景順投信 (IVZ) 2006 Q1 法說會逐字稿

Welcome to AMVESCAP’s 2006 first quarter 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.

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 payments on our debt, regulatory development, 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 forward-looking 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 no differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statement. In connection with any forward-looking statement, 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 President and CEO, Marty Flanagan and Chief Financial Officer, Loren Starr. A question-and-answer session will follow accordingly. At this time, I would like to turn the call over to President and CEO, Marty Flanagan.

Thank you. I appreciate everybody calling us for our first quarter results briefing. When we last talked and met in February, I told you we were very focused on identifying the opportunities in front of us and becoming a premiere global assessment management firm. Over the past few months since, we have made continued progress along that path. And today, we do have a much better understanding of the opportunities in front of us and also, frankly, the challenges. And we’re going to talk about that at some length today.

So I’m going to speak to the presentation that’s available on the website. I’ll give you a quick overview. Loren will talk about results. And then, importantly, we’ll get to Q&A.

So, a quick summary of the quarter. It was a strong quarter. We are making good progress; I think that’s reflected in the financial results. I think as we talk about the business, you’ll have a better sense of the opportunities. We’re seeing improving net flows. The market’s clearly helped us during the quarter. We are still very disciplined and focused on expense management. And we continue to see solid investment performance during the quarter, some of which generated some performance fees, which we’ll talk about in more depth.

We saw margins reaching almost 32%, up from 22% in the last quarter, and earnings per share of $0.13 as compared to $0.07 last quarter.

Business momentum continues to pick up. We had long-term net flows of $1.5 billion, which is the first positive in-flow quarter in the last 15 quarters for the organization.

Assets ended the quarter at $411 billion, up almost 6.5%.

We did see good growth across many of the different asset classes, client types, and also geography.

From a strategic point of view, we are continuing to see momentum generate within the business, and we’ll give you some of those highlights.

Taking a look at the quarterly flows, you can see over the last number of quarters the gross sales and redemptions and the net flows coming into the organization.

There is clearly some seasonally in this first quarter. It was very strong. Gross sales are up strongly. The seasonally is most reflected in United Kingdom and Canada in these numbers. If you look at gross flows this quarter -- first quarter 2006, first quarter a year ago -- that’s probably most relevant from the standpoint of the seasonally and the flow -- it’s up 34% quarter over quarter.

We did see an uptick in the redemption rates during the quarter, more specifically related to Canada and parts of the institutional business.

If you take a look at flows by the distribution channel, retail, institutional and private wealth management business, you can start to get a better sense of the different channels and how we’re performing. We had strong retail flows in our European and Asian clients around the world. Additionally, what’s not represented here -- this slide is focused on long-term assets -- we did have net inflows in the money fund business of $7.4 billion, and that compares to $1.8 billion in the fourth quarter last year.

If you look at assets under management on a quarterly basis, you do get a sense of the component parts of fresh [ph] flows and outflows. Highlighting quarter to quarter, there was a 46% increase in flows this quarter to last quarter.

The other element I would continue to highlight is the effective fee rate, or the net revenue yield; it was maintained at 58 basis points within the quarter. And I think you all know the sensitivity due to the asset mix and the potential impact to the organization.

If you then take a look at current investment performance-- Let me spend a minute on that. We continue to try to put in front of you a better sense of our investment performance over 1, 3, and 5 years. As you know, we’re very focused on trying to deliver consistent good long-term performance.

And an indicator of that is in the retail channel, looking at the percentage of assets in the top 2 quartiles against peer groups. In the United States, we’ve picked the 2 top providers -- or, most referred-to providers -- Lippert and Morningstar. And as you know, they would choose to categorize some of our assets in different categories by their discipline and their focus. And what we thought best to do was to give you both of them, Lippert and Morningstar. And you can see in these charts, and let’s just walk through the US and then you can follow through the rest of--

It shows 1 year, through March, as compared to 1 year through December. And you can see that the numbers are stable to improving depending on the product you picked. And staying -- importantly, I think -- looking at the 3-year and 5-year numbers, they continue to improve over those periods of time.

One thing I would like to highlight. This is presenting investment performance on a managed basis. And that means where our portfolio managers are managed as opposed to the full set of products being distributed in a market. We’ll consider, in future times, if we should modify that. And what I would like to point out -- one element that’s inconsistent with that. If you look at the Canadian line, and we will update this for you, if you look at the 1-year through March, that represents only the assets managed in Canada. And if you looked at it on a distributed basis, it would be more like 14%. So I know that’s somewhat confusing; we will come back and clarify that as we go forward.

