Janus Henderson Group PLC (JHG) 2004 Q4 法說會逐字稿

Okay. Good morning everyone. Welcome to HHG's Full Year 2004 Results, including those of you listening in by phone or via the website. We really appreciate your time this morning. In addition to the information we are presenting today, there's more detail in the Stock Exchange announcement and the Appendix 4E which we launched earlier today, and which is again on the website.

You should also note that these results are fully audited. They're not preliminary results. And also joining me in the presentation today is Toby Hiscock, our CFO.

As regards the agenda, I'll start with an overview of the results and then Toby will take you through the financials in more detail. Then I'll finish by touching on the new Henderson group and our strategy and outlook for 2005. And if you would, if you can hold questions until the end of the meeting, we'll take them all at that point.

Starting with an overview of the year, obviously 2004 was a challenging but also rewarding year. We further strengthened the financial position of the group and created shareholder value through the restructuring and through the turnaround in Life Services.

Operationally, we delivered an improvement in operating profit of over 9% to £107m, up from £98m in 2003. Henderson improved profitability, delivering £52m pre-tax, up 63% from £32m in the previous year. And that better result reflected the recovery in equity markets from their low in 2003, the shift to higher margin products within Henderson, and also higher transaction and performance fees.

Growth in Henderson revenue also ensured an improvement in the cost to income ratio, despite rises in some components of the cost base. That ratio has been driven down now from 84% in 2003 to 79% in 2004. And I think that shows that we're on track to deliver our medium-term goal of 75%. And finally, assets under management were reasonably stable at about £69b.

Structurally during 2004 we also took action to improve the capital position and operational structure of the Company. So we exited non-core or non-performing businesses through selling Virgin Money and through closing Towry Law International.

We also simplified the Group by buying out the Pearl holding in HHG Invest, which allowed us to take full control of Henderson Global Investors and strengthen the balance sheet. And in the second half, as you know, we entered into an agreement to sell Life Services and put forward proposals to return the majority of the proceeds to our shareholders. All of those actions helped to create a more streamlined Group, with a stronger balance sheet, and it all ensures that we're very well placed for the future.

Now turning to the Life Services transaction itself, when we listed in late 2003, a key part of our strategy was to maximize shareholder value from the Closed Life books. The proposed sales transaction, which was approved by shareholders at the recent EGM, accelerates the release of shareholder capital from the Life businesses and unlocks value now that otherwise might only be realized over a longer period of time.

And there are 3 key components to the transaction itself. The first is obviously a cash consideration of £1.07b in exchange for the Closed Life books. Second, revenue protection for Henderson to revise 10 year investment management agreements, on the £28b of assets we manage. That's for Life Services. And third, significantly reduce pension risk as we will transfer out £1.5b of employee pension liabilities, which relate to current and past employees of Life Services.

Once complete, we will have significantly streamlined the group, moving from 1 with pretty complicated structures, non-core assets and problematic inter-company ownership, to 1 that contains a pure play asset manager, with a simple corporate structure. And there's a slide in the Appendix, which sets out the extent of that change in more detail.

In terms of the timetable for the sale of Life Services we've set out, in this slide, an indicative timetable for you and also the return of cash to shareholders. So, the most important elements of it are as follows. By April 8, we are seeking to have secured FSA and Pension Trustee approval, after which the sale will complete. We then receive £1.07b in cash and ownership will transfer to Life Company Investor Group. And there's a detailed separation program that ensures a, hopefully, seamless transition for staff and policyholders.

After the sale, we'll proceed with our 2 proposals, which provide cash to shareholders in exchange for share cancellation, and reduce our register by over 700,000 individual shareholdings. The Court approval for cancellation is expected on April 8, after which the stock will trade ex-entitlement from April 11 in Australia, and April 18 in the U.K. And the record date for all holders is April 15.

We'll be back trading on the market in both countries - both Australia and the U.K. - on April 19, with a new share and issue number of about 1.15b shares in issue, down from the current 2.71b shares in issue and the ticker code will be HGI, reflecting the new name of the company, Henderson Group PLC.

By the end of April approximately £885m in cash will have been returned to shareholders. That's a slightly higher number than the £875m that we flagged in the circular, due to the impact of the higher share price of the calculation of the reduction of an investor base.

