景順投信 (IVZ) 2005 Q2 法說會逐字稿

Welcome to AMVESCAP's 2005 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 U.K. Financial Services and Markets Act regime governing real-time financial promotion.

This call may include statements that constitute forward-looking statements under the United States Securities laws. Forward-looking statements include information concerning possible or assumed future results of our operations, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, assets under management, acquisition activities and the effect of completed acquisitions, debt levels, and the ability to obtain additional financing or make payments on our debt, regulatory developments, demand for and pricing of our products, and other aspects of our business or general economic conditions. In addition, when used in this call, words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects" and future or conditional verbs such as "will," "may," "could," "should" and "would," or any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, you should carefully consider the areas of risk described in our most recent annual report on Form 20-F, as filed with the United States Securities and Exchange Commission. You may obtain these reports from the SEC's website at www.SEC.gov.

Today's speakers are chairman, Charles Brady; chief executive officer, Martin Flanagan; and chief financial officer, James Robertson. A question-and-answer session will follow accordingly. At this time I would like to turn the call over to Chairman Charles Brady.

Thank you very much and thank you, those of you in London, good afternoon, and those in the U.S., good morning. I have with me today James Robertson, who is going to go through the financial statements in a few minutes, but we also have our new president and CEO, Marty Flanagan, and I'm sure that's one reason everybody's on the call. So Marty will say a few words at the end and give you a chance to also ask some questions. And, needless to say, I'm delighted to have Marty with us. I think he is an outstanding person to take the role of president and CEO of this company.

Just allow me for a minute to look at what's been going on in the investment management business over the last 10 or 15 years, and going back that far, we clearly could see, or thought we could see, that the industry was going to develop along the lines of multi-products, multi-distribution, and global. Those are the three themes that we tried to build the business on. And over the last 15 years, I think, actually, the industry has proven that that is the direction it's gone in with a multitude of companies offering many products, distribution channels changing dramatically, and, of course, the globalization of the business.

AMVESCAP has responded to these, I think, in the appropriate way. We have products now that range all the way from real estate to private equities, any number of equity products, global products, international products, you name it, and so I think that we have put a product line in place that's really required today to meet all of the various and sophisticated needs of investors.

In distribution, clearly, there has been a change in distribution over the years and today we virtually operate in every distribution channel there is, with a large number of clients -- of relationships with major distributors around the world.

And globalization is also going to trend in the business, and today we are operating in 19 countries. So I think of the three main drivers of the business over the last 10 or 15 years, I think we have responded appropriately, and we've done all that by still being independent and still being in only one business -- asset management -- which makes us a terrible asset.

Clearly, size and the global structure allows you to leverage the business and leverage the world platform. I think this is especially true faced today with the trends of open architecture and a move to separation from manufacturing and distribution. This size and diversity has supported our growth and profitability in the past, and I'm sure it will in the future. Clearly, we've been tested over the last few years by a number of events, and, really, only the size and diversity is what has seen us through it, and I think it will continue to see us through it.

At this point, we have worked our way through many of the issues that have faced us over the last two years. We are now turning the team over to -- headed by Marty Flanagan, and I'm sure he'll work through the rest of the issues. I think since this is probably my last call, I believe I can make the statement that I think that we're positioned to begin a gradual and steady recovery in bringing our company back to the levels it was in the past.

With that, I'd like James Robertson to go through the second quarter financial numbers, and then we'll turn it over to Marty for a few comments.

Thank you, Charlie. I will be working my way through the presentation that you all should have available through our website. Let me remind you, as I did in the first quarter, the fees results are issued under IFRS and, as discussed last quarter, the most significant matters for AMVESCAP are the accounting for share-based payments, accounting for defined benefit obligations, and the treatment of goodwill with the cessation of amortization. Because the carrying value of goodwill is no longer systematically reduced over its useful life, any adjustment to value in future would be through a periodic impairment charge.

The release includes a reconciliation of 2004 half-year and full-year from UK GAAP to IFRS. Under UK GAAP, EPS was reported before amortization and was 11.2p. And IFRS, the 2004 EPS is reported, after including the amortization of management contracts, and therefore came in at 11p.

Turning to the environment for the half-year that we are reporting on, markets for the first half of the year in the U.S. were generally down. The S&P 500 down 1.7%, Dow down 4.9%, and NASDAQ 5.8%. Outside the U.S., the FTSE 100 was up 5.8, the Nikkei slightly up, and the Hang Seng slightly down. In the second quarter, markets were pretty mixed all around.

Although the dollar has strengthened back towards the 2004 levels recently, FX rates still have some impact on our financial statements. In the first half of 2005, the average dollar sterling exchange rate was 1.86 compared to 1.82 in '04. This had a negative 0.1p effect on the first half of this year. The second quarter average dollar sterling exchange rate is 1.85 compared to 1.81 last year and 1.88 in the first quarter.

