景順投信 (IVZ) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to AMVESCAP's 2003 Interim Results 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 UK Financial Services and Markets Act Regime governing real time financial promotion.

The Presentations that follow may include information that in US practice constitutes forward-looking statements. These are statements regarding AMVESCAP's goals, beliefs, plans or trend 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, Chief Executive Officer of the AIM Division, Mark Williamson and Chief Financial Officer, Mr. Robert McCullough.

A question and answer session will follow accordingly.

At this time I would now like to turn the call over to Chairman, Charles Brady. Please go ahead sir.

Thank you and good morning and good afternoon to all of the participants. Thank you so much for joining us, we're happy to be able to talk about AMVESCAP's second quarter, obviously an improving quarter and we feel very much better about it than we did 90 days ago.

Bob McCullough will be joining us as usual to go over the financials, but I've asked Mark Williamson to also join. Mark, as you know was with us on the Conference Call last quarter and talked about a number of changes that were going on in our Retail Division, our AIM Division in the US. I thought it would be appropriate to have him come back and kind of update on those things.

Last quarter we were talking about being cautiously optimistic about the market. Well, of course the second quarter was a strong market, but a quarter is not really sufficient to confirm a long-term trend. It does feel better, the trends are positive, the capital markets have improved, the general atmosphere has improved and I think if you read enough of the economic forecast they are looking a little bit better. So I feel that we have probably turned the corner and hope we will see an improving situation for the rest of this year and in the next year.

Today I want to talk about what we've done to in effect put our house in order and looking forward to this improvement. We've done a lot of work on cutting costs; I think you can see that in the numbers. I think, [believe] that we're probably in a better shape today than we've been in many years to participate any kind of upward movement in the markets.

The equity markets themselves increased in the second quarter and this increase led us to report, along with our cost cutting, a 29% increase in earnings over the first quarter. That's a very strong move just in one quarter. Funds under management were US $347b, that's 9% above the first quarter, most of that of course was the stock market itself. While retail flows have been slightly negative in the first half, the truth is that month-by-month they've got better and I really believe that in July we'll probably get on a positive. I don't have the final numbers, but I think that's the case.

Expense controls have been very active, if you look at the numbers you'll see that we actually cut expenses by 20% from a year ago. That's a lot of money to be cut out of a business, and our people have worked extremely hard to get that. But it's a lasting effect it will no go away, so we feel like we have done a pretty good job in the last 12 months. I think the Company now is in better shape, more efficient and really has more power in an upward moving market than it's ever had.

I think this also simplifies our business, because it is a complicated business, we work through financial advisors, and the structure we now have in place is much easier for financial advisors to work with, and hopefully for our institutional accounts as well.

Mark Williamson on I think will comment on what's really going on in the retail side of the business but let me give you a couple of highlights about the rest of the Company.

We have a diversified Company on purpose. We set out many years ago to build a Company that would be insulated against downturns, frankly we didn't anticipate something like we've had the last couple of years, but we did think that we were building a Company that could have bright spots at all times.

Right now one of the bright spots we have is in the UK. Of the retail business there 72% of our assets were in the first quartile for this year. That's up from 58% on a one-year basis and 54% on a three-year basis. Although there's not a lot of activity in the UK retail market right now, we're extremely well placed there with great performance. That's also in our fixed income assets where we have about 68% of our assets are in the top quartile both for one and three years.

If you look at our Real Estate operation in Dallas we're in the top quartile there, and we really have flows of funds that are almost beyond what we can handle. So we have a lot of bright spots in the Company.

One of the places that we'll be looking for in the future is that we have received approval from the Chinese Security Commission to commence our business in China. That is a joint venture, we're one of the first people to be there and we think we'll be able to launch a fund sometime this summer, late summer.

So these are all areas that I believe will be extremely positive to us going forward in the future.

Even in our Retirement business, which is less of a profit center but is a service center, adds flows to all of our accounts. We have added about $1.3b and 70 new plans so far this year. It looks like the US Congress itself is actually moving in the direction of allowing people to put more money into pensions and profit sharing accounts, so if that should happen, then we're one of the few people that really will benefit from that.

We also have made some changes to our Board I think you've seen in the Press Release that we've appointed a new Non-Executive Director, Diane Baker. That continues the process of evolution with our Board where we are emphasizing more non-executive directors. Diane comes with a great background and she will be a great positive to our Board.

