to that variation on the process that have had good results and continue to have good results in the current environment. So we are heartened by that. In terms of the break down we don't have one earnings momentum process so it's a little hard to answer your questions specifically, but we have about 46% of our equity products are in the core style and about a third in the growth style and about 10% in the value style. We have about 8 different investment teams all of whom have distinct investment possesses some of which employ again, in their own way, the earnings momentum process. So it's a little hard to give you a crisp answer but that maybe gives you some direction.

Thanks.

Looking at the margins that you referred to, it is true that our international business has - the margins have shrunk. They basically started from a lower level, if you want to go back 2 or 3 years, we were building out our global network and we really never got comfortable critical mass. We got critical mass but not comfortable critical mass in all of it. As the markets have declined of course, starting with a lower profit margin it goes away a lot quicker. I see a lot of progress going on. For instance we've turned around the whole situation in Australia and we are now forecasting that we will be more than break even by year-end there. So that's a big improvement.

In Hong Kong which is basically China, as you know we got a license there recently. We're planning to rollout our first fund there within the next couple of months. I'm not quite sure the exact time; it will be some time this summer. The success of people so far have been successive we expect to have a really good flow of funds out of China. Now of course that's subject to the new virus problem they have there which has certainly put all of Asia on a set back. It's incredible that we can have a war one month and a worldwide virus the next month. But the truth is that may delay those plans a little bit but whenever that comes we should pick up our growth there substantially. We depend, it's a tough market, it's trading on, has traded recently on a 20 year low, it's tough for anybody to do well there but we have pulled back our staff to the level that we want to maintain a presence there. It still is the second largest economy in the world and we will stay there as long as necessary. There will be a turn around there some day we think. Mark do you want to add something?

Yes I think I'd just be remiss if I didn't mention here that we also are seeing significant improvement in our fixed income fund performance. Also about the same point in time, not necessarily for the same reason, but we're heartened by that as well and we've just recently went through $8b level in fixed income assets which is a record for a firm ever. So although it's still not a big percentage of our assets it is growing and a capability that we're reinforcing.

I missed the third question.

Charlie he was asking about the UK I think?

Yes the UK I was just going to say, yes.

The same thing in the UK. We had the combination of bad markets, which we all know about. We moved into a new building, that probably cost a little [indecipherable]. We're still very deep into a conversion of the computer systems here, I don't know if you realize that but we'll be in that position for the next 2 quarters probably before year end. So all of that just added together I think is one of the things that eroded the margins here. I would again hope to see some improvement as we go through the year.

Okay. Thanks for that. Just a further one, just to clarify. Have you done any contingency planning if CP173 does get pushed through irrespective of your lobbying?

There are options. We can restructure the business in some ways. There's 2 or 3 options. One of which we could leave the UK.

Ya.

That's always an option, we don't want to do that but that's possible. Another is we could restructure the business into a European Holding Company in such a way that, that won't have to come hand-in-hand with the change in your [indecipherable]. We think we can get some relief, that's another thing. Some of the problem is because we have a couple of banking charters, we don't actually bank but we have banking charters. With the process of debanking ourselves we're getting rid of those charters, we don't have any real use for them. That all I think will be added together in some form that will give us some relief. I'm not quite sure which way any of this might go to be honest.

Okay. Thanks ever so much.

As a reminder, if you'd like to ask a question please press '*1' on your touchtone phone. The next question comes from Michael Lipper(ph.) with Lipper(ph.) Advisory Services. Your line is open sir.

Hi.

Hi Mike how are you doing?

Okay. Could you give us a little more color on the money market fund, what I'm somewhat concerned about is the shift in some broker/dealers to push their own bank as distinct from the use of money market funds. Also some banks that have used your institutional product are they internalizing? Then an unrelated question is what do you think your opportunities are in the variable annuity arena over the next year/18 months?

We'll let Mark talk about the money market fund because that really comes under his area.

Well Mike the bulk of the shift we've seen, the decline we've seen in assets from money funds, has over the last few months, has been at the institutional level rather than the retail driven brokerage business that we have. So I'm not really sure that we would agree with the premise there, at least from our own experience that that is a shift towards banking products has really affected our business in a meaningful way.

I think it's been more a matter of some of the large clients either do not have as much cash to employ because they're beginning to invest in other ways or they may be looking at alternative investments on a direct basis. But that's really more a function of the interest rate environment than I think it is any kind of strategic shift going on in the market place. As far as other banks where we have our funds, you know, preferring their own proprietary products that's something that we have lived with really for years. I would say that that has pretty much run it's course to the extent that large banks can and want to be in this business, they have done so I would think.

As far as the variable annuity business, we are meaningfully involved in that both with our own proprietary products as well as sub-advisor to many other products.

Mike I think the opportunity of the banking is actually created the other way. The banks are opening up their distribution systems much more than they have before. You may have picked up, I'm sure you did, a year ago we signed a distribution agreement with Deutsche Bank in Germany which was a kind of a break through. That was kind of a premature announcement because it really wasn't ready to be rolled out but it has been rolled out now and we're getting good flows out of that. We see that whole area where banks used to be closed to distribution opening up for us. So we really see more opportunity than loss of opportunity.