So turning to Slide 4, Summary Profit and Loss Accounts, looking at the numbers, a couple of points -- the 2004 numbers on this slide and wherever else applicable have been restated from UK GAAP to IFRS. Revenues are up slightly compared to last year; expenses are also up slightly. This increase is due to remuneration costs and marketing expenses, which I have signaled earlier on last quarter and the quarter before that we would be seeing increases in those areas. These increases are partially offset by some decreases in most other expense categories including office-related professional services and technology.

The year-over-year decrease in investment income was mainly due to the fact that last year we had a gain on the sale of our UK private wealth business, and this gain has been recalculated under IFRS and was £6.4 million.

The increase in interest expense is primarily due to charges related to the credit facility renewal that took place during the half-year and accrued interest expense related to the final settlement payment due later this year.

Diluted earnings per share decreased 1.5p and the majority of this decrease is accounted for by the change in other income, interest income expense, and the foreign exchange effect. The remaining decrease is related to the increase in marketing expenses referred to earlier.

Turning to the next slide, Quarter-To-Date -- this slide shows the quarterly comparison between the second quarter '05 and the second quarter '04. Revenues are up compared to last year, and these increases are due primarily to higher revenues in the UK and our real estate businesses offset by some lower revenues out of our MUS business.

Operating expenses are up for the same reason for marketing remuneration and again partially offset by decreases in other categories of expense. Operating profit is more or less unchanged from the prior year. Again, you see the interest expense up with the accrual of interest in the final settlement.

Diluted earnings per share decreased 0.3p, and this decrease is accounted for by the same factors that I went through for the half-year.

The decline in the average outstanding share balance reflects the purchase in the first half of 2004 of shares for compensation related to stock plans.

Turning to Slide 6, Quarterly Financial Comparison -- second quarter '05 compared to second quarter '04 -- this just shows the quarterly comparison in more detail. I've gone over the changes in revenues and expenses. EBITDA is very slightly below the prior year, as you can see, and on headcount, please note that from now on we will be reporting headcount on a full-time equivalent basis. Full-time equivalent is a better predictor of staff costs than actual headcount, and 2004 has been revised to reflect this change.

As you'll see, headcount continues to reduce, and after the sale of our U.S. retirement business, headcount will stand at 5,946. This is a reduction of around a third from when our headcount peaked in August 2001 at about 8,904 and reflects the ongoing efforts to improve the efficiency of our operating platforms, the integration of our businesses, in order to give the business much greater leverage as we go forward and bring back the momentum to the revenue.

Slide 7 -- this is comparing the second quarter of '05 to the first quarter of '05. The revenue increase is primarily due to increases in transaction and incentive fees in our real estate group, which had a very good quarter and increased revenue from our UK business. Operating expenses, again, made primarily due to marketing and remuneration costs as previously signaled. And operating profit shows a little over 5% increase over the first quarter.

As you can see, the operating margin improved slightly between the two quarters and the EBITDA margin remains at around 31%. EPS and EBITDA shows a small interest over the first quarter and, as you can see, headcount continues to fall.

Slide 8 -- moving to a segmental analysis, this slide shows the segmental results of the half-year. One thing I should point out is that under IFRS operating profit includes the amortization of intangibles, which, in our case, is primarily management contracts. Under UK GAAP, this expense was a below-the-line item. Operating profit throughout this presentation has been adjusted for this change, and the main effect of the change has been an impact on our private wealth division, which is somewhere around $8 million to $9 million effect on that division -- £5 million.

Just as a reminder, there are some changes from the 2004 release in that we have now adjusted to reflect that the Denver mutual fund business has been merged fully into the AIM mutual fund business.

As I discussed before, we have continually been evaluating and will continue to evaluate all of our products and business activities for their long-term prospects. This year we sold USDC administration business for AMVESCAP retirement. We originally entered into it as an asset-gathering opportunity primarily. The industry has moved, as we have talked about, into an open architecture paradigm, which benefits our entire firm greatly but did not benefit this particular business. Scale and administration has become an imperative to compete successfully, and we did not wish to invest to increase the scale. So we have sold he business to Merrill Lynch, with which we have a longstanding and strong relationship.

AMVESCAP retirement had revenues of £16.7 million in the first half of '05 and was running at a small operating loss. The sale closed in July, and we are currently finalizing the closing accounts, and we will be giving the full details of the transaction and the selecting of the gain on sale in the third quarter.

As part of our European platform restructuring, we are also in the process of winding down our European banking activities in Germany, and we have vacated more space in London now that we have achieved a sublet of the property. As a result, there are going to be one-off costs associated with these initiatives, which we would expect to reflect also in the third quarter. In approximate terms, we expect the gain from the sale of the DC business to be matched by the restructuring costs concerned with Europe.

We have seen profits more than double from our UK operations over a year ago when the strength of our business begins to show through and the results of restructuring throughout the UK and the rest of Europe begin to bear fruit. The European results bear some costs associated with the ongoing restructuring, and there will be more coming through, as I mentioned earlier.

