Janus Henderson Group PLC (JHG) 2005 Q2 法說會逐字稿

Good morning everyone. Welcome to Henderson Group's half-year 2005 results, including those of you listening in by phone or via the website, thanks for listening in.

In addition to the information presented today, there is more detail in the stock exchange announcement and the appendix 4D, which we lodged earlier today, and also which is available from the website. Hopefully, as well, most of you have access to the slide presentation, which is part of the results announcement. And we will make some reference to the slides as we go through the presentation. And with me today is our CFO, Toby Hiscock.

In terms of agenda today, I'll start with a brief overview of the results, then Toby will take you through the financials in more detail. Then I'll finish by touching on the priorities and outlook for the Henderson Group. And if you wouldn't mind, if you can hold questions until the end of the session, we will take them then.

In terms of the results overview, we think overall that this is a solid set of results. If you include the partial contribution from Life Services, Henderson Group pre-tax rose 66% to £35.1m, compared to the first half of 2004. Probably the better view is to look at continuing operations only, i.e. to exclude Life Services. And on that view, pre-tax operating profits rose 29% to £37m compared to £28.7m in the first half of 2004.

Within that overall picture, Henderson Global Investors, obviously the major subsidiary, improved profitability up 5% at £38m, compared to £36.2m in the first half of 2004. And that better result reflects both higher performance fees and slightly lower costs. Because of that, Henderson Global Investors improved its cost/income ratio. On an IFRS basis, the ratio declined from 71.9% in the first half of 2004 to 70.6% for the first half of 2005.

Assets under management were £66.5b at the end of the half-year, compared to £69b at the start of the year.

And finally Towry Law, which is our small IFA, produced a profit of £1.6m in the first half of 2005. Which is obviously a good turnaround, from the modest loss that it made in the first half of 2004.

So those are the headlines. Now let me get Toby to cover the financials in a bit more detail.

Thank you Roger. Let me start with the Group as a whole. The Group profit and loss reflects a steady trading performance by Henderson Global Investors, as you've just heard, up 5% on the equivalent period last year. A return to profit by Towry Law U.K., and cost savings in corporate enhanced by higher investment income. I will say more about the asset management and Towry Law performances shortly.

But with regards to corporate, we expect corporate costs to continue to fall in the second half of this year, whereas investment income is expected to remain flat and then taper down next year, as cash balances decline.

The loss from discontinued operations comprises Life Services' profit from ordinary activities to the date of disposal on April 13, 2005, offset by a loss on disposal based on the adjusted fair value of the Life Services business.

The effective tax rates for the continuing operations of the Group showed a marked reduction in the full year '04 and the first half of this year. This was due to the impact of tax relief for a deficit in the staff defined benefit pension scheme, which I'll say more about in a moment, and also the utilization of prior year tax losses. An effective tax rate of approximately 18% is expected for the full year '05, rising closer to expected rates, that is 30%, over the medium term.

Henderson Global Investors' management fees were broadly flat, with fee attrition from institutional and Pearl Group fund outflows and prior year investment trust losses offset by fee growth in higher-margin products. Good levels of transaction and performance fees drove an increase in total fee margin to 37 basis points of assets under management in the first half of this year.

Slightly lower expenses produced an improvement in net margin, to 11 basis points of assets under management, in the first half.

Operating expenses as a whole were slightly lower, which improved Henderson Global Investors' expense ratio to 70.6% in the first half of '05. Due to the new income recognition rules under IFRS, whereby we now take the bulk of our performance fees in half one, the expense ratio in the second half of this year is expected to be higher, although we remain confident of achieving our annual target of 75% for Henderson Global Investors in the short to medium term.

Savings in non-staff costs were partly offset by an increase in staff expenses, reflecting recruitment of new investment talent and higher pension service costs. The fall in investment administration costs was due to a fee renegotiation and institutional client losses. We still expect an increase in IT and marketing expenditures over the short to medium term, despite the lower levels seen in the first half of this year.

In general, we expect some further upward pressure on the cost base, and therefore further improvement in the expense ratio will come from profitable revenue growth and benign markets.

Group net assts at the end of June '05 were £620m after deduction of provisions of £127m. The provisions include a deficit and the staff defined benefit pension scheme of £31m net of deferred taxation. Provisions remain prudent and cover a variety of matters, such as restructuring, void properties and legacy product mis-selling.

The pension scheme has been accounted for in accordance with IAS19 and the deficit was influenced by a reduction in bond yields in the first half of this year. This is an accounting rather than funding deficit. The next actuarial valuation of the scheme will be at the end of this year. Overall, the balance sheet remains strong with good liquidity and minimal gearing.