So that's the timetable we're working on. And as we sit here today we're on track to meet it. Let me now hand over to Toby, who is going to recap the historic financials for 2004, which, for the sake of completion, include the Life Services profit and embedded value numbers. So Toby, over to you.

Okay. Thanks Roger. Let me start with the Group as a whole. The Group delivered a profit before tax of £41m, compared to a loss of £864m in 2003. In terms of the underlying performance of the businesses, operating profit before tax and other items rose over 9% in 2004, to £107m. This reflects solid performances in both Henderson and Life Services, which increased profit by 63% and 6% respectively.

Corporate expenses were higher in 2004, at £25m versus £6m in the first half because the second half was distorted by additional provisioning for Towry Law International, which takes total TLI legacy product provisions to £43m. We felt it prudent to take this action now to ensure an orderly resolution of all outstanding product and selling issues and to protect the Group from any future adverse impact.

It's important to note that the underlying 2004 corporate costs were relatively stable year-on-year, which we expect to continue. And going forward, these will drop by the previously disclosed £4m pre-tax cost savings associated with removing 700,000 shareholders from our register.

In terms of below the line, exceptional and other items comprise those previously flagged, and full details are disclosed in the report and accounts published this morning. But in summary, they are as follows. Restructuring costs of £10m against Henderson, the U.K. operations of Towry Law and the Corporate office.

Amortization of goodwill of £20m. A negative adjustment for short-term fluctuation in investment return of £2m. A net charge of £34m for non-operating exceptionals, this being a £47m loss on the Life Services sale, due to impairment of goodwill and present value of in-force business together with transmitted transactions costs. An £8m charge for closure of Towry Law International. Those losses offset by a profit of £21m from disposals of Virgin Money and Cogent.

The restructuring and capital activity undertaken in 2004 strengthened the balance sheet and increased shareholder funds to in excess of £1.8b. This strength ensures that we can keep corporate debt at a minimum. It was in fact zero at the year end. I've already touched upon provisions. And we believe that we've taken prudent action where necessary.

Henderson's assets under management were reasonably stable, year-on-year moving from £70.6b at the end of 2003 to £69.1b in 2004, as lower margin outflows were offset by the market rise and by inflows to higher margin and alternative asset products.

Outflows from the Life companies, and Institutional business have been heavily flagged and we expect these to continue. Life Services outflows may slow down as we move past the spike in the run-off. But Institutional is expected to suffer at least the same level of attrition as it experienced in 2004, or possibly more, although it's quite difficult to predict as flows are lumpish.

Regardless of this, Henderson is more focused on the margins contributed from assets under management, and therefore, will look to replace the margins from outflows with higher margin business, such as mutual funds, hedge funds and property.

Henderson management fees rose 12% year-on-year, assisted by the move to higher margin products and improved markets. Performance from transaction fees, pleasingly, jumped 95%, and whilst we cannot guarantee a steady quantum from these components in each period, we do know that they will continue to be a feature of the revenue line into the future.

Looking at the first half, where, for example, property transaction fees boosted revenue, and the second half, where hedge fund performance fees did the same, you can see the revenue protection provided by our higher margin products. Margins on average assets under management were stable on the half-year at 28 basis points, while total fee income rose in the second half, to 35 basis points. It's our intention to at least maintain revenue margins in the future.

Henderson's improved revenue performance was matched by an increase in variable costs, as we saw in the first half. Nevertheless, the cost to income ratio fell to 79% for 2004 as a whole. That's down from 84% in the prior year, and it dropped to 78% in the second half.

Future improvements to the cost to income ratio will be driven by the revenue line. Our medium-term target of 75% will depend on benign markets, and continued investment to grow revenues. 2005 is expected to show some further progress in this direction.

Specifically, variable costs in relation to people were the largest increase. These included the restarting of pension contributions, alone £7m, and growth in salaries and in bonuses as a result of improved operational performance. In general we expect some further upward pressure on the overall cost base, and therefore will continue to pursue measured cost control and focus expenditure where we can fuel operational performance.

Turning next to Life Services, we delivered on our targets with improved profitability, efficiency, embedded value and capital strength. Life Services operational profit of £86m was fairly stable, versus £81m in 2003.