Profits have increased by about 16% in our U.S. institutional business with good growth, particularly from our alternative asset businesses and by 11% in Canada, where the high quality of our business continues to produce exceptional results. Profits have been weaker from our U.S. retail business where we are working hard to get back the momentum.

Turning to operating profit, second quarter to first quarter, the NUS decreased primarily due to the high marketing costs and staff-related costs as we talked about. Starting next quarter, we have implemented some reductions in our 12B1 and administrative fees, and that will have about a $5 million per quarter impact on revenues for this business.

The AIM Canada Group continues to have strong results. There was a change in an insurance provision in that quarter, which caused a slight increase in our expenses in this group. Invesco U.S. increased mainly due to a very strong quarter from the real estate business with fees arising from successful disposal of properties for clients. These disposals, which amounted to around $600 million of assets will show up as outflows in this quarter's AUM. However, we retain the capital allocation from the clients, and once we find new investments, those figures will come in again as an inflow to assets under management.

Turning to the next slide, Funds Under Management, long-term assets are down £7.5 billion from the beginning of the year, and money market assets are down about £1.4 billion. As we mentioned, markets have been mixed and, overall, though, we have an increase in assets of £4.2 billion from that source offset by foreign exchange effect with decreased assets by £3.5 billion.

Net loss business is primarily in the U.S., which I will discuss a little later. We have seen positive flows in Canada and the UK, and I would note that the £2.8 billion of fund flows in the UK includes the sourcing of assets contracted in the UK with UK clients but managed by another division of Invesco. And this is an example of how we get leverage into our business -- the two leverage points that we've been working on is the ability to take product manufactured in one place across our global distribution network, where appropriate, to leverage our revenue whilst at the same time increasing the operating of common platforms where we can get scale benefits on the cost side.

We have examples of this happening all over the business with our bank loan products, with our Canadian product, with our U.S. international products and our real estate products, and a very long list. Overall, more than £20 billion of assets have been raised in this manner are using the global network.

Turning to page 11, let me give you a quick picture on investment performance. After I've just taken you through the figures overall, you can see that funds are down 2.2 billion for the quarter, money market assets are up 0.5 billion. Markets have been primarily up in the second quarter and raised funds by 5.8 billion. Foreign exchange decreased assets by 2.8 billion in dollar terms.

Again, in the quarter, net loss business is primarily in the U.S. units. We've continued positive flows in Canada, UK, and the private wealth business. As I discussed in the last quarter, we had expected the second and third quarter to have significant outflows for two main reasons -- the U.S. retail business would be affected from end-of-year reviews from DC and sub-advised [ph] platforms in respect of 2004, which take place in the first quarter with the asset withdrawals taking place primarily in the second quarter with a little holdover and will impact the third quarter.

And in the U.S. institutional business, as I mentioned, we are transitioning clients out of the underperforming core and growth products into a much stronger-performing structured growth product and, as a result, we were expecting, and we received, significant outflow from this area with a little more of the assets undecided, which we'll decide in the third quarter. The majority of this effect, however, took place in the second quarter and will not repeat.

I would also just mention again that the outflows in the institution area include the 600 million from the real estate disposal of assets, which eventually will be reinvested.

Turning to performance, we continue to have strong performance in our institutional products. Of particular note, our real estate group where in '05 we were the category winner for REITS bank loan products where we were recognized by Euro Money as CDO Manager of the Year, and we continue to be a market leader in stable value and institutional money market.

Turning to our three main mutual fund ranges, we have had strong performance in Canada and the UK. In Canada, short-term performance has been weaker with the rise in energy stock, which do not fit our investment file. In the UK, performances remain very strong with over 90% of our assets in the top two quartiles.

In the U.S. wealth, we have had strong performance in some areas. In aggregate, we have been looking and continue to look for improvement. We have continued to rationalize the fund range and following the recent fund mergers, our three-year performance, on an asset-weighted basis, shows 48% of our assets are above average and 50% on a fund-weighted basis.

Turning to the balance sheet, again, these are presented under IFRS -- the change in goodwill is due to the fact that under IFRS all goodwill is booked in its local currency. So, from now on, our goodwill number will vary with exchange rate. The change in non-current investments primarily reflects the adoption of IAS 32 and IAS 39. These standards require that investments are mark-to-market value. Therefore, December 31, 2004, balances have not been adjusted for market because the standard came into effect just after, and the unrealized gains and losses generated are not reflected in the earnings but book directly to equity.

Please note that we have also reclassified UK DC policyholder assets from debtors to current investments as part of the IFRS transition. At June 30, 2005, these assets were £518.7 million compared to £415 million at December 2004. The offsetting linked policies over liabilities are included in creditors.

Turning to Slide 13, in Group Cash Flow, the amount in debt is creditors and other line include payment for the exceptional items, changes in unsettled fund transactions, which are just a matter of timing; net cash out on banking loans and our banking business; and the normal changes in prepaids, accruals, receivables, et cetera.