We also made some other corporate changes you'll see that James Robinson, John Rogers and Mark Williamson were named. In addition to their present titles they were named executive vice presidents of the Holding Company. This continues the overall process of succession that we have talked about on these kinds of calls for a number of years.

Now let me turn it over to Mark and let him talk about the AIM Division, because that's where a lot of things went on this last 90 days.

Thank you Charlie and good morning everybody. What I thought I would do was try to give you a little bit more color behind some of the positive trends that Charlie described about our AIM business in the US and then move on and talk about the integration of INVESCO Fund's Group into AIM and then finally talk about our continuing success story in Canada with AIM Trimark Investments.

First of all looking at the flows, this as Charlie mentioned, is a process that's been underway for some time, where we've seen improving trends. We do believe that we'll report positive net flows in July with a very significant number [this is] meaningful. Our second quarter was better than the first quarter it was certainly better than a year ago period. We think this is a trend that has life to it.

Looking behind the numbers a little bit, one of the reasons that we're encouraged is because we're seeing continued improvement in basically all the channels through which we distribute. It is not a single channel phenomenon but rather across our business. In addition, there are an increasing percentage number of our funds in the complex that are showing improved results from a flow standpoint.

As the markets improve and our flow situation changes, we're beginning to see a slight up tick in [indiscernible] in terms of our asset mix, so that hopefully looking forward we should expect to have some increase in yield on our assets. So what's behind the improvements in flows is an improved market performance obviously, but also improved absolute and [indiscernible] performance of our funds.

In aggregate the performance of our funds continues to improve versus a year ago, versus two years' ago, significantly, and very importantly to some of our largest funds have significantly improved performance on a year-to-day, failing one-year basis versus what we might have talked about a year ago. Some of the names specifically Luccia (ph), Premier Equity our largest fund, Lime Garden Basic Value, Demographics, Capital Development, High Yields and our income funds all had significantly improved performance during the six months than the failing year period. So we hope that this is a trend that will continue for us, we continue to work hard on investment performance and will always do so.

Moving on a little bit to the integration of the INVESCO Funds Group into AIM Investments. As we talked to you before, the Board has approved a plan that would allow AIM to become the distributor for INVESCO Funds. That took place on July 1. The Board also has taken other important actions since that time they've approved a plan of rationalization of our product line that will result in 21 funds to be merged. In addition our transfer agencies are scheduled to combine, we'll have exchangeability of funds later this year and a total integration of operational [indiscernible] Denver and Houston. If you look on the time lines you get a sense of how this will play out. The TA integration will take place in the September/October time frame. Our shareholders will vote in meetings on October 21 and assuming those mergers are all approved, we will have a combined group of funds in the early November time frame. By the end of the year we think this integration will be completed.

We have here again a listing for you of the funds that will be acquired, in acquiring funds. When this is done we'll have obviously increased efficiencies from a smaller group of funds to manage, but we also think that we will have a significantly stronger product line and a product line that is easier to understand.

A couple of other things that are not on the slide that you see there, that I wanted to point out to you. We will have a number six position in the non-proprietary retail manager ranks in the US as a result of the combination of AIM and INVESCO and our goal of course would be to move into the top five, we think that's an achievable goal for us in the not too distant future.

Moving on for a minute to AIM Trimark. This continues to be a great story, our management team and the whole team in Canada has continued to do a very good job for us. We're number one in terms of gross sales and net sales in our peer group for the period and for the full-year. This is against a pretty difficult industry backdrop. Most of our competitors remain in that redemption, but AIM has managed to have positive net sales for the year.

In addition our assets have jumped from the fourth place to the second place overall in the Canadian Mutual Fund business and number one in our channel. Behind these results are some very strong investment performance, 82% of our assets under management that are ranked by Morning Star, rank 4 or 5 stars. On a three-year basis almost 80% of assets are ranked in the first quartile. This is a very unique investment process that we have in Canada and we intend to leverage that later this year, by introducing some Trimark managed products into our US business as well.

So in summary we have very encouraging up tick in our trends in both flows and performance in our US business. Integration we think is on track, it's going smoothly, it's on time. People have worked very hard and we're very appreciative of the work of our employees and the professionalism they've shown going through this. Then our Canadian business continues to move forward, so we think this is a very encouraging time for our business.