The second half was significantly higher than the first, due to the negative adjustment for a the [indiscernible] mortality provision, required in the first half, albeit mitigated to some extent by the release of prudential margins in that period.

The long-term technical accounts and other shareholder interests, are affected by accounting for contingent loans. Transfers between these 2 lines were made in the second half, although the total remain the same.

The service company achieved a profit of £8m, ahead of target, as the cost base was driven below £120m by year-end. The outsourcing assessment, due to be conducted in the second half of 2004, is still ongoing, and a decision is not now expected before sale completion.

Traditional embedded value grew to £1.31b by the half year, and to £1.46b by the year end, primarily reflecting additional shareholder capital from restructuring, from the disposal of Virgin Money in the first half, and also the unwind of the discount rate.

Needless to say, all of our work to improve the value of the Life books and strengthen regulatory capital during 2004 was key to ensuring that we could secure a good price and terms for the disposal of Life Services.

More detail on the embedded value increase and the capital position of the Life companies is included in the Appendix to this presentation.

Just in terms of Life company reporting, given the proximity to the sale, we've elected not to include all the disclosures set out in relation to Life companies under the new financial reporting standard 27, in our full year Accounts. And as we expect the sale to complete during the first half of this year, further Life Company reporting should be limited to inclusion as a discontinued business and final loss on disposal.

We will adopt International Financial Reporting standards from January 1 this year, and we'll assist investors in advance of our entrance by providing restated full year 2004 accounts for the remaining group during June of this year.

The main adjustments are expected to be in relation to pensions and goodwill, both of which should be positive, in profit terms. More detail is also included in the Appendix.

And I'll now hand back to Roger.

Alright. Thanks Toby.

I now want to turn to what the new group will look like once the sale is behind us. So Henderson Group PLC will be the new name of the company. There'll be a simpler and more straight forward organization comprising Henderson Global Investors and also the much smaller financial advisory business, Towry Law.

To give you a sense of scale, Henderson Group PLC, net assets, it was calculated in the end of December 2004, would have been £613m.

The strategic focus of the group will be on asset management but also we will try to deliver value from Towry Law.

There will still be lifts on both the London and Australian stock exchanges and we will still remain a member of FTFE 250, and AFTX 200 indices.

Around 1500 employees across the business, as we scale corporate areas back to a level appropriate to the new company.

In terms of capital allocation, it will be reasonably well capitalized. It will have no debt. Obviously, we'll be disciplined and prudent in the way in which we use our capital, making sure that we have an appropriate level of assets applied to meeting regulatory and working capital requirements, and to make sure we back up any provision and contingencies.

Any capital not required for the business will be returned to shareholders in an efficient manner.

Working down the allocation of the capital in the group, the key items are as follows. The goodwill of £233m -- most of that relates to the original acquisition of Henderson. [Related] capital of the £140m. Working capital, which includes seed capital of some Henderson products, of £50m. Our strategic investment in BPL, of approximately £65m. But the remainder of cash or cash equivalent of £125m.

But bear in mind, of that, as we set out in the circular in December, £30m were set aside for potential additional pension contributions. The rest is free capital, but again, as we outlined in the circular, we have to be prudent in relation to the pension liabilities associated with the warranties and indemnities that we've given as part of the sale.

It might be worth mentioning also that we have taken out some warranty insurance to provide us with additional protection in that regard.

Turning now to Henderson Global Investors. We've got a very good platform on which to build here. The business operates throughout the U.K. and continental Europe, with fledgling operations in North America and in Asia.

Assets under management of £69b, which is well diversified across asset classes, and across client types.

Asset diversification has been a great source of strength and stability during the turbulent market conditions of recent years.

But the fact is if you look across our business parts of it are experiencing rapid growth, other parts are low growth, or even contracting.

Despite these different growth rates, there's also a wide range of different margins in the business, ranging from over 100 basis points in private equity, mutual funds both in Europe and in the U.K. and hedge funds.

At the other end of the scale, our Institutional business and the money we run for our Life Services clients, obviously, are much lower, at much lower revenue margins.