The acquisition and disposal line reflects the taking of an increased interest in our China joint venture in 2005, and the acquisition of Stein Roe net of the disposal of the UK private wealth business in 2004. The other financing line includes option proceeds in '05 and the purchase of the shares for employee trusts in '04.

Turning to net debt, as I mentioned on the last call, we completed the renewal of our credit facility, and this is the completion of our debt restructuring program but, again, with the issuance of our new senior notes in late '04 and the tender of the senior notes in May '05, this program has enabled us to lower our ongoing banking fees and lower our borrowing costs, over time.

The credit facility outstanding balance has been reduced from 151 million to 25 million since the beginning of the year, and we paid off the remaining senior notes that were due from the May '05 that did not put in for the tender, and that was about $80 million. In total, we have paid down 206 million of borrowings but in sterling terms, the decrease in debt, please note, is only £74 million. This is due to reflecting the change in the exchange rates and the fact that our debt is nominated in dollars. In sterling terms, we paid down £113 million, but this has been offset by the FX impact of £39 million.

The facility will rise in the fourth quarter as we pay our annual bonuses and make final payment on the settlement, which will be about 162 million. Cash flow will then take the balance back down.

I would also like to tell you that we have now finalized our position with our regulators on the EU consolidated supervision question, and we will be now in compliance with the EU requirements without the need for any material injection of capital. This has been a discussion over a long period of time, and we are very pleased that this is now a settled issue without adverse consequences for the group.

Finally, we give you the average shares outstanding just as a matter of record, nothing to note there.

So thank you very much and with that let me hand back to Charlie.

Okay, James, thank you very much. Now we're going to have Marty Flanagan make a few remarks but, remember, Marty has only been here a day-and-a-half, so he doesn't have a lot to offer you, but -- Marty?

Thanks, Charlie, a pleasure, and as Charlie mentioned, I'll just make a couple of comments before we get to the most important part, which is question-and-answer. I'm very excited to be at AMVESCAP, and I have great confidence in the future of this organization, and the answer to probably one of your first questions is what are my next steps? And they are going to be, really, as you would expect, it's going to be taking time in getting around the organization, meeting people, understanding what's going well, areas that could be improved, and already we're in London right now. We have made brief stops in Toronto, Atlanta, and San Francisco, and also on this trip we're going to be meeting with major shareholders to understand their views and really convey our commitment to the future success of AMVESCAP.

As Charlie expressed, and James, I, too, am also very optimistic about the future of the global asset management business. I think there are tremendous opportunities for AMVESCAP and organizations such as ours that have global scale and comprehensive product mix, dedication to superior investment performance. And another topic that's been in the marketplace very much is the notion of maximizing shareholder value, and as you've heard from the board and Charlie, the board has made it very clear we are committed to maximizing long-term shareholder value. The challenge for us is really to shape AMVESCAP so that we can take advantage of the many opportunities out there and for us it's not a matter of too few opportunities, it's actually there's too many, and we just need to be very dedicated and thoughtful in picking the right ones and doing a very good job of executing against those.

Over the next several months, we will take a hard look at the areas of the business that are excelling and find out ways to expand on those successes and also look at the areas where they're more challenged and determine what we need to do to improve those businesses and, clearly, we want to unlock the power that's inherent in AMVESCAP as a global investment management firm.

As has been described by Charlie and James, I also am very dedicated to driving profitability to generate the resources necessary to compete in the global marketplace, and as with any business, there are some opportunities that we connect on immediately, and we will, once we identify them, and others will take a longer-term view to execute against. But we will, in fact, do that, and as we take the time to make these determinations, we'll instill a sense of urgency. But, that said, we want to make sure we have the right balance and make sure that we're nurturing the organization to make sure it grows in a very constructive manner.

We will lay out a clear path, but we also want to be very flexible and nimble to take advantages in the marketplace. We all know we are all in this business. It takes different twists and turns on a very regular basis, and the firms that do well are those that can react to those terms, and we will do that.

And, as all firms go through cycles, as has AMVESCAP, to the uncertainties -- the regulatory issues and also the successor to Charlie has been resolved, the full attention on the company is continuing to rebuild and take a leading position as a global investment management firm, and I truly believe in the promise of these global asset management firms and strongly believe AMVESCAP's strengths will serve it very, very well, its clients, and its shareholders over the long term.

With that, we'll turn it over to any questions people might have.

[OPERATOR INSTRUCTIONS] Mr. Bill Katz with Buckingham Research.

Thank you very much and good morning, good afternoon. Marty, congratulations. I'll start with you on this question -- I'm curious as to what attracted you to AMVESCAP. Obviously, things were going along quite well at your former firm. Was it just for new vistas or maybe you could talk about what attracted you there. And then as part of that, I hate to ask such a personal question, but could you sort of broadly talk about how you're being compensated and what might some of the financial triggers be?

