Prudential PLC (PUK) 2005 Q3 法說會逐字稿

Welcome to the Prudential third quarter 2005 results conference call. Today I am pleased to present Mark Tucker, Group Chief Executive of Prudential PLC. [OPERATOR INSTRUCTIONS] Mr. Tucker please begin.

Thank you and good morning, I hope everybody is well. Thanks very much for dialing in. What I would like to do now is work on the basis that you’ve all see the release. So I won’t go into too much detail. I’d like to give you an overview and then very happy to take any questions. I am on the call with Philip Broadley, my Finance Director. And Philip and I together will be happy to do that at the end.

What I’d like to do is just divide the call into effectively two today. One is to look at the third quarter new business figures. And then really go on to some of the statements we’ve made on the Group strategy.

On the third quarter new business figures, overall the business is performing well, overall growth at 32, 33% is an excellent figure for the first nine months. Looking at individual components of that, our U.S. business, Jackson National, had a very good nine months and total sales, APE sales are up 17%. And I think you know in a market that is flat to do just a small rise Jackson has been outperforming.

In Asia again, an excellent second quarter, an excellent second quarter being followed by an even more powerful third quarter. So the third quarter made up 32% on the same period last year. So in the last six months we’ve really seen Asia do a kick into gear. And after a slow start the first quarter I think you will remember was 13%.

In the U.K., growth is also very strong. It’s been driven mainly by sales of unit-linked bonds and bulk annuities. And I think what I can say is that we remain confident we will achieve our forecast for 10% APE growth in 2005. So the two targets are in place with 10% APE growth in 2005 and the 14% IRR in 2007 remain in place.

With M&G the -- supported by excellent investment performance had record growth inflows for the nine months of around £5.6b, which is a 62% increase on the same period last year. And I think importantly net fund inflows almost trebled to £2.7b year-to-date, so a strong performance on the investment side.

And last but not least Egg reported separately today their results, as Paul Gratton said earlier today, we have had a solid performance at a time when the unsecured lending market remains highly competitive.

Let me move on from that and I think that just gives you just a flavor. As I said you would have see all that detail and much more in the press release. If I could talk a little bit about where we have got to on the strategy? And the strategy side just to give a two-second overview in terms of the process. I think we did a pretty fundamental and clear bottom-up and top-down process looking at that markets, geographies, economies, regulatory trends etc., over a five to ten year period, looking at ways we can actually -- looking at our portfolio, looking at how the Prudential’s current position fitted.

And looking really effectively a gap analysis to see where we felt we should be. And where we felt -- what we felt we should be doing. But in all of this we use one clear standard, which was that we said and [going in to it] that the choices we make and actions we take must consistently get a sustainable value for our shareholders. And I think that was fundamental. And I actually said also we must achieve the optimum balance between present and future growth and profitability.

The conclusion coming out was the broad direction of the Group strategy is sound. However, we do see a need to target a broader spectrum of opportunity than just life insurance, even though that’s clearly [cost] and important as it is to us. And my overriding objective is to build on our positions in the U.S., Asia and the U.K. to become a leader in the provision of retirement services.

Looking just briefly country by country or region by region -- Jackson, what we said emphatically this morning, our position on participation in the U.S. market is a clear yes. We see the U.S. as a very important part of the Group’s plans to achieve a leading position in retirement services. Jackson, as you know, is a low-cost, highly successfully and well positioned participant in a market where we want to be strong in. And we said the advantages with the business model combined with the potential of the U.S. market, means that Jackson can achieve these growth plans while increasing the dividend it pays to the Group.

And what we’ve done this morning in more detail in -- and I think that the full script is going to be posted on the website later this afternoon, is demonstrates clearly that the -- to dismiss the myth that Jackson is sub-scale. We believe it is a scale business in the sectors, in the products and in the distribution that it plays in. And we will continue to build on that. But I think what has been important is the clarity of statements. I think we would have seen to have been critical on the U.S. participation in Jackson. And we’ve bee absolutely clear that Jackson is an important part of the Group’s future.