The pro forma capital position we showed you at the full year 2004 has improved in the first half of this year, due to a number of efficiency gains and regulatory and working capital. The regulatory capital requirement has fallen to £100m, due to a reduction in the need to hold consolidated capital. Working capital is being run tighter, while still retaining our investment in new Henderson Global Investors products.

The BPI stakes, which we retain, are now fully admissible. And we've reduced the amount of capital allocated to the Life Services sale agreement, because the pension contingency of £30m was triggered in the first half of this year and increased the loss on sale, and also because of ongoing review of outstanding warranty and indemnity risks. It's important to note that we've not received any claims to date from Pearl Group under the agreement.

As a consequence, surplus capital has been identified of approximately £190m at June 30, '05, more than the £125m of retained capital which we reported at the full year 2004 results. This amount includes allowance for the 2005 final dividend to be paid in respect of the second half of 2005 and early 2006, but no allowance for action, if any, on the next pension scheme valuation or any other contingencies.

We expect the initial dividend to be based on an annual payout ratio of 50%, phased one-third interim, two-thirds final dividend. Further guidance on the quantum and timing of the dividend will be provided with the full year 2005 results in February 2006. We will also give you an update on capital planning at the same time.

Towry Law U.K. is an independent financial advisor on pensions, investments, insurance and mortgages. In spite of difficult corporate markets and softening insurance rates, it performed well in the first half of 2005 and is expected to remain profitable in the second half, albeit at a lower level due to seasonality of its business. We continue to work with the regulators on an orderly exit of the Towry Law International business. We remain comfortable with the level of provisioning in place for outstanding legacy product issues, which did not change in the first half of this year.

And now I hand you back to Roger.

Thanks Toby. I'll now touch on really, I guess, what are the key drivers in the fund management business. These obviously relate to investment performance, fund flows, margins and costs. Toby has touched on costs, so I'll do the first three of those.

Starting with investment performance, obviously one of our main priorities has been to improve investment performance at Henderson. To that end, we've continued to recruit key investment professionals to strengthen both the fixed income and equity franchises.

At the start of the year, we appointed David Jacob as Head of fixed income. And in turn, he has appointed a new head of credit, a new director of liability-driven investing, and a new head of interest rate strategy. On the equity side, we've made key housing, U.K. core institutional, especially the recent appointment of Graham Kitchen and Andy Jones, and in multi-manager. And made better use of our existing resources, for example by deploying some of our award-winning investment trust managers on U.K. retail funds.

In both cases, both equity and fixed income, we continue to review investment processes to make sure that they remain disciplined and repeatable.

Obviously there is no quick fix for investment performance, but the signs are encouraging. Overall, so far in 2005, just under 60% of funds beat their benchmark. The strongest position is in retail, notably in investment trusts in our offshore Horizon range. We've yet to get quite as good results in U.K. retail, but there too there are encouraging signs with all our U.K. retail funds sold in that channel, which is by far the most important category in the top quartile over one year.

The institutional picture is more mixed. Fixed income is recovering, but the one and three year numbers remain poor. Balanced and core equity is weak across the board. And given that performance and the changing nature of the pension fund landscape, particularly the shift to specialist from balanced, which we've talked about before, it will be some time before that area stabilizes. By contrast in institutional, one of our newer capabilities, enhanced index, is performing well and is starting to win assets.

Obviously another measure of our success in terms of investment performance and the delivery of it to our clients is the outcome on performance fees. And here the first half result was a good one, with fees of £16.6m net of bonuses earned for the Company. Now, there is a slide on this, slide 15 shows the client groups in the portfolio's earning performance fees for us changes from period to period. So in 2005, for example, investment trusts and property were much more important contributors than they were in 2004.

The main point is that the fees are generated by broad and diverse client groups and portfolios, which gives us some confidence that they'll remain a feature of the profit and loss account.

Turning now to fund flows, overall assets under management were £2.6b lower at the end of the first half, compared to the start of the period. Within that, the markets and foreign exchange movements added £3b, while there were net outflows of £4b from external clients, plus an outflow of £1.6b from the Pearl Group. And obviously that client is in steady run off, as you know. Within the £4b of external outflows, institutional losses totaled about £4.3b, offset by inflows into higher margin areas, such as property, CDOs and private capital. And we expect those trends to continue. In particular, outflows from institutional are likely to remain significant in the second half.

