1st Mar 2005 07:02
Schroders PLC01 March 2005 Press Release 1st March 2005 Schroders plcAnnouncement of Preliminary Results for the year ended 31st December 2004(unaudited) Substantial growth in profits • Asset management profit before exceptional items £120.8 million (2003: £60.5 million) • Private equity profit £83.6 million (2003: £16.8 million) • Profit before tax £191.0 million (2003: £65.0 million) • Funds under management £105.6 billion (2003: £98.9 billion*) • Total dividend 20.0 pence per share (2003: 18.5 pence) *Restatement of assets predominantly due to the inclusion of additional Private Banking funds previously omitted. ----------------------------- ---------- ---------- Year ended Year ended 31st December 31st December 2004 2003 £mn £mn (restated)**----------------------------- ---------- ---------- Asset management profit before exceptional 120.8 60.5itemsExceptional items - profit on disposal of 2.6 2.4business/subsidiary undertakings ---------- ----------Asset management profit 123.4 62.9Private equity 83.6 16.8Group net income/(costs) (6.1) (4.4) ---------- ----------Profit before tax and goodwill 200.9 75.3Goodwill amortisation (9.9) (10.3) ---------- ----------Profit before tax 191.0 65.0 ---------- ----------Basic earnings per share 46.0p 16.5pDiluted earnings per share 45.7p 16.4p ---------- ---------- ** The Group has adopted UITF Abstract 38 'Accounting for ESOP Trusts' duringthe year. Comparative amounts, where necessary, have been restated. Contacts: Schroders Michael Dobson Chief Executive +44 (0) 20 7658 6962Jonathan Asquith Chief Financial Officer +44 (0) 20 7658 6565Jo Godfrey Acting Head of Corporate +44 (0) 20 7658 2589 Communications The Maitland Consultancy William Clutterbuck +44 (0) 20 7379 5151 Management Statement 2004 was a successful year for Schroders, with increased revenues andsignificantly higher profits in asset management, good investment performanceand exceptional returns from private equity. The rise in asset management net revenues to £491.0 million (2003: £417.8million) drove a substantial increase in asset management profit beforeexceptional items, which doubled to £120.8 million (2003: £60.5 million). Profits from private equity were £83.6 million (2003: £16.8 million), includingan exceptional gain of £47.8 million relating to the disposal of a privateequity investment by Internet Finance Partners. The exceptional gain of£47.8 million includes £15.4 million of gains attributable to minorityinterests. Profit before tax and goodwill was £200.9 million (2003: £75.3 million) andprofit before tax was £191.0 million (2003: £65.0 million). Group operating costs were £429.7 million (2003: £406.2 million). The increasein costs was the result of higher staff costs principally from rising variablecompensation linked to growth in revenues and profits. This increase was partlyoffset by a reduction in non-compensation costs. InvestmentWe generated good investment performance across a range of key products duringthe year, with two thirds of our institutional assets outperforming theirbenchmarks over three years and two thirds of our EU domiciled mutual fundassets returning more than the peer group median over the same period. In 2004 we added to our product offerings in equities, fixed income andalternatives, and we continued to invest in strengthening our portfoliomanagement and research capabilities. DistributionFrom an opening position of £98.9 billion* at the end of December 2003, Groupfunds under management rose 6.8 per cent. to £105.6 billion during the period. In retail, net sales for the year increased to £5.9 billion (2003: £4.2 billion)and were well diversified geographically and by asset class. In the UK andcontinental Europe net inflows were £4.1 billion and Schroders was rated numberone by FERI Fund Market Information for cross border net sales in 2004. In Japanwe had another strong year with net inflows of £1.3 billion, and a further £0.5billion of net inflows elsewhere in Asia Pacific. Retail funds under managementended