Well, Bill, I've known you for a long, long time, and you've known my personal belief and just the great opportunity in the global asset management business, and that there is a very important place for those firms that can take advantage of those at Franklin Templeton, and I was there 22 years. I believed it very, very much; I still do. And what was very attractive at AMVESCAP is very similar from the standpoint of global aspirations and very good investment management teams within the organization and it just looked like a real opportunity in some of the areas where AMVESCAP has faced challenges were not too dissimilar to prior experiences in the '98 and '99, 2000 period at my prior employer, and it's just a very exciting, invigorating challenge and opportunity. So that was a real attraction.

And, secondly, with regard to compensation, I know the -- it's been publicly disclosed and, as you would hope, the board will set annual plans and cash compensation based on hitting operating targets and the long-term incentives kick in and, as we hit earnings targets ranging -- nothing under 10%, but then somewhere between 10% and 50% earnings growth. So very much aligned, as you would hope, with shareholder success.

Okay, a second question and obviously you've only been in this for a very short period of time, but as you've gone around the world so far, I'm just curious -- are there any businesses that don't make sense that continue to have, even in a global footprint, I guess I was most curious about the money market business, given some of the changes going on there?

It's not even officially two days that I've been here, so it's hard to be very specific other than global capabilities of investment management are very, very important, and AMVESCAP has many of those. What's actually very unique about the money market business within the organization, and I can only say it from, really, I still classify myself as an outside, is they were early in on that business and were very, very successful at it, and those organizations that have had a foothold in it and been in it for a period of time do well, and that's really what has happened at AIM. So it's a really very, very good business once you're in it. And I can, once again, just from prior experiences, it's very difficult to get into otherwise.

Okay, and just one final question for James. I was curious as to your comments on reduction [audio difficulties]. Do you anticipate any type of reduction on expenses as an offset to those?

There may be some opportunities, but I wouldn't say that it was, in any way, a one-for-one. At the same time, the most important thing for us to achieve in that business is to get the revenue momentum back. We've built so much leverage into the platform, if we can get the revenues moving, we'll see the profits increase very fast. So it's likely that we will intend to keep investing in marketing as well as investing in whatever it takes to get the performance that we require.

So, yes, we'll be looking at opportunities to get even more efficiencies on the admin side, and we'll also look for ways of maximizing our marketing spend, but I wouldn't be looking for too many direct offsets.

Ken Worthington of CIBC World Markets. [audio difficulties]

Hi, good morning. The first question, Marty, although you're new to AMVESCAP, you have been a competitor for quite some time. If you could just maybe walk us through a little bit further the top three things that you feel you need to do to improve the earnings outlook for AMVESCAP.

I'm going to get ahead of myself, but the headlines, which, as you would imagine, and it's not science, and I'd say this anywhere, it's just a continued focus on investment quality, which I do think there is great talent here. Secondly, trying to take advantage of the breadth of the product globally, as James talked about. That's one of the great elements of these organizations, but then also, and it tends to be harder work, is driving operational efficiencies through the different service elements within the company, whether it's transfer agency, investment operations, those types of things, and executing well gives you great operating leverage. You could have written them down before you asked me. So not to insightful, but that would be where we'll look.

And is everything on the table at this point, or are you going to do a strategic review of all the different businesses and how they interact and so on?

Oh, sure, but I think that's normal business practice, right? But, in all fairness, the approach, for me, is the great advantages and disadvantages -- I don't know anything about this business. And so I mean it very sincerely that we will not only get around and meet people but also comprehensively look at the business, and it will be repetitive for some people but for me it will be educational and, hopefully, through that, with different points of view, we might come up with some different answers. I have no idea what they might be.

Okay, thank you. And then the second question is on CI funds. We understand that CI has approached AMVESCAP and its advisors to discuss strategic alternatives and that AMVESCAP has said it has nothing to discuss. First, is that true? And if you could, discuss how you plan to balance the long-term returns for shareholders and short-term opportunities like what we're seeing from CI.

Any inquiry that has been made to AMVESCAP has been responded to. I really can't add any more than that. It's sort of shadow-boxing otherwise, and then let me -- your second question is probably the most interesting. Before joining this organization, the CI conversation was out there so, clearly, when I joined the organization, my intention is not -- I was at Franklin Templeton for 22 years, I intend to be here for 22 years. It was not a three-month view, and I came to an independent conclusion that what is best for the clients of AMVESCAP and ultimately the shareholders of AMVESCAP is that create the energy and forward momentum in this organization and will far exceed any short-term gains that might be talked about right now. So I feel very strongly that the right thing to do is to keep our heads down and move forward with taking advantage of the footprint that's been put in place.

Huw van Steenis with Morgan Stanley.

Two questions -- first, Marty, when you look at businesses which have got performance gaps, say, for instance, like at AIM, what are the principles you use to weight up whether you should be patient about waiting for fund turnaround, performance turnaround, firstly say lifting out teams from other places versus possibly considering bolt-on acquisitions. How do you weigh up the different options when there are performance gaps?