Thank you Charlie.

Thank you Mark. Mark will be ready for some questions at the end, but let's turn it over to Bob McCullough now and let's go through the financials.

Thank you Charlie and good afternoon or good morning to all of you. I'd like to spend a few minutes walking through the financial presentations. As Charlie indicated I'm going to spend most of my time focusing on the second quarter, compared to the first quarter. As I think that gives a little bit better comparison and looking at the half-year results.

Starting with the six-year Group Profit and Loss Account slide that you have, a few points I might make on that. You can see that revenues are down 26% and expenses down 22%. When you look at that expense reduction, the first half of last year to the first half of this year, that amounts to £115m [indiscernible] you were to annualize this £230m for the year and I think you can see that it's really quite a dramatic change in the cost base that we have for our business.

Our profit before tax was £110.9m, that's against £192.5m last year, above those figures pre-goodwill and pre-exceptional items. We did have an exceptional charge in this quarter of £62m as you can see I'll speak more about that in a couple of moments.

Our tax rate remains unchanged at 30.6% pre-goodwill and our goodwill continues to be amortized in accordance with the UK Accounting Principles. We will do a thorough review of our goodwill at the end of the year for impairment purposes, but I can say that I don't foresee any impairment charges coming out of that review.

The Board yesterday declared a 5p per share dividend, which is the same as we had this time a year ago. That's in keeping with our practices of sharing our results with the shareholders.

A word about foreign exchange, the currencies have had some rather dramatic change during the course of the past year and the comparative periods we're looking at. Our average rate for the dollar against sterling last year was $1.45 this year it's $1.62 so obviously there has been an impact on our results, when you look on a comparative basis. Beyond just the dollar to sterling comparison are the euro to sterling and the Canadian dollar to sterling, being the other two major currencies, have also seen some important changes.

I would also just like to say that if you look at the three major components of our expenses, and this is for the half-year as well as for the quarter. Compensation, technology and marketing, the percentages that we have published in the Annual Report and I've talked about in prior quarters, remain basically in line for this quarter and this half-year as they have for some period of time. The compensation of course being the largest part, accounting for just a touch over 60% of the total expense base.

Turning now to the three month P&L account. A couple of points I'd like to make here. The exceptional charge I mentioned before was really a further part of the charge that we made - let me back up - the charge we had in 2002 was the first step in our charge for restructuring that we added to in the fourth quarter, and we had - I think at the time said to you that we would have something more as we completed the activities in the second half of this year. That's what the current year charge relates to.

Interest is slightly higher this period versus last year, that's because of the fact that we have now, during the course of this period, issued $350m of senior notes that we held outstanding for a period of time until such time as we paid off some senior, notes that [indiscernible] during the course of the year.

Foreign exchange of the quarter, $1.63 this year versus the $1.47 in the quarter a year ago, that accounts for about a 0.5p per share differential. If you look at the first quarter of this year versus the second quarter, it accounts for about 0.1p per share of differentials. That's all from translation because of [real money movement].

Turning to the exceptional item page and it's spelled out also in the Press Release itself, £62m pre-tax equivalent of £39.7m after tax or 4.9p per share. Two largish groups here I would like just to talk about, redundancy of £31m and the US retail reorganizations for £12m.

The first on redundancy, our headcount at the end of this current quarter stands at 7,110 people, which is reduced, as we'll see later by 210 people in the quarter. But going back to the third quarter of last year, where we commenced our targeted expense reduction program, we have seen a reduction of headcount of 883 people from the end of the third quarter to the end of June this year. There are some further reductions that will take place in the second half of this year, but the severance costs are included in this charge, largely related to positions that are in the US retail. People know what their timetable is [indiscernible] we will not commence their - complete all of the platform transition until [indiscernible] this year.

There are some major differences in the way the redundancy charge comes through between the US and the UK accounting principles and in actual point of fact, the charge under the US accounting in the second quarter would be about £1m, so a quite small amount.

Turning then to the quarterly financial comparison, comparing the second quarter versus the first quarter, you can see what Charlie indicated in his comments about our revenue increase, with an operating expense decline, that's in light of higher foreign exchange rates, so it's even a little bit more dramatic than that. Our margin is recovery toward the 30% targeted level that we've used as a minimum at 26.5% and EPS up 29% and a diluted EBIT up per share figure, up 22%. So you begin to see the impact of the reductions if you will.