Obviously, in the medium to longer term, we want fund flows to be driven by our distribution capabilities and by investment performance. So just let me touch on distribution for a moment. Given the size of the markets, the growth in them and the margins available, building our U.K. retail and Horizon offshore fund businesses is a cornerstone of our strategy. In Horizon, we have a very good and in the U.K. an improving investment performance picture to build on. In the U.K. we've got to continue concentrating on entering key wholesale distribution platforms. While in Europe, progress will come from exploiting the strong performance we have, as well as from new product launches.

In the alternative areas, we've had a lot of success winning new property clients. But unfortunately revenues don't flow until the assets are invested, so that's our immediate priority there.

In private capital we've successfully closed our PFI fund, and are actively planning a second Asia fund.

It is fair to say the hedge fund business was slower in the first half, although we do have plans for new products in the next few months.

Meanwhile, in institutional, the priority obviously is to stabilize that business. And my sense is that we are further along in that process in fixed income than in equities, but in both cases it's a multi-year task. Obviously it will take time to bed down the new recruits and to stem outflows, let alone start to win new business. Although we are pleased that starting to offset some of those losses is this enhanced indexed capability, which is buy-rated and which has started recently to win mandates.

Turning now to revenue margins, we've shown before the split of our business by assets under management compared to revenues. Specialist areas, mutual funds, property, private capital, hedge funds, account for 58% of revenues but only 21% of assets under management. And that highlights what we need to do to achieve higher margins. We are confident that, by growing these specialist areas, we can improve margins and replace lost institutional and Pearl Group revenues. It doesn't mean to say that we will ignore institutional or our Life client; on the contrary they are important parts of our business. It's just that we recognize that it will take time to stabilize institutional and that Pearl will remain in run off.

Another way of showing the same thing is to plot the different -- the growth of different parts of our business versus their margins and the size of revenues they represent. And we've shown this on slide 21, and it shows that Pearl and our institutional businesses are in net outflow, but that they are lower margin and smaller in revenue impact compared to growth specialist products, which are both expanding and a higher margin. And again, that's why we've been able to offset the revenues lost from institutional and the Pearl, and expect to continue to do so.

So let me summarize where we think that leaves us. I think, from the time we listed the business in December 2003 to the sale of the Life Services business in April 2005, was very much a first phase for the Henderson Group. It was about restructuring the Group, dealing with a range of issues in the Life companies, and delivering value to shareholders from those businesses. And I think that phase completed with the sale of Life Services, and the return of £870m to our shareholders.

The next phase for the Group is about getting Henderson firing on all cylinders as a pure fund management company. And in that context, I think 2005 is very much a transition year, albeit one in which profits are increasing. It's a year in which we are working to improve investment performance to drive future flows in revenues. At the same time, we are trying to ensure that Henderson becomes a more profitable business by improving revenue margins, which we are doing, and improving the cost/income ratio.

All those things represent the hard yards in fund management and we've got to do them. We are encouraged by the process -- the progress we are making thus far, although obviously fund flows will be the last and lagging indicator.

Meanwhile, at a corporate level, we are not going to stand still, so we are working to deliver lower corporate costs. Towry Law has been returned to profit and we can build on that, which will give us options for the future. We'll pay a final dividend in respect of the second half of 2005, probably starting with a prudent two times level of cover, and then we'll move forward from there. And finally, we've started the work to see what further capital we can return to shareholders and how that should be done if it's not needed in the business.

So that's the end of the formal presentation. We will now take questions on anything I have said or not said.

Thank you gentlemen. [OPERATOR INSTRUCTIONS] Our first question comes from Nigel Pittaway from Citigroup. Please go ahead.

Thanks very much. Hi Roger, Toby. Just a question, please, on the slide on the capital. You mentioned, obviously, that you've made some savings in regulatory capital from holding the consolidation -- from the consolidation level, but also some efficiencies in your working capital. The first question would be do you think you've got further to go in those two areas?

And then secondly, also on that slide, I was just wondering whether you can just highlight the main warranties and contingencies you are holding the £50m against, and the expiry date of those warranties?

Thanks Nigel. I'll get Toby to cover off both those things.

Okay. On the regulatory and working capital we think we've worked pretty hard already, and the numbers you see today are pretty much the core requirements. I think there's very little upside, if any, remaining in those numbers.

So far as the warranties and contingencies under the sale agreement are concerned, we itemized the more material items in the shareholder circular. There are some fairly standard tax and other warranties. The period for the non-tax items is 15 months from the completion date, so we've got another just under a year to run. And for tax, subject to the statutory period, so three years for indirect tax and six years for direct tax.

And as Toby said in the presentation, obviously during the second half we'll work with the Board and figure out what we should do with that money.

Thank you.

Our next question comes from [Argen Van Dine] from CSFB. Please go ahead sir.