The next question comes from Robert Mumby(ph.) with HSBC. Your line is open.

Yes, good afternoon, good morning. Just to clarify I think where we are on the timings of implementation of these costs.

You're asking me to give you a timing? Hello?

Pardon me sir unfortunately we've lost his line. The next question is from Martin Cross(ph.) with Heather and Greenwood. Your line is open.

Yes, hello. On the same subject please. The $150m of costs. Did you sense that in implementing these cost reductions that you have any measurable losses of revenues associated with it? Going on, if things didn't improve and you were to embark on a second round of cost reductions would you then really be in the area of losing revenues do you think? Perhaps I could ask you to go back to Robert who's there as well because his question was on the same topic.

Okay well we just lost him; we didn't hear all of his. Martin I don't think we can trace a single dollar of loss to what we've done, most of it is invisible to the clients. It's all the infrastructure that we've picked up while making a number of acquisitions over a period of time. Yes there's some consolidation of management teams but that's not really where the big redundancies and cutting costs have been. So far I can't think of any dollars we've lost. Should we have to do more? I think we actually are going to do more. I don't think, we always set it out as a kind of a target. We hope to accomplish it; we didn't want to give a number any higher than that because we weren't really quite sure. We were involved in a couple of strategic studies about how we might structure the whole operations of a company that operates around the world. And after we got that study done we had a course of implementing that. That will go on for a while longer. I feel sure that when we add it all up over a period of what will be maybe 18 months or so, it will greatly exceed what we ever said we would do. I don't think it will have anything to do with revenues.

Martin let me just add to just confirm what Charlie said. In our calculations of that figure the impact on revenue would have been just a minimal impact, less than 1% or 2% very very small.

Okay thank you. One particular question. Bob can you give us a steer on the further restructuring costs? Do you anticipate any in the second quarter?

I wish I could. If I could I would be happy to do so but some of the plans and things that Mark in particular eluded to are really very much for the moment work in progress and we just don't have a handle upon what the cost for those will be. I don't think it will be of the magnitude we saw for sure in the Q4 of last year but it will be large enough I think to be shown separately.

I think actually Mark we gave everybody a heads up even before that we would have this second charge. Because the things studies we were making were very long term related.

For sure. It was just that I had assumed they were going to come in the first quarter. So I was wrong about that.

No, no, no. In fact Bob says the second quarter I'm not sure if they will come before the third quarter Bob. I'm not going to debate you on this.

Thank you.

The next question comes from Robert Mumby(ph.), sir your line is open again.

Hello yes I'll try again, can you hear me now?

Yes certainly.

Sorry the question I was going to ask, just to get a feel for the timing as to whether you could give us a steer for where you think the operating margin would come out for the rest of this year assuming flat markets from now on and where it would be at the end of the year on that basis?

Well if you have absolutely flat markets, I feel like we're now in a slightly positive flow position, which we were not in. I feel like the momentum for the cost cuts is continuing downward and so I would look for, let's just call it marginal increases in the margins and we might be able to get more out of the cost cutting quicker and we might get some relief in the market even though [indecipherable] going to affect the market pretty dramatically.

So on that basis you only get a pretty marginal improvement from the figure you got in the first quarter?

You said flat markets and I've given you that - yes that's probably right. But an improvement.

Okay some improvement but where would you think it would be at the end of the year? Somewhere around about what 20%-23%?

Well it's just going to be a combination of all those factors to be honest with you. I just don't want to go on the record there. We have always felt that if we could, if whatever was a stable revenue level, we would also get back to the margins we've had in the past because it's just a matter of adjusting your costs over time. The problem you have of course when you have a decline in revenue so rapidly you just can't get the costs down that quickly. I think we've done a pretty good job of getting costs down. I think you can see that. We're still operating at over 20% margin. But that's not the kind of margin we expect to operate in long run. If revenues stay flat we'll work our way up to a higher margin.

Yes okay thank you.

The next question comes from Anard Basudevin with Dresdner Kleinwort Wasserstein. Your line is open.

Thank you. Morning, good afternoon. I have a couple of questions. The first one is on the revenues that you've reported on the INVESCO US business. I can see that revenues have fallen by 12% quarter on quarter from Q4 of last year. This is a bit surprising, particularly when comparing with AIM US where revenues have fallen only 6%. Surprising because INVESCO US has actually seen in flows while AIM US has seen out flows. I'm wondering if there has been something to do with the institutional business in INVESCO US. If you could throw some light on that?

I think the answer is that the INVESCO institutional business, institutional part of INVESCO had in flows. I think the funds group actually had an out flow. That's the reason that you would have the changes in profits I think.

That's right Charlie.

Right. This seems to indicate a much sharper drop in IFG than in AIM US in Q1, is that fair enough?

There was a greater drop in the first 2 months but the 3rd, March has been much better.