Turning then to the second quarter of this year compared to last year, I won't walk through the figures, but I would just like to call your attention here to the point that I made a few moments ago. That is on operating expenses we have about £54m decline from last year's second quarter to this, which when you annualize is over £200m for the year. Again a headcount reduction from the same period last year of almost 13% of 8100 to 7100.

Looking at the six-month segmental numbers, I'd be happy to take your questions. There's a lot that can be said about these, but I think I'll just primarily leave those to the questions, but just call your attention that there are large expense reductions when you look at the comparisons throughout. Let me make one comment here about the INVESCO Funds Group, because as Mark said they're coming back into the AIM fold. What we have done in all of our numbers is to go ahead and present all of those figures in the [best] AIM line and out of the INVESCO US line where they've been before. We have given you restated quarterly information in the back of this Presentation to help you sort of sought through the numbers. The only difference would be that some of the investment teams in Denver - or the investment teams in Denver I rather should say are staying with INVESCO and so when we look at headcount a bit later on you'll see that that headcount will stay there. So all the costs and all the revenues for the Denver activities are shown in the AIM lines for this period of time.

Moving on then to the operating profit comparison for the second quarter of this year versus the first, again a lot could be said about the numbers here, you can make your own calculations, let me just make a couple of points quickly. The first thing for me, the most important is in that change column, that every single line of our business has shown a positive improvement from last quarter to this. The second thing is there was a lot of discussion last quarter about the margin level of the UK business, and we talked at the time that a lot of the expenses were [indiscernible] and had not come out quite as quickly as had originally been planned. The margin of that business has grown from 3% in the first quarter to 16.6% in the second quarter, a dramatic improvement if you will.

The same story can be made about margin change in all the other businesses as well.

The third point I would like to make goes under the corporate - what you see there is an increase that's in expenses that is due primarily if not almost completely to our requirement for providing for the long-term [indiscernible] where we have to mark-to-market the stock and calculate [the best thing to] amortize that charge through our income account. So those I think are the three main points that I would like to make about that charge.

Turning then to funds under management, first to the six months comparison, you can see here outflows of 4.5b and with 2.8b of those coming in our US retail business.

Looking at the next page and by subtraction you will see a significant improvement. The first quarter had 2b of outflows and we're looking at 800m outflows in the second quarter.

Our AUM (ph) split is 51% to 49% equities for fixed income. Our breakdown between core growth and value has seen a slight shift from June to March. You can see that in the Press Release. The split between the institutional part of our business and the retail remains consistent. Again at 51/49 against [indiscernible] retail. I think that all areas we've seen improvements in those overall from one period to the next.

Our gross sales for the first half of this year were 39.5b, that's slightly down from 44.7b last year, but turning the page and looking at the second quarter, our gross sales are actually up 20.7 in the second quarter versus 18.8 in the first quarter. So once again we see a trend line of improvements.

Looking at that three-month slide of funds under management, we had market gains of 7.5%, the reduced outflows that I mentioned, the money market funds of June 30 split at 55.5b, that's slightly down from where we were at the end of the year, but up on the quarter. Then also the outflows in the INVESCO US business are just a matter really of timing and a shift in some product mix. The revenue implication of that asset movement is actually positive on an annualized basis because fixed income products have seen some outflows, but they're replaced with higher level CDOs, CLOs and other new products that are coming in, or assets with higher fees.

You can see that the UK has had a very strong quarter in terms of flows an in Europe that 1.2 outflow is due almost entirely to one account that we had in Europe, where they took the management in-house. We actually are going to be getting some part of that money back [for] a specialty product that is what accounts for that. Otherwise Europe and Asia have been very resilient not only in the second quarter but throughout this period of time.

Our average basis points have improved by 2bps in the second quarter, again that's due mainly to the higher fee products accounting for that.

Then moving on quickly to the balance sheet, just a couple of points here to make if I can, the first is the last [indiscernible] of the [indiscernible] Rudman (ph) earn out agreement came due, actually today is the anniversary of that transaction, and we had provided in our accounts in accordance with UK accounting for all of the goodwill that could arise on that acquisition, by having a credit in our provisions line and [indiscernible] the goodwill. That is not going to materialize so we have reversed at June 30 £17m of goodwill reducing the provisions line and reducing the goodwill line. That of course will have some slight change on the future amortization [indiscernible].