Thank you. Roger, a couple of questions, firstly on the dividend and the dividend payout ratio. Can you maybe just talk a bit through how you derive, or how you decided on the 50% payout ratio, given the strong excess capital position?

And also a second question on that, in terms of the capital surplus, you stated that you'll come to us again in February '06. Is it likely that you'll do something with that excess capital before the warranties expire, or is it likely to be after the warranties expire in June next year?

And if I can ask just a question in terms of the business, on the overseas business in North America and Europe, both had very strong growth when we look from the December numbers, up 19% in the U.S. and 10% in Europe. Can you maybe just talk us a bit through how those businesses are running and what you expect from them going forward?

On the dividend, the Board actually hasn't sat down and talked about it yet, so I'm probably a bit premature talking about it myself. But I think that my assumption is that we'll start off from a prudent position. And I regard a prudent position as a cover of two times. How we move forward from there is another matter, but I think as a starting point I wouldn't be surprised if that's where we started. I am saying that without the Board having met and discussed it, but that's my working assumption.

On the capital, again, we haven't sat down with the Board and worked through that process yet. But I -- as I've said a thousand times before, if we've got excess capital, we don't need it in the business, we'll get it back to the shareholders as soon as we realistically can. And hopefully we've got a bit of form in that regard, we've -- I hope we've got a tidy track record in not sitting on capital unnecessarily. So as fast as it can possibly be done without jeopardizing the business in any sense.

And thirdly, North America and Europe. North America is growing quickly in one particular sense, which is the U.S. mutual fund operation. We started it a couple of years ago, it's gone from nowhere to $1b. And obviously we are trying to grow it as quickly as we can. The key is the distribution agreements you have with the wholesalers in North America. And we've got most the big institutions and big distribution machines signed up now, so hopefully that business will continue to prosper. But it is, in the context of the Group, still a relatively fledgling business.

Europe is obviously more substantive. There the business is building in two ways. One, property has done extremely well. And although we only get revenues when we get the money invested, I think that's something that is a positive for the future. And certainly, in terms of assets won so far this year, I think as I stand here today there is about £600m, £700m of new money won. And again, we've got to get that invested to get the revenues out of it.

At the same time, Horizon continues to grow steadily month-by-month. Rather disappointing, the first two months of 2005 were just awful. And I can't put my finger on why it was bad, we just saw fund of funds just staying away from the market. But it's got better every month since then. And we are hopeful obviously, with slightly better markets, that investor confidence will help us build that business even further.

And we will take our next question from Dougal Maple-Brown from Maple-Brown & Abbott. Please go ahead.

Hi, Roger. I'm just confused about that capital slide Nigel referred to, the BPI stake of £65m. I think Toby said it hadn't been sold, but it's zero in actual June '05. So I didn't assume that that £65m is now up in regulatory capital.

Yes, the -- as we said, the stakes are now fully admissible for regulatory purposes, so we don't need to hold any shareholder equity against them.

So effectively, 65% of your regulatory capital is tied up in that BPI stake?

No, none of the regulatory capital is tied up in the BPI stake, it doesn't require regulatory capital.

So the BPI stake in the June '05 number in the capital surplus then?

That's right, it's fully admissible.

But presumably there's no intention to sell the stake?

No, no intention. We've actually included a slide in the appendix to the presentation, on where we are with the relationship at the moment. And you will see from that that we've extended our agreement with BPI, as it's now known, for another four years.

I am just trying to get to, is the actual true capital surplus £192m or is it £192m less about £65m?

No, it's £192m. We don't need to sell the BPI stake to raise the amount of surplus capital that you see on the slide.

Okay, thank you.

And we have a follow-up question from Nigel Pittaway from Citigroup.

Thanks very much. I just wondered if you could make a few comments on the seasonality in the performance fees. You've obviously made the strong point that they do tend to be lower second half than first half. There's obviously the indication there of how they tracked in '04. Should we take the '04 as a meaningful indication of the seasonality, or is that a normal and you expect the seasonality to be somewhat less pronounced this year than it was last?

Well, traditionally there has been a fair bit of seasonality in our performance fees, in that the bulk was earned from hedge funds in particular. And you can see that in the performance fee diversity slide last year. This year we've got -- this first half we've got less concentration. But as a rule of thumb, I think it's correct to assume that the bulk of the performance fees in general will fall into the first half under the new IFRS rules.

So the '04 is a reasonable indicator? I know it's hard to predict, but it's not completely abnormal to mean that it's not a reasonable indicator of the future.

It's not an unreasonable indicator.