the year at £30.2 billion (2003: £22.1 billion). *Restatement of assets predominantly due to the inclusion of additional Private Banking funds previously omitted. In institutional we had net outflows during the year of £8.4 billion (2003: £4.3billion), principally due to restructuring by UK institutions away from balancedmandates. Two UK clients alone accounted for £3 billion of net outflows. Butwhile the historic book of business was turning over, we took on £8.5 billion ofnew institutional mandates across regions and in a range of asset classes in2004. Institutional funds under management ended the year at £69.1 billion(2003: £71.4 billion). Overall, the fourth quarter saw a net new business inflow of £0.8 billion,reducing net outflows for the year as a whole to £1.8 billion (2003: £0.5billion). The revenue effect of net business outflows in the year was outweighedby higher margins, driven by the growing importance of retail in the businessmix. Private BankingWe had a positive year in Private Banking with net inflows of £0.7 billioncompared with an outflow of £0.4 billion in 2003. We continued to strengthen ourmarket position in key intermediary distribution channels in the UK and directsales improved across Europe. We also attracted a number of new charitymandates. Our Swiss business performed well and overall Private Banking fundsunder management ended the year at £6.3 billion (2003: £5.4 billion). GovernanceThe new Combined Code on Corporate Governance formally applied to the Companyfor the first time in 2004 and the Board is able to report substantialcompliance with the provisions of the Code. We appointed two new non-executive Directors in 2004: Merlyn Lowther joined theBoard with effect from 1st April and Andrew Beeson from 1st October. DavidSwensen will step down from the Board at the Annual General Meeting in April.The Board thanks Mr Swensen for his contribution to the Company over the pastthree years, and intends to appoint an additional non-executive Director in2005. DividendIn the light of these results and the Group's strong financial position, theBoard has recommended an increased final dividend of 13.5 pence per share,payable on 21st April 2005 to shareholders on the register at 29th March 2005,which brings the total dividend for 2004 to 20.0 pence per share (2003: 18.5pence). OutlookProfitability in 2004 increased significantly due to higher revenues in assetmanagement and exceptional private equity gains. Asset management net revenuemargins continued to improve as a consequence of the changing business mix andaveraged 49 basis points in 2004 (2003: 46 basis points). Net operating marginsin asset management were substantially higher at 11 basis points (2003: 5 basispoints). We are focused on providing our clients with a superior service in terms ofinvestment performance, product innovation and client service, and as a resultgrowing revenues, margins and profitability. Whilst we do not expect theexceptional private equity performance to be repeated in 2005, we see continuedmomentum in our asset management business. Reflecting our long-term approach tothe development of the business, we will continue to seek growth opportunitiesand invest in them as they arise. Michael DobsonChief Executive 1st March 2005 Consolidated Profit and Loss AccountFor the year ended 31st December 2004 2004 2003 (restated)----------------------- ------- ---------------------------- Continuing Continuing Discontinued Total operations operations operations £mn £mn £mn £mn----------------------- ------- ------- ------- -------Net revenues 515.8 427.5 0.1 427.6Gains on current asset 19.6 16.5 - 16.5investmentsAdministrative expenses (415.2) (387.2) (0.4) (387.6) Depreciation (4.6) (8.2) (0.1) (8.3)Amortisation of (9.9) (10.3) - (10.3)goodwill ------- ------- ------- -------Group operating profit/ 105.7 38.3 (0.4) 37.9(loss)Share of operating profit 6.0 2.5 - 2.5of associated ------- ------- ------- -------undertakingsTotal operating profit/ 111.7 40.8 (0.4) 40.4(loss)Profit