The second part is on Asia, where Asia has been the main engine for growth in the Group in recent years. And what we said today is we have no intention of [stripping] growth in Asia to a level lower than what we consider commercially optimum and sustainable. But I think what we -- or the good news is that we feel not only can we maintain high and aggressive growth levels, but we can also go -- become cash positive in 2006. So this morning we said we will go cash positive in 2006. And I think that combined with not slackening and ensuring that we keep the pressure on both in Asia is a double win.

The twelve markets we are in will be the key markets in the region for the Group for the foreseeable future. The strategy will continue to be to grow primarily by organic means. And we are particularly focused on China, Korea, India and Taiwan. But we’ve also announced the restructuring of the management team through a team that is lead by Mark Norbom. Mark has structured the team underneath him to really -- to position ourselves even more powerfully to take advantage of the opportunities there.

And again our -- we have multi-distribution, a mix of agency, of bank distribution, of bank assurance partnerships and alternative distribution brokers and other intermediaries. We have a good combination of the three of those.

In the U.K. what we looked at, and I think again what is different, is that we see an opportunity to develop a broader retail financial services offering, by building on the strength of the existing franchises. And building on the strength of Prudential, building on the strength of Egg, and building on the strength of M&G. And enhancing and really stepping up to the next level of collaboration on both costs and revenues.

As such we’ve made a decision to retain and develop Egg. And we -- our view is that the potential advantages we get from owning Egg make it clear that retaining it is the right decision. It sits with our objective of generating more value for our customers and shareholders.

The four main reasons behind this were clearly were, one a 3m younger more affluent customer base, and a great complement to Prudential’s already significant customer base without any duplicate or overlap. Second a very powerful and well know consumer brand. Thirdly and importantly Egg’s distribution model has really supported up with a 20% growth since 2000. And in a U.K. world, I think it’s not dissimilar clearly in the U.S., in a world of increasing intermediation, maintaining a direct distribution capability remains very important, and Egg gives us that.

And finally I think Egg provides the expertise and infrastructure into the highly profitable personal savings and loans market. And is a good complement if you look at the product side with short-term payback in the lower capital-intensive lending and deposit products, are a complement to our longer term capital-intensive retirement offering in the U.K.

What we said also is that we feel by working more closely with organizations, working more closely, which they’ve never done before, they’ve worked as fundamentally independent operations. And they will remain independent of any fences but collaborative in -- I am looking particularly at the cost line. We think cost benefits can be won through managing administration and IT infrastructure.

We can even do things -- we’ve negotiated marketing deals or any buying power have been negotiated by the three separate companies in the U.K. Put them all together and negotiating with the power of three in one, we know will bring us significant benefits.

We look at every opportunity and this is a potential prize as we work to our best to add value to our millions of customers. And we can -- we talk about potential customers and whether there is opportunities for banking and loan products manufactured by Egg. And the attractive medium- to long-term savings products, the investment products manufactured by M&G, so we see opportunity there.

What we are doing is we are in the process now of a detailed review of how best to realize these synergies. And we are considering whether there is a financial and commercial case for bringing Egg fully into the Group, through a share exchange. Or whether we should just keep the -- keep and retain the existing structure. And what we said this morning is that no decision has been made as yet. And we are clearly working through that, and working to see if there is a financial and commercial case.

We said a little this morning also about further trilogies in capital management, risk management and group IT infrastructure. We gave one example of this as the beginning of a process not -- certainly not the end and we are going to push harder and harder on this.

And finally we spoke, and Philip spoke for a good while this morning, about capital management and Egg’s at the center of both our agendas for the Group. And I think we will take a very hard look at where capital is deployed. And our performance and our efforts to improve capital efficiency have yielded significant improvements over the last year.

So what we said this morning is over the medium term, we have the capital and cash to fund organic growth within our current and developing balance sheet. And in addition to that there are also further options to increase our capacity in the future through debt and alternative capital sources.