I honestly don't think that there's anything large to talk about on the balance sheet. I would just like to just call your attention to the decline in current maturities of long-term debt and we'll get to that in a moment.

Looking at the cash flow statement, just a couple of quick points here. Again you will see that we've had a decline in our cash and cash equivalents. That is because we've been working very hard to maximize efficiency of our cash against our credit facility and we've had I think a good result on that and also on the fixed asset investment you will see that last year we had invested [indiscernible] and we have had a small return of that in the form of [indiscernible] capital, which is expected from time to time.

Looking at our net debt position on the next page. You'll see the cash reductions for the senior notes and the ESBs that as I mentioned are being retired today, so they will be gone. You can see the ten-year notes that we've put in the 350m and I am pleased to say that the banks gave us a renewal on our 364 day credit facility for $200m during the course of the second quarter and so we're in good shape there as well.

The FX reductions - our FX movements have also had an impact on the comparisons here that I think you can see in the page.

The next page I won't say anything really about on the shares outstanding, but again as presented to help you understand with the base of our EPS calculation.

So then moving onto headcount you will see that from December we reduced our headcount by 470 people, including 210 in this quarter. In all cases we've seen a reduction in the headcount, one area there is INVESCO US showing an increase is the investment team that are staying with INVESCO for the INVESCO Funds Group [inaudible].

The last two pages deal with the reconciliation for the UK to the US accounting. I don't think that there's anything there that is [inaudible] but let me just sum up by saying that I think this quarter, and also the half-year results, you can really begin to see the impact it's having on our cost reduction [inaudible] results. We feel quite good about where we are against the targets that we mentioned to you on the achievement of the target of the expense reduction program [inaudible] at the end of June. As Charlie's comments in the Press Release indicated, we expect [inaudible] that target by the end of this year.

With that Mr. Chairman [inaudible] for questions.

Thank you. I know that we've given you a lot of numbers this quarter, maybe more than we should have, but the truth is you can see that the Company is really in many ways turning around, and a lot of moving parts at this point, but they're all moving in the right direction. So I think our basic trends [inaudible] no matter how you look at it, they're all positive.

If you look at the economy, look at the things that we think are going in the future, I think we can hopefully hope for a recovery, a continuation of the recovery. I think we're on target to participate in that recovery, more so than ever before. I believe our whole strategy of being [indiscernible] worldwide has come to prove itself, so I think our Company's in good shape.

So I'd like to now opening it up for questions please.

Ladies and gentlemen if you would like to ask a question press star then the number '1' on your telephone keypad, again, if you would like to ask a question press star then the number '1' on your telephone keypad, to withdraw your question press star '2'. One moment please for your first question.

Your first question is from Bruce Hamilton from England.

Just three questions if I may. Firstly on the cost cuts, because [inaudible] as you mentioned and as the integration is ongoing for the rest of this year. What sort of run rate can we assume for the costs going forward? Given 60m odd exceptional, can we see costs coming down to sort of 190m per quarter run rate for '04? That's my first question.

Secondly, is it possible to get the quarterly split for Q1, the segmental split for revenues and costs for Q1, we've got profits but not for revenues and costs, that would be quite helpful?

Thirdly, sorry, no those are the two questions [indiscernible].

Okay, Bob do you want to deal with those?

I'd be happy to Charlie. In terms of the run-rate for the first quarter, I think if you look [inaudible] you'll be able to [indiscernible] make up several subtractions and get the Q1 [inaudible] results.

Unfortunately we probably should have put it in [inaudible] to provide that figure.

The second thing is on the run-rate, we've not published an announced figure beyond the 150m, I think [inaudible] that other than to say that we expect to exceed it significantly. [indiscernible] what I think we've also said previously was that we expect it by the end of June. 130m of that 150m to be in our run-rate and we certainly have the [inaudible].

Let me give you a little bit of flavor if I can. Also at the time of the announcement we had mentioned that targeted reduction in headcount of 500 and that's why I think when I looked at the figures I noted that we closer to 900 reduction [inaudible] last year [inaudible] second quarter. So the compensation being our largest component you begin to see that what we've [inaudible].