Okay.

Also Mark pointed out there was one day difference. That one day cost us a lot of money too.

Actually it was 3 days right?

The institutional business I think that that has already been reported but that lead to the end of last quarter remember..

But he's talking about revenues.

I think he is but that doesn't perhaps make the difference in the first and second quarters.

Actually just looking at the precise figures the drop between AIM in the US and the INVESCO Funds Group percentage wise was pretty much in line. So there really isn't anything different there. There was as I mentioned, with February being a short month you do get a, you will get a drop and it's most of that 15m pounds that I mentioned comes from our US businesses. So it would be split proportionately between AIM and INVESCO Funds Group. So that would certainly account for part of that drop that you're seeing in the US business under INVESCO.

Right but I presume that you'd have the same February effect in both the line items in both AIM US and INVESCO US. It's not really clear to me actually.

No no no no. Because the institutional business bills on a quarterly basis.

Yes.

Retail business bills on a daily basis.

Okay, fine. My second question is on the capital expenditure line item in your cash flows. We can't see the actual CAPEX but your net of sales number is about 5.5m sterling of cash flows. What would be the indicative capital expenditure for the full year? Given that you've spent about £59m in 2002.

It will be, I think it will be less than last year. This is an area that we're looking at as we speak. It too is impacted obviously by some of the initiatives that we have underway. The budget for this year would indicate a figure of about 10% less than last year. I would speculate that maybe a little bit less than that number before we're all said and done.

Okay. Could you give some color on which areas you see that you'd be able to save on your CAPEX?

Well most of our CAPEX spending is, well in fact let's back up. If you look at our CAPEX spending over a number of years it's very very heavily skewed towards technology. Last year we had a heavy spend for the new facilities in London that we moved into at the end of the year last year. The year before that we had new facilities that we took possession of in Denver so the last two years we have had capital spends toward the leasehold improvements and fittings and so forth for the new quarters. Obviously we have none of that planned for the current year of any consequence so what we're looking at is back to the technology level. One big project that we have is what Charlie alluded to and that is the project underway in London, where we do have a heavy commitment for capital expenditures to complete that project this year. But the rest is just, I hate to say normal technology spending, but that's about the best way I can describe it.

Our final question comes from Peter Davies(ph.) with Lansdown(ph.) Partners. You line is open.

Hi guys. Two quick questions. One just to be absolutely clear on the achievements from the cost reduction program. Could you give a figure within the sort of $212m of costs that you incurred during the Q1, how much achieved cost reduction is there during that quarter of the $150m? If you see what I mean, the amount that's actually already gone through the cost line.

Bob do you want to deal with that?

I knew this question would come, that's a hard one though. It's a hard one to answer; it's a reasonable question. It's a hard one to answer because we look at the cost saves really on the basis of run rate and a lot of it happened late in the quarter so I think what you can really say is most everything that you see from Q4 to Q1 of this year would be attributable in one way or the other, direct or indirectly against the cost reduction initiatives. With some add backs in there, as I alluded to you earlier, for marketing spends that are slightly up in Q1 of this year. But that's why it's hard to be much more specific because these things sort of begin to run together a little bit at the end of the day. But fundamentally I think, looking at it almost all of it related to that.

Fine. It's more to just to get a sense of what there is left if you like out of the $150m rather than what's - you can see where the question is coming from?

We'll come back at the end [indecipherable] I think and try [indecipherable] as we gave a bench mark before, you know, we'll do our best to do that again at that time.

Is it fair to say that at the end of Q4 I think claiming you'd achieved run rate of around $50m.

That's the number yes.

And you're now claiming you've achieved run rate of around $100m and something.

That's right.

But most of that gap in run rate has only come through for one of the 3 months during the first quarter.

That would be right.

I'm sorry just a quick follow-up second question. You mention the point that the retail funds are billed daily. Obviously during Q1 you had a situation where markets fell substantially for most of the quarter and then rallied late in the quarter. Was there a meaningful effect from that in terms of the sort of achieved margin on the retail business or was it just the February affect that drove the margin down?

Mark do you want to deal with that?

Well sure I mean it impacted revenues. The markets did decline pretty sharply in February and as you mentioned they rallied back some in March and then kind of ended on a low note. Of course they've advanced from those levels today, where we sit today. But they do impact your revenues because as Bob has mentioned we calculate the [indecipherable] rate every day.

Let me put it another way. Do you have a weighted average but day figure for those kinds of funds under management compared to the actual sort of mathematical, the sort of mid-point between the start and the end of the quarter?

I do not have that in front of me but I'm sure we could get it for you.

Would you mind, that would be very kind. Just to get a sense of that. Okay thanks very much sorry.

Okay. I think that's the last question so I'm going to thank everybody for being with us today. As we said it was a difficult quarter but I really think that we've done a lot in this quarter. We're looking forward to the rest of the year and I feel like that we probably won't have as many quite worldwide catastrophes we had in the first quarter so maybe we can get off to a good start here. So we're looking forward to seeing you later in the year.

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