Yes, once again, I can't be specific other than to say all indications are there is a great deal of talent at AIM as in other parts of the organization. So now de-personalizing it, the process is one you would imagine. You would look at performance and try to understand what generated the performance and with the goal of generating consistent good long-term performance versus peers, benchmarks, whatever is appropriate and making sure that the teams are focused on their process and that the talent is there to execute against it and have the support. So there's not a lot of rocket science to it, and I think -- you mentioned AIM.

You know, really, all growth fund managers ended up in a very difficult state coming out of the great bubble, and subsequent to that time, just from looking at the high-level numbers, AIM's performance over the last number of years has really been quite good there, but you're really still working through the aftermath of a very, very difficult time, and no one would deny that fact. But you're asking the right questions in all elements of the business. We just want to make sure that we have the best investment talent around, and that this is a place where investment talent wants to be and investment talent wants to join. So those would be elements that I'm sure are in place, and we'll just continue to focus on that.

Thank you very much. And then, James, can I just ask for a couple of clarifications? Of the 14 million you had in the institutional business in core and growth, could you just give us some color on how much is left at the end of Q2 just to give us a sense of how much of that is worked through? You mentioned you've renegotiated your credit facility. Are there any changes to your debt covenant so, hypothetically, if you were to take a large restructuring charge at any point, would that potentially impinge your ability to pay to these? And then, lastly, I think you mentioned $20 million per annum revenue less at AIM, and I just wanted to check that I heard that correctly. Thanks.

I'll take your last one first -- yes, you're correct -- $5 million a quarter, $20 million per annum on the 12B1 and admin fees. Part of that can move with volume. So if the volumes go up on the admin fees, that may recoup some of it. But, broadly, 20, yes.

On the credit facility, returns were slightly enhanced from our point of view in terms of lower cost and increased flexibility. But, no, there is nothing new in terms of any new constraints -- just slightly less constraints, actually.

In terms of the position on the core and growth assets, actually when we started the transition process, we were looking at around 10 billion in the core and growth, a particular product that we were transitioning. We had an outflow in that area of about 5. The rest has been about another 1 to make decisions on, and the rest is transitioned.

Ms. Haley Tam with Bear Stearns.

Good morning, good afternoon, gentlemen. A question on the operating margin, if I can. I see that has increased by slightly from Q1 to Q2 up to 24.5% and within that, I suppose offsetting any future impacts on the 12B1 fees in the U.S., it looks as though the UK business has seen a doubling in profits up to £15.9 million in the Q2, which is also doubling of the operating margin. So I was wondering if you could give us any color and really how that was achieved and how sustainable that might be, going forward?

The UK, we signaled, over the last three quarters -- three or four quarters -- I've been talking to you all -- I think I've been signaling that we were not satisfied with the margins achieved last year, and we had four that we were working on improving that, and we've been doing so over the last months and years. The results are what you see, which is it's a demonstration of everything that Marty has been talking about, which is how fast the leverage takes hold in this business when you begin to get the revenue flow back, and you've got your operating platform in line. You don't just see a slight return to profitability, you see this kind of doubling that we've got here.

We knew that the inherent strength of the business was going to show through if we could get the operating platform right. We've begun to get it right, there's more that we can do. So, yes, it's sustainable and, yes, we hope to improve on that as we go forward.

In terms of operating margin, in total, I would say that our objective remains the same, which is, again, we believe there is fantastic leverage in this business that in order to show through the substantial improvements you can make, you have to get the revenue line moving, and the two main components of that are market movement and flows.

Having got into a position where I believe we will see an improving trend on flows through the fourth quarter and on from there, we will begin to be able to get some leverage from that point, and then the markets, which have been better recently, and in some places been quite strong, will add to that leverage, and we can then take advantage of all the work that we have put in place over the last three years as we took our headcount down by about a third to increase the efficiency of the operating platform.

So, yes, I would look in the medium term for us to be able to increase the margins. In terms of quarter-to-quarter, I think, as I had indicated earlier, the second and third quarters and for the balance of this year is very much in the spirit of a turnaround year. I think that we will continue to have some difficulties to get over before we can break clear and start to show continued improvement.

Chantal Moshal with Deutsche Bank.

Good afternoon, gentlemen. Haley addressed my question to some extent in the previous question. Marty, I just want to draw on your experience in the industry, in general, and if you look at the [audio difficulties] group, there have been issues highlighted that operating margins are materially below the U.S. peer group. Are there any obvious reasons to you as to what areas you could target in the short term? I understand that revenues need to be addressed in the longer term. That's the first part of the question, and the second part -- what level of operating margin do you think is achievable within AMVESCAP -- just drawing on your experience in the industry?

You're asking a very specific question, and I really can't do that because I haven't gotten really into the organization yet. But a few comments, just broadly, is that it's very hard to target a specific margin, and I think you want to think more of ranges just because of what James is talking about and Charlie before him, really, is market movements and flows have such a huge impact on the organization when you get to the level of assets that AMVESCAP is at.

That said, every organization needs to be committed to continuing improvement within their operating environment, and those are things that AMVESCAP has been dedicated to and will continue to do that in a very aggressive manner. And from that you usually get, "drive down" as I call it, per-unit cost of production and that puts you in a good position during difficult times. And it's just to early. Literally, I haven't even been here two days, so I can't be more than very broad.