on disposal of 2.6 - 2.4 2.4business/subsidiaryundertakingsProfit on disposal of 47.8 - - -fixed asset investmentsInterest receivable and 28.3 24.7 0.1 24.8similar incomeAmounts written back to/ 1.3 (1.9) - (1.9)(written off) fixed assetinvestmentsInterest payable and (0.7) (0.7) - (0.7)similar charges ------- ------- ------- -------Profit on ordinary 191.0 62.9 2.1 65.0activities before tax ------- -------Tax charge on profit on (41.4) (16.4)ordinary activities ------- -------Profit on ordinary 149.6 48.6activities after taxMinority interests (15.6) - ------- -------Profit attributable to 134.0 48.6shareholdersDividends (57.8) (53.7) ------- -------Profit/(loss) retained by 76.2 (5.1)the Group for the ------- -------financial yearBasic earnings per 46.0p 16.5pshareDiluted earnings per 45.7p 16.4pshare ------- ------- ------- ------------------------------ Statement of Total Consolidated Recognised Gains and LossesFor the year ended 31st December 2004 ----------------------------------- --------- --------- 2004 2003 £mn £mn (restated)----------------------------------- --------- ---------Profit for the financial year 134.0 48.6Exchange translation adjustments to foreign currency (8.0) (7.6)net investments --------- ---------Total recognised gains and losses relating to the 126.0 41.0year ---------Prior year adjustment relating to adoption of UITF (0.6)Abstract 38 ---------Total gains and losses recognised since last annual 125.4report and financial statements --------- Reconciliation of Movements in Consolidated Shareholders' FundsFor the year ended 31st December 2004 ----------------------------------- --------- --------- 2004 2003 £mn £mn (restated)----------------------------------- --------- ---------Profit for the financial year 134.0 48.6Dividends (57.8) (53.7) --------- -------- 76.2 (5.1)New share capital subscribed 5.4 4.8Reduction in shares to be issued (4.9) (5.0)Cancellation of non-voting ordinary shares (0.5) -Transfer of own shares at cost to reserves at 1st - (61.7)January 2003Shares expensed but not unconditionally vested at 1st - 50.9January 2003Acquisition of own shares (8.9) (12.6)Disposal of own shares 15.1 36.6Reversal of unrealised losses on own shares taken in - 3.3prior yearsShares expensed but not unconditionally vested (0.9) (26.3)Exchange translation adjustments (8.0) (7.6) --------- --------Net increase/(decrease) in shareholders' funds 73.5 (22.7)Equity shareholders' funds brought forward* 1,029.2 1,051.9 --------- --------Equity shareholders' funds carried forward* 1,102.7 1,029.2 --------- -------- *2004 brought forward and 2003 carried forward figures were originally £1,039.6million before deduction of £10.4 million prior year adjustment. Consolidated Balance Sheet31st December 2004 2004 2003 £mn £mn £mn £mn (restated) (restated)-------------------------- -------- -------- -------- ------- Fixed assetsIntangible assets - goodwill 14.6 24.5Tangible assets 7.5 10.1Associates 54.9 49.9Other investments 64.9 66.7 -------- -------- 141.9 151.2Current assetsDebtors due after more than one year 226.9 266.2Debtors due within one year 515.3 499.9Investments 1,369.3 1,245.0Cash and balances with banks 444.2 462.9 -------- -------- 2,555.7 2,474.0 Creditors - amounts falling due within (1,386.3) (1,350.6)one year -------- --------Net current assets 1,169.4 1,123.4 -------- -------Total assets less current liabilities 1,311.3 1,274.6Creditors - amounts falling due after (170.0) (213.0)more than one yearProvisions for liabilities and charges (27.2) (32.4) -------- -------Net assets 1,114.1 1,029.2-------------------------- -------- -------- -------- -------Capital and reservesCalled up share capital 297.0 296.3Share premium account 26.7 22.0Shares to be issued - 4.9Capital reserves 160.5 130.8Profit and loss account 618.5 575.2 -------- -------Equity shareholders' funds 1,102.7 1,029.2Minority interests 11.4 - -------- -------Total shareholders' funds 1,114.1 1,029.2-------------------------- -------- -------- -------- ------- Consolidated Cash