So to put both of those things into context, that is, the different growth rates in the business, plus the different margins, we have shown here a split of our assets under management, by different types of business, but also a revenue split, for those different types of business.

As you can see, specialist high margin businesses in Henderson, account for just over 20% of our assets under management, which generates over half our revenues.

That demonstrates the power and potential of those businesses. And we intend to continue to invest across the range of those operations, both individually, but also across the full breadth of them. We have actually read that [indiscernible] is important.

It's also important to bear in mind that we have all those businesses are fully scaleable. In some cases capacity is limiting.

Clearly the mainstream and Life sums in our business are also important. They deliver the other half of our revenues. And the priorities in those areas are as follows.

In Institutional, the shift of specialist mandates, combined with relative performance, is lead to outflows in 2004. We have got to reverse that performance and play in as many niche areas where we are competitive. But I think that will take time. And I think it will be 2006 before that institutional business stabilizes.

And Investment Trusts, we don't expect any further attrition there. Rather the peak opportunities to grow our business, although we tend to be relatively few. You may haves seen this morning, our seeking to intersperse ourselves in the securities trusts of Scotland take overbid, via our own Lowland Investment Trust, in that regard. But those types of opportunities tend to be few in number.

Meanwhile our Investment Trust performance is currently very good and supports our confidence in retaining those assets. It's a very important area for us. One which has a long history and which continues to offer good returns for us.

Finally the Life funds, the sale of Life Services, we continue to manage their assets by a revised investment management agreement, also there's good revenue protection and a 10 year extended term.

But also allows potential for additional fees, if we can deliver excellent investment performance and can work constructively with the client to evolve the new investment strategy.

But the plain fact is, as we all know, that those books are in runoffs.

As regards investment performance, obviously that's the lifeblood of any investment business. And we've got to make sure we deliver good and consistent results.

I'm glad to say that the newer and higher growth and higher margin areas of our business, do continue to deliver strong performance including 100% of our Mutual Fund bench mark, 88% of our Investment Trust, 84% of our hedge funds, and 68% of our horizon range of our mutual funds.

We continue with our investment awards --- 19 in 2004 across a range of products in London. The equity to hedge funds to property including 6 Standard & Poors first place awards. We've also got our challenges as regards investment performance. You've already heard that we need to defend our institutional business, and reverse the outflows we've seen in that area. And that does require an improvement in investment results.

To effect that improvement we've made a number of changes in the second half of 2004 to revitalize those investment results. And first we have added 2 new positions to the senior management team Andrew Formichael (ph) was appointed Head of Equities and we've recruited David Jacob from UBS Asset Management, as Head of Fixed Income.

We have already taken steps to weed out underperformance and to add talent to improve our investment bench strength And you'll see more of that during the 2005.

As you will know, there is no silver bullet, as regards investment performance out there. [indiscernible] sadly. Changes will take time to deliver, but as I say, I'm very encouraged by progress we're making in response to what Andrew and David have done so far.

I should also touch on the smaller point of the group, Towry Law. And also Towry Law and Towry Law International inherited businesses and during 2004 we closed the offshore operations, and we have been working hard with regulators in local offices to ensure an ordinary exit in those regions.

There has been a number of negative products achieved associated with past operations of Towry Law International. 2 of those we've settled with the relevant regulators during 2004. But certain other achievements -- part of the exits from Towry Law International, have been the subject of ongoing review by other than the regulators.

And to asses that, we've recently put in place additional provisions, so that total product provisions in relation to Towry Law International, now reach £43m.

All of that designed to reduce any adverse impact on the Henderson Group going forward. To make sure that we can have a clean start of the new company.

With regard to the U.K. operations of Towry Law, that will continue as an independent advisory firm. Around about 500 employees and the key job there, in creating value, is to generate an acceptable margin on revenues. Towry Law Management is in the working part of cost reduction in the last year, to create a platform for a better business unit financial result, in 2005, even though that's not going to be material in the context of the overall group financial results.

In summary, obviously, the next step for us is to execute the Life Services sale and return the majority of the proceeds to shareholders. As regards the Group, we'll reduce corporate costs that [indiscernible] the U.K. in the black and in early 2006 we'll pay a final 2005 dividend. And that reflects the fact that Henderson will be a new company after the sale.