If you take a look at the institutional business -- and once again, now, this is against a benchmark and I think we all know that tends to be a greater focus of the clients. The equity business continues to be pretty solid, largely half of the assets exceeding benchmark. Longer term, the numbers are very, very strong.

Fixed income continues to be very strong across the board, as does the money funds business.

We still continue to have very strong success in the real estate business throughout the organization.

Now, to frame some of our focuses, again, I would just like to take you back to February and we have been very focused on the inherent strengths of the organization. As I’ve said, we’ve made good progress in this quarter. It is one quarter in what we think is really a multi-year effort to get us to the full potential that we have as an organization. We are definitely moving in the right direction, but I would just like to reiterate, I do think we do have a number of the right ingredients to be very successful as an organization. We do have a very knowledgeable, dedicated group of individuals -- the inherent strength of the global depth and breadth of our investment management team. And they are very focused on consistently delivering strong investment performance for our clients.

And the other areas, I’ll continue to highlight, as times goes on. The competitive advantages we have, we think, along the lines of diversification of our business by asset class. Half of our assets are between equity and fixed income -- many more categories within that. From a client point of view, a third of our clients now reside outside the United States. That’s, we just think, strategically very important for our future growth. And then, from-- the channels that we operate in -- retail and institutional -- being equally strong drivers for the business.

And then finally, if you look at the depth and breadth of our global footprint, we continue to be very focused on trying to find ways to take advantage of our locations in 19 different countries around the world.

Now, when we look to execute against this strategic direction, we do recognize what we think are the many strengths of our organization going forward. And we feel strongly that the aspiration of being a premiere global investment management firm is very attainable. We are focused on four principal areas. And first and foremost, it goes without saying, but we will say it and we’ll continue to say it, is this focus on achieving strong, consistent, good investment performance over the long term, ensuring that we have well-defined, repeatable investment processes that we clearly communicate to our clients. And that, importantly, we create this culture and maintain this culture of investment excellence that attracts and maintains the best investment professionals possible.

The other area where we have pointed to where we think we can really add something very different than maybe a number of our competitors around the world is looking at the products that we have and taking the ability of the inherent products that we have and making them available around the world to different clients if we can meet a client need.

And to update you in that area, just from the institutional side of the business, we’re looking to strengthen our institutional capabilities -- the areas that we have strengths -- to take them to different parts of the world. And we think that is a great opportunity for us as an organization.

We continue to focus very much on our US retail platform. We want to make sure that the platform fully represents the investment capabilities we have internally within our organization for our clients. We have been making progress along those lines and, within the last month, we have launched seven new funds. We’ve talked about them in the past, of the potential, but they are now available for clients, leveraging the global terms around the world. The new products are managed by the structured products team, worldwide fixed income team, the investment team in Japan, and the investment team in Hong Kong. The early reactions from the wholesalers and clients and analysts has been positive. This is really proof of our efforts to bring the best of AMVESCAP to our client base.

I do want to reiterate -- and we talked about this at the last meeting -- just because we’ve introduced our products and have brought the product lineup, we shouldn’t expect that to result in a massive change in net flow since this is a multi-year effort to educate our client base along those lines with our skill set.

The other area that I’d like to come back to and highlight is the fixed income and cash management area. Cash management within the organization is really one of the best in the industry. And we continue to find ways to introduce and be more successful in this marketplace by introducing low-volatility investment solutions, and we are making some progress along those lines. We have combined the futures-based fixed-income team with the worldwide fixed-income team and we see that as strong capability within the organization.

And, finally, we are anticipating the positive impacts of Power Shares joining the organization. We still expect that later in the year. But that will be, we still believe, an important addition to the product lineup in energizing the retail channel, again, for us, and really further meeting our client needs.

The next area we’d like to come back to and bring you up to date on -- this focus on unlocking the power of the global operating platform. It is absolutely one of our key drivers for future success. It is central to what we want to achieve as a single firm, and we want to find ways of fully utilizing inherent strengths and we have a bunch of very smart people in that area. And it’s just organizing them in a fashion that will simplify our operating platform and align that platform against our business globally.

We are seeing early successes, but this is a multi-year ongoing effort and it is an effort that will, in the short term, as you’ve seen, reduce some short-term expenses. But really, it’s about a longer-term view of decreasing our per-unit cost of production. But probably, equally importantly, it has just really put us in a position to be more efficient, more effective, to do a better job of serving our clients and responding more quickly to opportunities as they present themselves to us around the world.

And then finally, the continued focus on buildings a high-performance organization. The organization is very committed to delivering against the needs, focusing on our clients, focusing on having the best people in place as an organization, and a continuous improvement notion throughout the organization.