Offsetting that a little bit is a couple of things in the project that [inaudible] probably the end of this year, so we will certainly expect that early in the year next year, [inaudible] run-rate figure [inaudible] close to it. That's part of the reason [inaudible].

Okay, sorry [inaudible] in terms of the headcount reduction obviously that's well ahead of your previous target and it sounds like there are more heads to come out even from the 7,100 [inaudible].

Let me tell you that all the people that we would make redundant already know about this. This is not a new plan, but yes there are some more people.

Okay, any [inaudible] sort of quantifying that or?

You know we've obviously got to be a little bit careful on this but it will run as well on the 7,000, sure.

What Mark talked about in terms of the integration taking place in the second half of this year, is largely [inaudible].

I think by the end of the year [indiscernible] run-rate into the first quarter of next year will probably be in the low [indiscernible] of where we want it and that would be a very positive number for us.

Again ladies and gentlemen it's star and the number '1' if you do have any questions or comments.

Your next response is from Anard Basudevin with DKW.

Thank you. Hello Charlie, hello Bob. Just a follow-up question on the run-rate [inaudible] achieved so far. You mentioned that you are ahead of your [inaudible] second quarter of this year. [inaudible] want the numbers, Q3 [inaudible] Q3 of 2002 [inaudible] you had operating expenses of $328m. I'm working in dollars [inaudible] and in this quarter your costs have been [$335m (ph)], which is a saving of $12m over Q2 [inaudible] of last year, and that is a run-rate of $48m. [inaudible] when you say that you actually exceeded your $120m of [inaudible].

I can answer that very quickly [inaudible].

I'm working in dollars.

You have to start in sterling to get to dollars and then if you look at the exchange rate it was $1.42 or something like that last year, it's $1.62 this year.

Yes, I have adjusted for the dollar exchange rate difference.

But trust me that's the difference [inaudible] clearly that is the difference.

Right. Also, [inaudible]. Is there any reading into your bonus policy and to [inaudible] market performance exceeds your [indiscernible]?

Is the question - if market performance exceeds our projections are we obligated to increase the bonus pool is that the question?

Yes, I [inaudible].

Well the policy on the bonus pool, which is for the most senior people, about 150 that is actually set under a remuneration committee of the Board and they would take into consideration all factors, you know, what's there for the shareholders, what's there for the professional staff [inaudible]. So it's not a fixed number and it's not tied to any particular performance criteria, it's really tied to all of them, but it's actually done at the end of the year by the remuneration committee.

Right and how about the cost savings? If cost savings exceed your [inaudible] targets?

It is the same issue because all of those things go into the calculation on how large bonus (indiscernible) should be or how small it should be.

But it is also with the balance of what can we do for shareholders. The test of that is of course in the margin. At the very peak of our operating efficiency our margin was up around 36%. It has dropped down, but is now beginning to improve. Even in low point we were probably in the low 20s although there was a very substantial amount of money set aside for the shareholders in reported earnings. Obviously the bonus pool itself for the employees came down even more. If the market improves, we would hope to build that back so it is a decision that is made by the remuneration committee, it is not a policy.

Your next question is from Joanne Mader (ph.) with Lehman Brothers.

Hi. I guess the first questions are for Mark. What is this thing that John Rogers articulated at the beginning whether you end up with divisions with [Quorum set]. Part of the division was to capitalize on {indiscernible] and [indiscernible] institutional. Now it seems that the retail is going into AIM and I just wondering does that mean anything strategically? Then I am also wondering if you could comment a little bit on the progress with those separately managed accounts and also your 529 Plan and what your growth expectations are there, and what you think you are doing relative to the market?

With regard to the first question of strategy. We have really not changed strategy at all with regard to [inaudible].

As regards to 529 it continues to go forward there. We have had a couple of [inaudible] one of which was a partnership that we announced not long ago at [inaudible]. We will using our [inaudible]. We continue to have our own [inaudible] and we also [inaudible]. That [inaudible] is growing but [inaudible] some early prognostications that we could hope for, partly due to the same factor.

I am sorry, what was the other question?

I am just wondering about the separately accounts which is one of the areas that people keep dragging in [indiscernible]. I am just wondering how you are doing there?

We have both [inaudible] years and [inaudible] a couple of years ago. We continue to make significant progress [inaudible] in that business and we are also continuing to give new mandates to major players in this and we are very happy with the result [inaudible].