Flow StatementFor the year ended 31st December 2004 2004 2003 £mn £mn (restated)--------------------------------- -------- -------- Net cash inflow from operating activities 134.9 129.9Dividends/distributions received from associates 0.2 -Returns on investments and servicing of finance -------- --------Interest received 29.4 26.2Interest paid (0.7) (0.7)Dividends/distributions paid to minority interests (4.4) - -------- --------Net cash inflow from returns on investments and 24.3 25.5servicing of financeTaxation -------- --------United Kingdom corporation tax (paid)/recovered (1.5) 0.2Overseas tax paid (17.0) (9.4) -------- --------Total tax paid (18.5) (9.2)Capital expenditure and financial investments -------- --------Tangible fixed assets - purchases (3.4) (1.6) - disposals 1.0 0.6Fixed asset investments - purchases (59.4) (63.5) - disposals 57.2 49.6 - exceptional item 42.2 - -------- --------Net cash inflow/(outflow) from capital expenditure 37.6 (14.9)and financial investmentsAcquisitions and disposals -------- --------Associated undertakings - acquisitions - (4.2) - disposals - 0.4Subsidiaries/business - disposals 2.8 27.0 - cash disposed - (21.8) -------- --------Net cash inflow from acquisitions and disposals 2.8 1.4Dividends paid (56.4) (53.4) -------- --------Net cash inflow before use of liquid resources and 124.9 79.3financingManagement of liquid resourcesNet cash outflow from management of liquid (17.7) (157.3)resourcesFinancing -------- --------Purchase of non-voting ordinary shares for (0.6) -cancellationNew share capital subscribed 0.6 -Acquisition of own shares (8.9) (12.6)Disposal of own shares - 10.3 -------- --------Net cash outflow from financing (8.9) (2.3) -------- --------Increase/(decrease) in cash 98.3 (80.3) -------- -------- Notes to the AccountsBasis of PreparationThe preliminary results for the year ended 31st December 2004 are unaudited. Thefinancial information included in this statement does not constitute the Group'sstatutory accounts for the years ended 31st December 2003 or 31st December 2004. The financial information for the year ended 31st December 2003 is derived fromthe statutory accounts for that year which have been delivered to the Registrarof Companies and include the Independent Auditors' report on those accountswhich was unqualified. The Independent Auditors' report on the statutoryaccounts for the year ended 31st December 2004 has not yet been signed. Thoseaccounts are expected to be dispatched to shareholders on 17th March 2005, andwill be delivered to the Registrar of Companies after the Annual General Meetingto be held at 31 Gresham Street, London, EC2V 7QA on 19th April 2005. Accounting PoliciesIn preparing the financial information included in this statement there havebeen no material changes to the accounting policies (except for the adoption ofUITF Abstract 38 'Accounting for ESOP Trusts') previously applied by the Groupin reporting its statutory accounts for the year ended 31st December 2003. Segmental Reporting - by Class of BusinessThe Group has three continuing classes of business: asset management, privateequity and Group net income/(costs). Asset management principally comprisesinvestment management and private banking, including advisory services, propertyand other alternative assets; private equity principally comprises privateequity, venture capital and buy-out funds; Group net income/(costs) representsthe return on the investment of the Group's liquid capital, Group central costsand provisions, and big ticket leasing. 