Okay, and just a question for James -- James, if we look at the outlook for headcount, can we expect further reductions going forward and to what extent?

On headcount, when you take a third out of your workforce over the last -- since August 2001 -- that kind of signals that most of the sort of large, across-the-board type initiatives have been undertaken. However, we will have a sort of neverending quest that we will look for operating efficiencies where we can get them. As our businesses grow, for sure, we will have to add some headcount, and with successful businesses and where we can get efficiencies, we will look to take those efficiencies, over time.

Referring back also to Haley's question on the UK, just for a matter of clarification, we did take benefit in the second quarter from some performance fee income, which helped the margin, and that will not be something that repeats each quarter. Hopefully, if the performance continues to be as spectacular as it's been, it could repeat year-on-year, and nonetheless whilst we will expect to see variations quarter-on-quarter, the general direction of that business is meaningful improvement.

Okay, can you provide any color on the extent of those performances in the UK?

Year-on-year the increase was something on the order of 3 million to 5 million.

Ms. Claire Harrison with Lehman Brothers.

My question was with regards to the U.S. and institutional business -- whether [inaudible] real estate transaction-related gains and performance-related revenue there? And also parts of the real estate outflows you mentioned -- whether there are any mandate losses at all?

Certainly as far as the real estate is concerned, there's a queue of people waiting for mandates. There is no mandate outflow. The issue there is that the team is highly dedicated to maintaining the quality of the properties they invest in and, therefore, we have a queue of money waiting to be put to work into properties. The 600 million or so that came out of the result of disposals is now available for investment into new properties as we find them and, no, there were no withdrawals the first year even there.

Can I also just confirm that the retirement business, the P&L effect is going to be offset by the restructuring so we don't need to factor anything in there?

More or less, the cost of the restructuring and the gain will be similar. We haven't finished the closing accounts yet, but within a few million of each other, I expect.

Okay, and then a more general question on costs this quarter and whether that's an indicative level for going forward. And so then more indication on the marketing expenses?

Well, the marketing expenses will vary, according to the response and opportunities that we see. We certainly regard that the expenses were worth it in terms of the effect, if we can get the momentum going that will -- the effect of the momentum will go off the cost of the marketing expense. So we would be targeting whatever we thought was producing the results we wanted as opposed to having a particular number in mind.

We do have quite an amount of variability in legal and professional expenses. We have some insurance recoveries that are unpredictable as to exactly when we might get them, and we don't reflect them until we do get them. So there could be some variability there. I would expect to continue to ensure that the remuneration side of the equation is competitive to the marketplace. As Marty said, our lifeblood is our talent. That being the case, those points being made, the general level of expenses subject to normal escalation in the business, is about normal where we are now.

Mr. Martin Cross [ph] with Tetherwood [ph] and Greenwood.

Good morning, good afternoon. Yes, it's about the dividend. One area where you, I think, probably exceeded most of our expectations was to increase the interim dividend from 2.5p to 4p. Forgive me, if I've forgotten what you've guided before, but can we read anything into your intentions for the full year from 4p at the halfway stage, and was your decision to put it up influenced either by your larger share price in recent months or is it dictated at all by your desire to pay down debt? Which does make the increase quite surprising.

I'll take the last point, Martin. We have a pretty strong position now on our debt and our credit facility with an unused 1.1 billion on the credit facility at the current moment. So, therefore, our concern was far more to look at -- now that compares, I think, to the cost of the dividend, which is 33 million -- to the interim dividend, to sort of give you a sense of it.

I think the board weighs out maintaining a conservative position on payout ratio and takes the view as to the prospects of the company, going forward, and as we have indicated, last year's reduction in dividends was very much as a result of taking into account the loan covenants in respect to the impact of the exceptional items. So the board, as it always does, takes a view of what is a prudent dividend in the light of the trading circumstance of the company at the time and on that basis declares a dividend of 4p.

So if I could just push the boat out a bit farther there, then you wouldn't be surprised to expect more cost of 12p for the year. Are you getting back to the level you were back in 2003 plus a bit?

I think that you -- I wouldn't want to second-guess what the board would do, but I think that the board would look at the level of profitability and historically as being a small increase from the final from the interim, that's not a given, it would be assessed according to the final results. I think that you're talking about quite a substantial lead there.

Fred Nieto [ph] with Ninemsha [ph] Capital.

I just have a couple of questions. The first one relates to the performance fees and the transaction fees that were earned in the quarter. You gave us a differential year-over-year and I was hoping to know what the actual contribution is simply because it looks as though AMVESCAP North America's assets under management were down in the quarter, although the revenues were up significantly sequentially.

And then my second question relates to the outflows and just trying to get an understanding of what the trends were for gross sales year-over-year relative to redemptions, because I know in the past you've commented that it's more a problem of redemptions and that --

Hello?