Yes, alright. Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from [Mark Hancock] from [Lutfus]. Please go ahead.

Roger, I wondered if -- could you explain the transaction fees, the nature of those fees, what products they emanate from and the outlook for those fees?

They come from a range of -- in Life performance fees, a range of sources. But by far the biggest part of it is derived from property, where as part of the property business most of the mandates that we have tend to have not just underlying management fees but transaction fees attached to them. It's a common feature of property businesses like ours. And that's why they've been, I wouldn't say steady, but they've been a pretty permanent feature of our lives and we expect them to continue to remain so. The exact level is hard to predict because they are based on transactions, but they are principally related to property.

So they are related to the purchase of properties and putting them into an unlisted trust, or a listed trust?

Or into a segregated mandate, yes.

Yes. Can I also ask a question in relation to staff bonuses?

Sure.

I understood the accounting mode changed on those and you might have been recognizing bonuses earlier this year, in the first half?

No change in accounting policy there. We early adopted FRS20 on share-based remuneration last year, so we've been accounting in full for all our bonus costs in the same way during the last couple of years.

So is there seasonality in that, that we should expect in the second half?

Not particular seasonality, no. As I say, one of the factors in that staff cost increase was an increase in pension service costs, which is really a function of the IAS19 impact on the pension scheme accounting, which is subject to fluctuation. But certainly the vast majority of the number is not particularly seasonal. We accrue as we go; we calibrate our accruals in line with our current view of performance for the year.

Thank you.

From [Starneck Investment Management] our next question comes from [John Trustworth]. Please go ahead.

Gentlemen, you've outlined the long-term dividend payout ratio of 50%. This year, for the second half, can we expect two-thirds of a normal dividend or can we expect the 50% payout ratio for the full year paid at the final?

I think more like two-thirds for the -- in relation to the second half of '05 that we'll pay in early '06.

Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from [Roslyn Anderson] from [AAT].

Hello. I've just got, I suppose, a fairly broad question. I am hoping you can answer it; it's not too specific. It's to do with fund flows, you're saying that the fund flows would be the last and lagging indicator of the progress that Hendersons are doing at the moment. So I suppose I wanted to ask why the assets under management have been going down and when you see that turnaround is likely to happen?

Well, maybe the first thing I would say is we think much more about revenues than anything else. But with that caveat, there is one thing that we can't do much about, which is the outflows from the Pearl, at about 2.5 during the year plus or minus. That's something that is a constant feature of our lives, given the fact those are booked at close of new business and are in steady run off, so that's just a fact of life.

Obviously the big driver of the outflows is the positioning in institutional. We've done a huge amount of work, both in recruiting and process, and communication with the clients and consultants, to get that business back on an even keel. But as most of you will know, it is a feast and famine business. It's very strongly directional and it's very hard to change direction.

I think we are making more progress in fixed income probably than we are in equities. We've had a good reaction to the people we've hired and to the work we are doing. But what happens is, first of all, you stop losing, then you get on long lists but don't get short-listed, then you get on short lists but don't win, and finally you start winning. It's a two to three-year haul to turn that business around.

Meanwhile, what we've got to do is obviously we have an expectation of what revenues we'll lose from the institutional attrition, and from the loss of assets from the Pearl Group. And we've got to make sure that we do well enough in some of the higher-margin things to offset the revenues lost, and our whole business is geared up to try to do that. That doesn't mean to say institutional isn't important, of course it is. It's just a recognition that that's what we need to do to keep the business moving in the right direction.

So the great thing is that we've got enough positive things going on in the business to do what I've just described. It would be a sad day if we were just -- if all we had was the institutional turnaround to cope with.

And I will tell you, morale is very high in the Group. It's the hires we've made, the ability to attract good people, the right trend in investment performance in general. People are very up around here.

Thank you for that.

As there are no further questions remaining in the queue, that will conclude today's question and answer session. Mr. Yates, I would like to turn the call back over to you for any additional or closing remarks.

Look, thanks very much for listening everyone. And hopefully we'll get to see some, if not all, of you face to face or over the telephone before too long. And I do think we are making progress here, especially driving margins up in the business. Obviously we've got a bit of a headwind with institutional and the Pearl Group. But over time we are being able to offset that; we did it last year, we will do it this year, keep the business moving.

Meanwhile, we will try not to stand still on the corporate front - lower corporate costs, dividend payments, getting the capital -- the excess capital back into your hands. And hopefully that's a reasonable package to keep everyone going with. I really miss questions on the Life companies, but I guess when we sold them, that was going to be a fact of life.

Thanks for listening everyone and hopefully we'll get to see you soon. Thanks a lot.