But the big opportunity and a big challenge relates to Henderson Global Investors. We've got a good, diversified business, with some good market positions in high growth and high margin areas, with some fantastic opportunities here.

Equally, we've got our challenges, especially in Institutional, as you've heard. My job and our job here after 2 years of de-merging and restructuring and selling the Life companies is to make the most of those opportunities, and overcome those challenges.

In that context, 2005 is probably something of a transition year, albeit 1 in which we do expect to expect to grow profit steadily. We continue to face the margins and asset outflows with difference in higher margin areas and it is [indiscernible] improving the company's expense ratio. And we'll do all that while restructuring and revitalizing the business to continuing investment in both people and in infrastructure.

So that concludes the formal part of the presentation. We'll take questions, I think, in the room first, and then we'll move to the Operator, to take questions from the telephone. So, let's take questions here first.

Thank you, Robin Savage from Panmure. I have a number of questions, which are sort of related. First of all can you talk about what HHG's dividend policy is going to be? Obviously I'm looking, having to look a number of years out, so if you could talk about the dividend policy.

Secondly, post-distribution, how much net cash will you have in the residual Group? I'm looking at page 62 in the presentation. This seems to say that after adjustments, of £549m of investments. I assume that is the cash position?

The third question is, in terms of the warranties and the indemnities and the insurance, I seem to remember there was a, I think, £300m was the sort of maximum. I just wonder whether you can make a further comment on that, and the insurance protection you've taken out?

And just, I suppose, lastly about the debt. There was a comment made in the presentation that you were pleased to have no debt. I just wonder if, going forward, are you happy to keep the Group financially un-geared because it's operationally, I suppose, very good?

Okay, that's a good list. Now, we'll split this, Toby, and maybe you'd like to deal with the cash position. On dividend policy, you heard me say that we expect to pay a dividend in early 2006 as a final 2005 dividend. I can't be too precise because obviously the board hasn't met to consider dividend at this stage, so I'm speaking for Roger Yates as opposed to the Board.

I think my view is that I'd like to see a dividend, an operational dividend paid out on operating earnings at least twice covered, okay? On net cash, we tried to show you that we take the capital allocation from the cash in that, but Toby, why don't you pick up that point?

Sure. The figure that you refer to in the pro forma is not quite all cash, or cash equivalents. We do also have in that number the BPL stake, the seed capital in Henderson products that Roger referred to, and 1 or other items, but it's fair to say that the majority of it is cash equivalent, near cash and equivalents required for largely regulatory capital purposes and also that we're paying the capital figure that you saw in the capital allocation slide.

That's why we were very keen to split out that the portion of the capital as it relates to regulatory capital to BPL, how much is working capital, how much is potentially additional pension contributions and what is essentially free cash which obviously we're holding back prudently for any risks on the warranties and indemnities.

Talking about which, the warranties and indemnities that we gave were normal ones that you would expect in this sort of sell. Most of them relate to information that you're actually giving. You're warranting the information in relation to the shares that you're selling, the subsidiaries that you're selling and so on.

There are some tax indemnities that tend to run for longer. We did a cap on them, as you rightly identified. It's not our plan to be paying out on any of the warranties and indemnities, obviously, but we are prudent, and that's why we took out additional warranty insurance. I'm not going to give you any details of warranty insurance because it's a confidential matter between us and the insurers, but obviously we think we're very prudently placed to deal with any issues that arise.

Just on that point, is the amount that you set aside in cash the retention element, at least which various insurance kicks in? Is that the idea? Does the insurance come in only if there is a major settlement rather than a?

I think it's fair to assume that, yes.

And the question in relation to gearing, [indiscernible] tends to be cash generative by its very nature, and that's why it's 1 reason it's such a good business. I suppose if we found major acquisition opportunity, we could, in theory, take on some debt. That's not in the plan. I'm not in general a great believer in big financial acquisitions. That's not to say we wouldn't seek it if there are opportunities to make infill or small acquisitions if they make sense but I can't imagine that we have any plans to go significantly geared.

Is that the full list? Did we get them up?