An update that I do want to take everybody to is taking a look at the alignment of the management structure. We have made some changes. It’s further aligned the management structure, again, [with] the strategic direction of the organization. As you can see, from February as we are looking more on a global retail, global institutional growth management basis, matching up against some of the functional activities of finance and legal compliance and administration, these 8 individuals, our senior management directors of AMVESCAP, Phil Taylor, has taken on the role of North American Retail.

Bob Yerbury continues in his role in the UK but will continue to, as we talked in the last quarter, help in some other strategic projects -- global trading and with the investment counsel also.

John Rogers will have a greater focus on worldwide institutional business, continuing with Europe and Asia-Pacific.

Jack Markwalter will stay in his role of running the private wealth management business.

There’s be a new addition to the team -- a fellow named Colin Meadows, a very talented person who will come in and join us as Chief Administrative Officer.

Loren Starr, you know -- CFO.

Kevin Carome as General Counsel.

And James Robertson is heading up the operations IT effort, which is critical to our success going forward.

So I’m very confident in the skills of this team. I think it is aligned to what we want to achieve as an organization, and I feel they are, and we are, very ready to respond to the opportunities and challenges in front of us.

So with that, I’m going to stop and turn it over to Loren to go through the financial results and we will then get to the Q&A.

Thanks, Marty. Let’s go to the operating results.

Before I begin, I just want to remind people that the fourth quarter 2005 numbers shown here exclude the $76 million restructuring charge we took in order to provide a better comparison quarter over quarter.

As you can see here, our net revenues were up 5.9%, ending up with $584 million for the period. Management fees -- obviously, the largest component of our revenues -- increased 8.1% over the quarter to $620 million due to two things. One is our growth in our average AUM [ph], which grew by 5.4%.

It was also due to more than 100% increase in performance fees. In fact, we actually generated $33 million in performance fees this quarter, which was $17 million more than the last quarter as a result of the strong investment performance in several of our UK retail funds and investment trusts as well as performance in our institutional structured product group.

As you probably can imagine, the performance fees tend to be rather lumpy and somewhat unpredictable, but they do typically occur in either the first quarter or the fourth quarter of the year for AMVESCAP. As such, therefore I don’t really expect to see a continuation of performance fees at the same sort of level as we go in the second and third quarters.

Service and distribution revenue moved up in line with our average annual growth, as you would expect, while other income declined as a result of lower real estate transaction revenue.

Moving down the P&L to operating expenses, you’ll see that operating expenses declined quarter over quarter by $29.9 million, with $16.6 million of that due to the goodwill charge that we took in the fourth quarter.

The majority of the remaining operating expense reduction of $13.3 million was a result of lower compensation. In fact, compensation was down $10.1 million, despite an increase in payroll taxes of about $5 million versus Q4, which is typical of the first quarter of every year.

In addition, I’d like to highlight the decline in headcount of 212 since year end -- again, demonstrating that we continue to tightly control our staffing levels.

Marketing expenses were up modestly over the quarter with an increase of about $2.5 million as our advertising efforts ramped up in time for the ISO season, or the I-S-A season in the UK.

Operating losses as well as technology and telecom were essentially flat quarter over quarter.

G&A, excluding the impact of the Q4 2005 goodwill write-off, was down $6.4 million as recruiting, travel and entertainment, and consulting costs decreased due to our continued focus on discretionary expense management.

So with net revenues up 5.9% and operating expenses down 7%, our net operating profit for the quarter grew to $187 million, which is up 50% from the prior quarter. Our net operating margin increased to 31.9% compared to 22.5% for Q4.

Other income grew to a more normal level this quarter. And as you may remember, in the prior quarter we incurred the cost related to the Taiwan bond.

And finally, AMVESCAP’s EPS came in at $0.13, up $0.06 from Q4.

And before we move to the next slide, I think it’s appropriate to discuss where we are with respect to the $120 million in cost savings. At the last meeting, we emphasized that the $120 million reduction was predicated on continuation of a static business environment relative to the beginning of 2006. The $120 million also assumed no impact due to the Power Share acquisition.

And furthermore, we indicated that if the 2006 revenues were flat to 2005, we’d expect to achieve a net operating margin of about 28% for the year. So as you can see from our actual operating results, the business environment did change for the better, with stronger markets, performance fees, and significantly improved net flows than we previously experienced in 2005.