2004 £mn-------------------- -------- -------- -------- -------- Asset Private Group Total management equity net income/ (costs)-------------------- -------- -------- -------- -------- Net revenues 491.0 23.3 1.5 515.8Gains on current asset 9.0 7.2 3.4 19.6investmentsAdministrative expenses (383.0) (3.0) (29.2) (415.2)Depreciation (4.1) - (0.5) (4.6)Amortisation of goodwill (9.9) - - (9.9) -------- -------- -------- --------Group operating profit/(loss) 103.0 27.5 (24.8) 105.7 Share of operating profit of 0.2 5.8 - 6.0associated undertakings -------- -------- -------- --------Total operating profit/(loss) 103.2 33.3 (24.8) 111.7 Profit on disposal of 2.6 - - 2.6businessProfit on disposal of fixed - 47.8 - 47.8asset investmentsInterest receivable and 8.0 1.3 19.0 28.3similar incomeAmounts written back to fixed 0.1 1.2 - 1.3asset investmentsInterest payable and similar (0.4) - (0.3) (0.7)charges -------- -------- -------- --------Profit/(loss) on ordinary 113.5 83.6 (6.1) 191.0activities before tax -------- -------- -------- --------Total shareholders' funds 496.8 175.8 441.5 1,114.1 -------- -------- -------- -------- 2003 £mn (restated) ---------------- ------ ------- ------- ------ ------- ------ ------- ------- Asset Asset Total Private Group Total Total Total management management asset equity net continuing discontinued continuing discontinued management income/ operations operations operations operations (costs) ---------------- ------ ------- ------- ------ ------- ------ ------- ------- Net revenues 417.7 0.1 417.8 6.4 3.4 427.6 427.5 0.1Gains on current asset 5.2 - 5.2 10.9 0.4 16.5 16.5 -investmentsAdministrative (360.2) (0.4) (360.6) (2.2) (24.8) (387.6) (387.2) (0.4)expensesDepreciation (8.0) (0.1) (8.1) - (0.2) (8.3) (8.2) (0.1)Amortisation of (10.3) - (10.3) - - (10.3) (10.3) -goodwill ------ ------- ------- ------ ------- ------ ------- -------Group operating profit 44.4 (0.4) 44.0 15.1 (21.2) 37.9 38.3 (0.4)/(loss)Share of operating 0.2 - 0.2 2.3 - 2.5 2.5 -profit of associated ------ ------- ------- ------ ------- ------ ------- -------undertakingsTotal operating profit 44.6 (0.4) 44.2 17.4 (21.2) 40.4 40.8 (0.4)/(loss)Profit on disposal of - 2.4 2.4 - - 2.4 - 2.4subsidiaryundertakingsInterest receivable 6.4 0.1 6.5 1.2 17.1 24.8 24.7 0.1and similar incomeAmounts written off (0.1) - (0.1) (1.8) - (1.9) (1.9) -fixed assetinvestmentsInterest payable and (0.4) - (0.4) - (0.3) (0.7) (0.7) -similar charges ------ ------- ------- ------ ------- ------ ------- -------Profit /(loss) on 50.5 2.1 52.6 16.8 (4.4) 65.0 62.9 2.1ordinary activities ------ ------- ------- ------ ------- ------ ------- -------before taxTotal shareholders' 440.2 - 440.2 118.6 470.4 1,029.2 1,029.2 -funds ------ ------- ------- ------ ------- ------ ------- ------- Consolidated Cash Flow Statement 2004 2003 £mn £mn (restated)--------------------------- --------- --------- Reconciliation of total operating profit tonet cash flow from operating activitiesTotal operating profit 111.7 40.4Depreciation of tangible fixed assets 4.6 8.3Amortisation of goodwill 9.9 10.3Decrease/(increase) in debtors 32.2 (105.7)(Decrease)/increase in creditors (8.5) 246.3Decrease in debt securities in issue (6.4) (55.6)Gain on sale on tangible fixed assets - (0.1)Share of operating profit of associated (6.0) (2.5)undertakingsProvision for liabilities and charges 2.2 3.1Gains on current asset investments (19.6) (16.5)Other non-cash movements 14.8 1.9 --------- ---------Net cash inflow from operating activities 134.9 129.9 --------- --------- 2004 2003 £mn £mn (restated)--------------------------- --------- ---------Reconciliation of net cash flow to movementin net fundsIncrease/(decrease) in cash in the year 98.3 (80.3)Cash outflow from redemption/issue of 6.4 55.6certificates of depositCash outflow from increase in liquid 17.7 157.3resources --------- ---------Changes in net funds resulting from cash 122.4 132.6flowsNon-cash movements in liquid resources (10.4) (2.6)Non-cash movements in debt securities 8.2 -Net funds at 1st January * 1,659.0 1,529.0 --------- ---------Net funds at 31st December * 1,779.2 1,659.0 --------- --------- *2004 brought forward and 2003 carried forward figures were originally £1,669.4 million before deduction of £10.4 million prior year adjustment. Reconciliation of movements in cash ----------------------- --------- ----------- ------------ 2004 Cash flow 2003 £mn £mn £mn----------------------- --------- ----------- ------------Cash and balances with banks - 300.8 