One moment, please. Sir, you may continue.

Sorry, could you give the end of your question starting with gross sales?

I was hoping you could give us an indication of the gross sales relative to redemptions inside of the flows, especially given the noise that you mentioned inside the flows relating to the real estate at AMVESCAP North America -- just to understand how that is trending year-over-year.

Okay, I don't have those numbers to hand, but I can try and give you an overall picture. From the real estate side, the property disposals tend to -- amounted to just short of 600 million, and that would be equal growth in that in the way it occurred. And that was in the North American business. The performance I was referring to earlier was in the UK business.

In general, on our gross sales side, the pipeline in the institutional business has shown some improvement over last year. The gross sale volumes in Canada are up slightly over last year and are up a lot more in the UK business, where the gross sale picture is better, both in the industry and for us there. In the U.S. mutual fund, our gross sale picture is not yet picking up substantially at this moment in time, nor is it dropping off substantially. And that's where we are concentrating our efforts to pick up momentum.

Simone Glass with UBS.

I've got three questions. First of all, I'm really sorry to have room to get back to the UK, to the improvement in the UK profitability, and I understand you have some leverage there, but the cost decrease by 9% quarter-over-quarter, maybe you could give us some more detail to that. The second question is on your European business. You mentioned there were restructuring costs in the quarter, and there were to be continuing restructuring costs going forward. And can you give us some details what exactly your current plans for the European business are? And the third question would be for Martin. You mentioned that there are in terms of your strategic approach, there would be some, what you'd call "quick wins," earlier on, and then, on the other hand, you mentioned that driving further operation efficiency would be the heart of work, as you called it. Could you maybe give us some idea about your approach to the business? Thank you.

Okay, I'll go first, and then hand over to Marty, if that's all right, so I'll take you in order. On the UK profitability on the cost side, for some time we've been looking at moving to -- been working on moving to single European platforms as opposed to individual business platforms. It's a process that takes time, because you have to, first of all, align your systems, which we did, and then you can get the efficiencies by unifying your structures underneath those systems, which we have been doing, and that's across all the functional areas. In fact, we have put in a European platform functional management team that looks across all areas of those functional support areas, be it transfer agency, fund accounting, client administration, HR, finance, IT, and legal compliance, et cetera.

Part of the effect of gaining efficiencies on that front and also, at the same time, we've been working on gaining efficiencies on the distribution side, moving to a single distribution sources across product ranges and some of the investment team rationalizations, investment product rationalizations, falling out of that becomes a reduced requirement for property. Our emphasis has been to decrease the central London property requirements, and as a result we have vacated various London property and have entered into a sublet arrangement on that, and we took an exceptional charge to bring forward the future lease obligations on that space, and we will have a little more -- that's what I was referring to when I said we will have some more on that next quarter, because we have actually vacated more space than we originally thought we could, by squeezing out a bit more because of gaining a few more efficiencies. So that's, I hope, not too long an answer on the UK profitability side.

On the European business, part of it, of course, is that we've been taking a pan-European view of all those four structures, as I mentioned. The main emphasis of the business is on being part of the global distribution network. That is what it's extremely good at, and the distribution side is, of course, slightly different to our businesses in the sense that, on the whole, it is acquiring assets to be managed by other businesses, predominantly nearly all the assets that the distribution force in Europe gathers, gets sent to the other businesses to be managed overtly. Inherent margin of investment management will not be reflected in the European platform, it will be reflected in the businesses where it's sent.

With that, I'll pass over to Marty for your third question.

I'm sorry to say, I really can't give any more specifics than what I did previously but just confirm that to identify sort of quick wins and longer-term opportunities, it's just a typical process that you would imagine and that spending time with people and being very methodical and diligent and reviewing all the business units, and we intend to do that.

Mr. James Alexander with M&G.

Just a quick question on this UK turnaround, in particular, this 10%, 9% reduction in costs in the quarter-on-quarter. It does look as though you might have expected, from your last answer, moved some costs from UK to Europe-Asia, because the Europe-Asia costs are up quite a lot quarter-on-quarter. Is there a bit of reallocation going on? It does sound like that from what you said about the product margin, going to where it's managed from where it's sent? Is that right?

No, there haven't really been any cost [audio difficulties] into Europe or Asia. There has been some revenue and cost reallocations out of Europe into U.S. North America in terms of structure product removing to be a global group and accounting for that there, but that was a pretty even movement of revenue and expenses on that front. But we reclassified both side of the year there. So, no, I'm not aware of us reclassifying out of the UK.

At this time, there are no further questions. You may continue.

Okay, well, let me thank everyone for participating. As I said earlier, this is going to be my last quarterly call. Marty's only been here a day and a half, but he's already running the business, he will continue to run the business, and I'm very happy that he's running the business. But I am also very excited about what's going to happen in the future, and I think we have a great management team led by Marty now. I think they have the ability to actually get this company back the momentum that we've been lacking for the last couple of years and, for one, I am going to be cheering them on. Thank you very much.