Are you keeping the technology together, or are you going to merge the technologies or are you going to merge the technologies for the [indiscernible] or are you [indiscernible].

Well, we want to in time. There are [inaudible]. [Inaudible] integration of the retail park and I am sure in time we look [inaudible]. But the real point is that [inaudible] the mandate.

Okay. Thanks.

Your next question is from Michael Clipper with Clipper.

Hi. Mike Clipper with Clipper.

How are you doing?

Okay. You are introducing TRIMARK into the US. How are you going to do that and does this change any responsibilities within the US?

Mark, do you want get to that.

No, it doesn't change anything really Mike. What we are trying to do as I mentioned earlier, is take the best array of products that we can to the market place through our various [inaudible] and try markets with more additional product lines. We will have main products; special products [inaudible] and TRIMARK managed products available. That will give us, we think a very substantial advantage in the market place and we have the most [inaudible].

So I just wanted to make sure that the money is raised in the US will be under the TRIMARK brand if you will, or sub-brand be managed out of Canada?

TRIMARK will be a subsidized [inaudible].

It will be a [indiscernible]?

Okay. And it will be available in all of your channels at about the same time?

Well, subject to the product being [inaudible].

Okay. Thank you.

Thank you.

Your next question is from Peter Davis with Lansdowne.

Can I just [indiscernible] the point that was made earlier about why it is slightly difficult to see the cost savings coming through in this quarter's numbers? If you just compare the first quarter with the second quarter, I think you said last quarter that you had realized sort of an annualized $55m from the cost program. In the second quarter I think you started around $70m and finished around $130m, so theoretically it is around a $100m of realized savings in this period. Yet the dollar cost [indiscernible] has gone down about $1m or $2m? I am genuinely struggling to find what is happening.

Mark? Can you put some numbers on the exchange?

Let's go back to the beginning because I probably [inaudible]. First of all when we initiated this cost cutting program, we never said it was [inaudible] the third quarter of the second quarter. The third quarter [inaudible]. What we said at the end of quarter, as we came together, what we continued to say was a spiraling line of revenues and for us to close the dam [inaudible] was marginal. Looking for [inaudible] of the August, September activities was a result of [inaudible]. Because early in that quarter, actually, June and July, the retrospect thing was different. It was pretty good. [Inaudible] and precise third quarter figure and that was with August and September activities, which were [inaudible]. {Inaudible]. If we move through the fourth quarter a large part of that is headcount [inaudible]. About 145, 150 people of that 500 have initial dates and we expect it to [inaudible]. People sign on for that so all of those who are accepted, but still there is a large number [inaudible] the result is that we reduced our headcount by around 400 people last quarter. And we continued with those savings. We didn't [inaudible] in the fourth quarter but we certainly saw it in the [indiscernible] in the fourth quarter. As we moved into the first quarter, we began to see that conversion rate at [inaudible].

We continue to monitor this and we continue to say that the target that we set of $130m annualized run rate savings on the [inaudible] is still on target. Now we cannot give you the precise foreign exchange figures, but I can just tell you that every [indiscernible] that we have been through, starting with the place we started, as I described it, is where we are now, puts us on line with that item.

The foreign exchange from the second to first quarter, I think -- I will just go back to my notes here, accounted for quite a significant variation if you just look at the expenses by themselves.

It is a positive effect, it is a positive variation that you use, isn't it?

No it is not.

Why not? It is not a cost that is being translated back into sterling is it?

But if you look at the dollar as we are coming down but it is not being reflected in sterling.

So the dollar is falling?

The dollars are falling.

Is there a similar level of dollar cost that you have? Or is that a higher exchange rate?

I think we have probably got to deal with this off-line Mark. Could you give us a call later and we will see if we can...?

Could I just ask one last question, just to be absolutely crystal clear? The current run rate we have seen in the second quarter, if you get $150m of opts out (ph.) what does that equate you for a run rate for a quarter?

It would be one quarter of that.

No, no, no. A run rate of actual physical costs in the business.

I think that is a conversation off line. [Inaudible]. We have $150m annual expense savings. [Inaudible].

Well, look I think we could use up a lot of time on this. Let me give you some numbers and then let's talk to you off line.