So given this favorable environment, we actually incurred a modest increase in our expense base commensurate with the higher AUM and flows and, specifically, there were about $5 million more in market-driven expenses during the quarter in the compensation line item due to greater levels of sales commissions and performance-based bonus pulls. And this incremental $5 million wasn’t part of our targeted $1.553 billion expense base that we laid out in early February. So if you add back the $5 million in incremental market-driven expenses I just discussed and adjust for the seasonal factors such as payroll taxes and advertising, you’ll see that we’re very much on track to meet the cost savings objectives we presented to you in February.

And we’ll continue to provide you any market-driven expense difference should they persist through the remainder of 2006 so you can tie back to the original guidance that we gave you.

Let’s now turn to the next slide. Capital deployment is a topic that we had indicated to you last quarter that we’d address today. And this slide lays out the approach that we intend to take. As Marty mentioned in February, having too few opportunities to invest in our business isn’t really a problem for us. And, in fact, we almost have too many, if that’s possible. We feel that reinvesting the cash back into our business, allowing it to grow and strengthen, is our first priority in capital deployment.

Our second priority will be acquisitions, when and if they make financial and strategic sense for AMVESCAP. We would consider acquiring a business if we’ve identified a product gap or a talent gap in our lineup, and if we find ourselves unable to effectively address the gap using internal resources. And a good example of this would be the Power Shares transaction.

Our third priority will be to use excess capital to progressively increase our dividend over time and to repurchase our stock on an opportunistic basis. Importantly, we don’t feel compelled to target a specific payout ratio in order to achieve our dividend goals. Furthermore, we’ve confirmed that we can use buybacks as an effective way to return excess capital while receiving the appropriate treasury stock accounting.

We’ve also provided you, on the slide, some background information on our current cash situation and potential needs. Currently, you’ll see that we have $493 million in cash, of which $172 million is client cash. The remaining, about $322 million, is subject to different degrees of regulatory constraints and potential tax impacts if moved from local centers.

We also have some potential notable cash needs in 2006 and beyond, and this would include paying Power Shares $100 million at the closing of the transaction, due in the second or third quarter of this year. And then, potentially, another $130 million in 2006 or 2007 based on the next earn-out trigger for the deal.

We also have $300 million in debt maturing in January of 2007, which we may or may not refinance; we’re still looking at that.

And in Q1, we did complete about $157 million in share purchase. Through the remainder of 2006, as far as where we stand today, stock buybacks will be somewhat limited, as we have to balance this against our future need for cash.

That concludes my section, and I’ll now turn things back over to Marty as we open the telephone lines for Q&A.

Thank you, sir. At this time, we’d like to begin the question-and-answer session of the conference. [Instructions] The first question comes from Mr. Huw van Steenis with Morgan Stanley. Sir, you may ask your question.

Hi, Marty and Loren. Three quick questions. First, great news about the flows. In Europe and Asia, could you give you a bit more color on how concentrated they were in either particular geographies or products?

Second, I understand why the redemptions are off in the Canadian business, but could you give a bit more color on why the redemptions are up in the institutional and, more generally, how you see sort of the institutional-- the trajectory of the institutional business from here?

And then lastly, I know you’ve had a couple of billion of inflows in Power Shares. Could you just give us a bit of a sense of materiality? I mean, for instance, if Power Shares is a $10 billion company by the end of the year, how material could that be for your earnings? Thanks, guys.

Hi, Huw, this is Loren. Let me handle the first part. In terms of the flow pattern, which has been significantly increasing in Europe, we’ve seen great success in Italy, Spain, and, probably on a tertiary basis, Germany. So that is something that seems to be persisting. The mix, I think, is somewhat fixed income oriented, although I do think there is greater interest on the equity products and I believe we’re making more progress there.

I’m sorry-- your second question was, Huw? Sorry.

Why was the redemption rate up in institutional and what would the future bode?

In institutional, we saw some increased redemption. As the equity markets have sort of done much better in the quarter, while we did see some movement out of basic value types of products, the institutional group manages into more equity-oriented products. And so that ‘s part of it. The others, I think, are just general rebalancing for our international products, which, I think, reach certain maximums in clients’ accounts.

I think, Huw, what I’d add, too, is, you continue to-- if you look at the pipeline generally, you’ll continue to see increasing pipeline request through RPs [ph] and moving towards the process to finals. Now, once again, we don’t want to suggest success there, but if that’s a leading indicator, which I think it is, we’re in the hunt for continued future success there.

Right.

And maybe on the Power Shares side, I guess-- We are very much anticipating them joining us. We’re still anticipating a close, probably at the end of the second quarter into the third quarter, and I think we’d really sort of prefer holding off on making judgements until we get there. But they continue to do very well.

Okay. Thanks very much.

The next question comes from Maceo Ananator [ph] with Lehman Brothers. Ma’am, you may ask your question.