95.8 205.0repayable on demandCash and balances with banks - 143.4 257.9other --------- ------------Cash and balances with banks 444.2 462.9 --------- ------------Exchange adjustments 2.5 -----------Increase in cash 98.3 ----------- Tax on profit on ordinary activities 2004 2003 £mn £mn (restated)--------------------------- --------- ---------Profit on ordinary activities before tax 191.0 65.0 ---------- ---------Profit on ordinary activities before tax 57.3 19.5multiplied by corporation tax at the UKstandard rate of 30% (2003: 30%)Effects of:Non-taxable income less expenses not (1.0) 11.2deductible for tax purposesImpact of profits/losses arising in 1.5 2.2jurisdictions with higher tax ratesImpacts of profits/losses arising in (30.6) (16.9)jurisdictions with lower tax ratesMovements in tax losses (0.6) 1.1Timing differences - fixed assets (2.5) (4.5)Other timing differences 7.1 1.5UK tax - prior year adjustments 0.6 0.6Foreign tax - prior year adjustments (1.0) 0.1UK tax on profits of overseas entities 0.4 0.5 ---------- ---------Current tax charged for the year 31.2 15.3Deferred tax - origination and reversal of 10.2 1.1timing differences ---------- ---------Tax charge on profit on ordinary 41.4 16.4activities ---------- --------- Five year financial summary 2004 2003 2002 2001 2000+ £mn £mn £mn £mn £mn (restated) -------- -------- -------- -------- --------Profit/(loss) on ordinary 191.0 65.0 18.9 (8.1) 275.3activities before taxTax (41.4) (16.4) 7.7 (12.6) (53.8) -------- -------- -------- -------- --------Profit/(loss) on ordinary 149.6 48.6 26.6 (20.7) 221.5activities after taxMinority interests (15.6) - (0.5) 0.1 (0.2) -------- -------- -------- -------- --------Profit/(loss) attributable 134.0 48.6 26.1 (20.6) 221.3to shareholders -------- -------- -------- -------- -------- Earnings per shareBasic earnings/(loss) per 46.0 16.5 8.8 (7.0) 74.6share (pence)Diluted earnings/(loss) 45.7 16.4 8.8 (7.0) 74.2per share (pence) DividendsCost (£mn) 57.8 53.7 53.3 53.9 54.1Pence per share 20.0 18.5 18.5 18.5 18.5Total shareholders' funds 1,114.1 1,029.2 1,051.9 1,112.5 1,161.2(£mn)Net assets per share 383 350 355 372 391(pence) ------------------- -------- -------- -------- -------- --------+ Includes the investment banking business sold in April 2000. Operating and Financial ReviewOverview Schroders is a global provider of fund management services for institutional,retail and private clients. Our operations have a broad geographical spancovering the main financial centres of the world, with 34 offices dividedorganisationally between the Americas, Europe and Asia Pacific. The managementof international assets is concentrated in two locations, with a further tenprimarily responsible for domestic assets, and the balance acting as salesoffices. We are committed to an integrated approach to the management of thebusiness, designed to achieve maximum leverage of our intellectual andoperational resources across geographical regions and asset classes. Over recent years we have tightened our focus on asset management, outsourcingadministrative functions to specialist third party suppliers and disposing ofnon-core activities. Within the asset management field, our products cover awide range of asset classes and client segments, but the management of equityportfolios still dominates the mix, with 69 per cent. of client investments inequities at the end of 2004. Schroders' client profile continues to diversify,with Retail and Private Banking clients now accounting for 35 per cent. (2003:28 per cent.) of funds under management and 55 per cent. (2003: 49 per cent.) ofnet revenues in 2004. Revenues for 2003 and 2004 are now stated before fundmanagement charges previously paid by Retail and Private Banking toInstitutional.