Hi, it's Geoff Miller from [indiscernible]. I'm afraid I have a number of questions as well. Firstly, you mentioned that you hope to at least maintain revenue margins which slightly flies in the face of the idea that Life flows are going to continue. That would imply, effectively, that you didn't think that revenue margins were sustainable on some of your other products. I wondered if you could comment?

Secondly, on the U.K. retail, it's an area where you said before that you wanted to beef up sales and marketing. I wondered if you could comment on progress there? Thirdly, on the dividend you have given some indication of dividend policy but I wonder, just exploring the final dividend, will that be on the basis of a sort of compared to what you would have paid had you been a clean business for 2005?

And finally, I noticed in the Appendix there was something about BPL and the relationship there. I wonder if you could just give a few comments on how that is likely to develop in the future?

Okay, revenue margins, I think what we're saying is that they did rise during the year. Part of that increase is obviously the generation of performance and transaction fees, having with us being prudent, because those can be variable, and if we manage to maintain them, then we'll happy with that. Obviously our plan is to improve them. But whenever you see performance and transaction fees, you're always slightly chary of guaranteeing them for subsequent years.

The U.K. retail, as you know, Geoff, we appointed [Yakel] Till-Jefferson to head our retail business to give that a real kick forward. He's already making a big difference in 1 particular regard, which is shifting the business somewhat away from a simple dependence on IFAs to more wholesale distributors, you know, the big platform distributors, the HSBCs, the Barclays, the co-funds of this world, and he's making good progress there.

Obviously performance is the primary driver. And so Formichael and David Jacobs are also doing their job. And I think that's 1 area where, again, you might continue to see us recruit talent, because it is a, however much we might like to think that the retail business is entirely process driven, I have to say it's still, in my view, a business which is in a large part driven by individual talents.

The dividend, as I said, I'm not going to be drawn on that because I don't want to prejudice anything the Board may say. And BPL, Toby, can you pick that 1 up?

Sure, yes, in brief, it's been a very good relationship for us. As we say in the slide, it's coming up to its 5th anniversary this year. There is a review point at the end of the year, and we would like to renew the agreement but obviously we haven't yet engaged in any particular negotiations with the Italians about that, so that will be 1 of the things that we need to do this year.

Thanks, Martin Cross, Turner & Greenwood. Perhaps a slightly off the wall question, perhaps, but I mean, there is speculation about your longer-term future and in light of consolidation in the industry, not their own speculation about everyone of course, but actually, a particular question is, in the event of an offer for your business, what is the status of the Closed Life fund, the 10 year contracts? Would an acquirer get the benefit of those, in simpler terms, please?

Well, either they would transfer on these, on the basis of the existing financial agreements or if the agreements were terminated, compensation would be payable by Company Investor Group.

And another, perhaps similar sort of question, is there any, apart from AMP retainer of 10% which they have made through fairly encouraging noises about being a long-term, are there any other substantial shareholdings which, if you like, are connected with the Closed Life funds which we might presume would diminish over time?

I don't think so. Just on AMP's 10% holding, we've said it wasn't a long-term holding for them, but obviously they're not going to flag their intentions to the market. I wouldn't expect them to still be holding stock in 3 years time but when they choose disposal, I don't know. I haven't had any conversations with Andrew [Moll] on that subject.

We are covered on the major holders' perpetual investments in Australia and Perennial Group, again in Australia hold 9 and about 5 respectively, and there are a whole range of other institutional holders, so as we, hopefully the answer to your question is no, the only area of potential linkage to the past in many ways is the funds we still manage for AMP but those are not significant in a total context, but obviously that's a relationship that's still evolving as we are now 2 independent companies.

[Indiscernible] of UBS. The performance fees, I think, are seasonal as a function of just for timing when you've got them. Are there any costs which were directly related to the performance fees that should also, therefore, be seasonal or do you accrue those differently from the way you accrue performance fees?

Well, we do share the performance fees with the individual managers concerned. The numbers you see in the revenue line are net of performance fee bonuses.

And they're not included in the stock costs?

No. We'll now turn to see if there are any questions on the telephones, so Operator, if you can pass those through?

[OPERATOR INSTRUCTIONS]. It appears we have no questions at this time.

Okay, any more here? [Inaudible]. No, thanks for coming. I really appreciate it. Thank you.