Before coming to questions, let me just deal briefly with Taiwan, because what we’ve tried to do this morning is clarify the situation in Taiwan. And you would have seen a detailed explanation in the release. The story here is a negative spread on traditional policies which I think is to make it absolutely clear, being built into all our planning and always has been, is not a material cash or profit issue even if interest rates stay exactly where they are.

We said it would be a cost of £30m a year in cash and not withstanding that it would break even in 2010. All of that is -- has been included in our plans for years. It is not new news we are managing and what we’ve done today is and what we haven’t done before, is disclose fully a number of the issues surrounding that, which we hope and believe will draw a line under the issue.

We see the market, we see the Taiwanese market as a major growth opportunity and we are building strong sales in the profitable unit-linked and A&H products. And we changed the product mix from 100% of traditional to now only 20% with the majority of the business, the new business being the unit-linked business which is -- and the accident health business which is highly profitable and not capital intensive.

In conclusion to it all I must say then to leave it open to you guys, is really -- the view is, and my view is Prudential is a successful business. You’ve seen the third quarter figures. You’ve seen the outline. We want to continue to focus on building shareholder value. We are going to sustain the geographical diversity that has really stood us in such good stead over the last decade. We are steadily building market-leading franchises in the U.S. and Asia, and beginning to build on our strong positions in the U.K.

But we are looking to do that by organic growth and by building on our proven strength. And in particular we will take advantage of the global retirement financing opportunity in our strong fund management businesses.

So I think it’s -- the opportunities for us I think are and remain considerable. We have focused this piece of work on confirming the U.S. which I think hasn’t been confirmed before. Confirming the position of Egg in the Group in terms of being confirmed in the more -- previously. The differences, the work in the U.K. of getting the businesses together more cohesively and collectively there. Clearly the Asia cash flow positive, again the story again complete and clear there. And having all of that is, we believe, provides us with a terrific platform. And now we have to do the hard thing which is deliver.

I think that that’s all that I wanted to say. And as I said Philip and I are now very happy to take your questions.

Okay. We will now begin the question and answer portion of this call. [OPERATOR NSTRUCTIONS]. I see the first question is from James Pearce at Cazenove. James, please go ahead.

Good afternoon. My question is on the closer working together of the U.K. businesses, do you see the major change coming from revenue synergies or from cost synergies? And if it is revenue synergies there are quite a lot of permutations. Is it about selling more Pru product through the Egg distribution network? More Egg products through the M&G distribution network? Or I think there’s about six different combinations you can dream up. Which are the biggest opportunities on the revenue side that you see?

Thanks James. I think the answer is that there are, we believe, both cost and revenue synergies. I think we view the revenue synergies as a potential prize, an upside. And I think as you described it, there are six or seven permutations and variations that you can do, are quite considerable given the three companies and what the can do. And the fact there has been no element of co-operation previously. So I think this is -- it provides a whole new range of opportunities. But that is the potential prize and that is clearly tougher to realize, and something that is going to take a little bit of time.

What we can look at and get and where we are spending a particular amount of time is trying to get clear on the cost side, to see what we can do and how we can do it. And then there is the range, I think as I said, the IT side, the marketing side you can almost look at most sides of the business all the way from customer service all the way to postage and printing. And look at ways and things to be done a bit differently and to get synergies out. And all of that work will be looked at in the next -- or is being looked at now, and we will be able to come back and talk about that in a more cohesive and coherent way a bit later on.

Okay thanks.

Pleasure.

Okay there seems to be no further questions in the queue. Shall I pass it back to you for closing comments?

Sure I am happy to do that. As I say, I think to finish, I think the story today is one, I think, with the team here working closely and clearly together, we are very optimistic and excited about the opportunities there. As I said I think it is now up to us to go away and deliver these, and that’s where we intend to spend our time and our energy. Thank you for listening and I hope to see some of you. I know Philip and I are due in the U.S. in a few weeks time, I hope to see some of you then. Thank you for listening.

This now concludes our conference call. Thank you all very much for attending.