But if you go back to the first quarter, second quarter of 2002, our run rate was about $380. The third quarter which is where we are getting off base. We started this program not on the basis of the third quarter earnings, but some hybrid about in between there. The third quarter our run rate dropped already to $346, so we went from $380 to $346 and we then went to $337. If you take the difference in say the second quarter of the year it is about $50b, which is about $250m a year and it is continuing to go down.

So, you combine that with the exchange rates and I think you get really in excess of the $150m(ph.) we talked about. But I really would like to talk about this off line.

I'm sorry to take up so much time. Thank you.

Can we move on to the next question please?

You have a follow up response from Anard Basudevin with DKW.

Sorry, I have pressed the button earlier and the question was again to do with the cost savings because frankly Bob, your response to that, if we look at the numbers in sterling then the numbers work out and just don't work out in my mind to the reported numbers. For clarity, if instead of telling us that it could be the July or August numbers that you are using for the cost savings, it would help a lot if you were actually to tell us what is the absolute number on cost [indiscernible] that you are looking at when you set your cost reduction of $106m?

You and I have talked about this before and we are just not going to do that [inaudible] to disclose. We have [inaudible].

In any case, the proof is in the pudding and what you will have to see is when the rates will continue to come down and the run rate gets closer to the number that was torn out a $100m plus a little bit per month. That is where we will probably hit it. I think we will get there right after the first [indiscernible].

The problem is that we don't understand the datum, which you are starting from.

Yes, I think that is the problem and I appreciate that. It was not the end of the third quarter; it was a hybrid number that we probably came up with on our own. Probably closer in August than it was at the end of September. So that's our fault. We must not confuse you, if we simplify it later.

Okay.

Do we have any other questions, this morning?

Your next question is from Lewis Middleton.

I just wondered if you could say a bit about the regulatory issues you are faced with. You are still dealing with regulatory capital issues. I wonder what is the progress you have made there? Currently you have been working very hard on that.

Yes, we have.

As you know that was something we have been working behind the scenes on until it became public knowledge around our AGM. We have continued to work upon it. We have been lobbying in Brussels. The third drafts of the capital adequacy regulations have been posted now. They are asking for comments. We did comment on the second draft. We will comment on the third draft. The final regulations will be put forward in February. Frankly we are just on hold to receive what those regulations finally say.

The third draft did not give us any relief. I met again with the FSA and the Treasury and both are trying to assist us, so it is really a Brussels issue. It is not a UK issue. We are hoping that we will get some relief. In the meantime, we have studied what would happen if we felt like we had to re-domicile and to our happy surprise, we think we can do the borrowing. We think we can stay in the UK. For listing purposes it would be our primary market. We think we can stay in the FTSE 100. We think we can adopt the UK, as our tax base home and therefore there will be very little change to our shareholders. So we are not sure how it is going to go. We are going to wait and see what the regulations finally say. If it is not enough relief for us, if we have to re-domicile it should not really affect our shareholders all in all. We are happy about it now.

Thank you. Also just one other thing. Could you say if you plug into my model sort of markets with some market growth and further revenue cuts, you are operating margin really does get pretty near the sort of levels as you are describing as peak levels before. How high do you think the operating margin can actually go, before you end up either into pay staff significantly more, pay more on advertising and so on and so forth?

I think you can drift upwards. The case we made back when we felt the world was going to go home forever, was that the thing would drift upward to over 35 and maybe in time it would drift up towards 40, but obviously we are starting from much more base now. But it seems to me like that you have all the ingredients to have the model just to continue to drift up.

We have a much better platform today than we had two years ago, because we have consolidated so many (indiscernible). So yes, I think it will go up.

Thank you.

I am not predicting in the very short term it will get there, but we will be moving in the right direction.

Okay. Thanks a lot.

Any more questions this morning?

There are no further questions. Gentlemen, do you have any further comments or closing remarks?

Well let me just thank everyone for participating. I know we threw a lot of numbers at you and maybe we are not as precise as some of wish us should be. We would be happy to deal with any of you about the issues that we raised that were not too clear this morning. The savings are there. The swing is happening. It is a bit like sitting in a battleship and watching the swing through. We do feel active to report on Q3 earnings, we will be pursuing positive year on year type results. So subject only to the market, I think we are on the way back up.

Thank you very much for participating. We look forward to meeting with you again.

Thank you ladies and gentlemen for your questions and participation. That concludes today's conference. You may now disconnect at any time.