Hi; good morning to you. A couple of questions. I’m just wondering if you could elaborate a little bit on the process, or timeline, for getting the institutional cross-selling sort of working in terms of spitting the product that you have globally.

And also, sort of what role do consultants play in this process that you’re undertaking, and how are you sort of making it work with them?

And then also, just on the Canadian outflows. Do you think there’s any risk of brand damage here just because of sort of the narrowness of the product range that you have in Canada in terms of the value orientation? Or do you think that there’s any possibility that you can do what you’re doing in the US and use some of the more growth-oriented or fixed-income product and push it through the Trimark channels, or relationships?

Let me start with the last one. That’s an important one. We’re not helping ourselves here, as I say, on this performance slide. That represents right now the very-- the Trimark discipline, which we feel very confident in. It’s a strong team dedicated to their investment philosophy, which we’re very supportive of. The reality is, as you point out, already in there and it is in Trimark, and it has been-- it is a broader lineup. And the main products, actually, have some-- they’re strong performing products, and that 4% in the one year in that table would be 14%. I don’t think there’s brand damage there. I think it’s from-- if you go back to the Trimark, it’s reinforcement of their investment discipline.

And the other reality is, they are generating, in those traditional products, still double-digit returns. It’s just some underperformance. They’ve made thoughtful investment decisions. So I don’t think that’s the case, and the product lineup is broader than sort of what we have represented here on the performance slide.

With regard to the institutional business, there already is-- there are sort of steps along the way to what you want to achieve on the institutional business. We’re seeing strong success as the retail business-- excuse me, the real business goes globally, being offered in more parts of the world.

Also, there are elements, as we highlighted the last call, that the aim at international growth products is very, very strong. And that is a product that has historically been in the retail channel in the United States, and that is a product that is being introduced into the institutional business. As is the large cap growth product, which traditionally has been a US retail product only. Don’t want to claim success, but those are examples of that.

And the other areas where the institutional business-- the strong fixed income element, also, there have been some wins crossing over into what was traditional money market fund area.

And then, finally, we continue to see the global tactical asset allocation product start to have more traction in different parts of the world.

So those are just highlights of, if you want to call it, maybe some short-term successes. But there is, again, continued effort over time to sort of improve how we’re lined up against the potential opportunity.

And are you sort of-- you have salespeople from the various locations brought on board with this already in terms of sort of the education and that kind of thing?

Well, I think it’s steps along the way. So there was a focus initially on what are the products that are more globally acceptable -- if you’d like to call them that -- or wanted around the world? That’s the first port of call. Not all investment mandates are wanted in different parts of the world. Some of them are, as you know, unique to a country, and those will stay there.

Okay, that’s great. Thank you.

Your next question comes from Mr. Philip Middleton with Merrill Lynch. You may ask your question.

Hi; good afternoon. Just very briefly, I wondered, on the performance fees, what’s the operating margin on those? I mean, how much of that drops through? How much of your $5 million in market-related expenses is due to that? And how should we think about that when considering your cost line? Particularly in future as well.

Hi, Philip. It’s a little hard to actually provide a formulaic type of response to that because it has a lot to do with where they’re generated and the nature of them. So there isn’t any one way to answer that, and so I’m afraid I’m going to have to beg off on being explicit on how that works.

So you quote about $5 million. Presumably, that will be on a much broader suite of products than just the predominately UK retail products where you’re signing performance fees from.

That’s correct.

So it would be reasonable to assume that the operating leverage would be quite high on that, even though, as you say, it’s difficult to give a precise number.

Well, again, yeah, I’d be hesitant to say-- to use what happened this quarter as a guide for future quarters. It is something that is going to be very specific to how they’re generated [inaudible]

Okay, thanks very much. That’s helpful.

And I would just add, we feel very good about the quarter and, that said, we don’t want the point of [inaudible] around the performance fee is we don’t want to have the analyst community get ahead of where we are. Even if you strip off the performance, if you look at the operating profit margins the business is still very, very strong. We’re making good progress.

Sure. I mean, there can be $30 million in a quarter. From now on they’re [inaudible] [Laughter] That’s all right. Thanks very much. [Background cross-talk]

I’ve only known you for 15 years.

[Laughs] Thanks.

At this time, sir, I’m showing no further questions and I’d like to turn the call back over to Mr. Flanagan.

We once again appreciate everybody’s time and attention, and we really firmly believe we’re on the right path. We are making progress in this quarter and are very focused on being disciplined and delivering against what we have discussed with all of you. And we just look forward to seeing everybody and talking to people in the next quarter. And we will be very focused. Have a good afternoon.