* Most of Schroders' income derives from fund management services sold throughthird party or institutional distribution channels. The principal exception tothis rule is in Private Banking, where the retention of direct distributioncapacity to individual clients and the provision of banking and trust servicesto supplement the core fund management offering, are central to the businessmodel. ResultsGroup profit before tax of £191.0 million for 2004 compares with a profit of£65.0 million in 2003. Group net revenues were £515.8 million (2003: £427.6million), whilst total costs before goodwill were £419.8 million (2003: £395.9million). Exceptional items contributed £50.4 million (2003: £2.4 million). Netinterest receivable and movements in the value of fixed and current assetinvestments generated a net profit of £48.5 million (2003: £38.7 million),whilst goodwill amortisation was £9.9 million (2003: £10.3 million). Inaddition, the Group's share of operating profits in associated undertakings was£6.0 million (2003: £2.5 million). The Group's profit attributable to shareholders after tax and minority interestswas £134.0 million (2003: £48.6 million). Basic and diluted earnings per share were 46.0 pence and 45.7 pence respectively(2003: 16.5 pence and 16.4 pence respectively). *In the functional reorganisation undertaken in September 2003, the Investmentfunction previously reported as part of Institutional was split off into aseparate division. As a result internal fund management charges are no longerpaid by Retail and Private Banking to Institutional and 2003 net revenues bydistribution channel have been restated accordingly. Asset managementNet revenues in asset management rose to £491.0 million from £417.8 million.Asset management costs before goodwill were £387.1 million in 2004 (2003: £368.7million). The sale of the Group's U.S. small cap equity business in Bostongenerated an exceptional asset management gain of £2.6 million during the year,whilst net interest receivable and movements on asset management fixed andcurrent asset investments generated a net profit of £16.7 million (2003: £11.2million). Asset management profit before goodwill was £123.4 million (2003:£62.9 million). Private equityThe Group's private equity profit increased from £16.8 million in 2003 to £83.6million in 2004. The largest item under this heading was the exceptional gain(before minority interests) of £47.8 million relating to the disposal of aprivate equity investment by Internet Finance Partners, a controlled limitedpartnership. The private equity profit also included a mark-to-market gain of£6.3 million on the Group's holding in SVG Capital plc (formerly known asSchroder Ventures International Investment Trust plc). In addition, other flowsincluded direct distributions totalling £11.7 million from the sale ofinvestments by Permira Europe I, a private equity fund in which the Group hasdirect and indirect interests. Minority interests in the Internet Finance Partners disposal amounted to £15.4million, which is reflected in the Group's profit attributable to shareholders. Group net income/(costs)Group net income/(costs) comprises income on the Group's liquid capital lessGroup costs and provisions - that is those costs not directly attributable tothe other segments - and the results of the leasing business (before any taxcredits, which are taken through the tax line). Losses within the segmentincreased to £6.1 million (2003: £4.4 million), as improved returns from themanagement of the Group's liquid capital were outweighed by increased costs dueto the implementation of new financial systems across the Group, increased costsfor surplus office space and a rise in compensation costs within the segment. PensionsPensions have been accounted for in accordance with SSAP 24, with a net cost of£9.8 million (2003: £11.4 million) relating to the Group's UK defined benefitscheme. Under FRS 17 the market value of the assets of the scheme is £389.2million and the deficit on the scheme is £21.2 million. The FRS 17 charge forthe year would have been £4.9 million. Funds under managementFunds under management (FUM) increased by £6.7 billion from £98.9 billion at31st December 2003 (adjusted for £0.6 billion of funds previously omitted,primarily within Private Banking) to £105.6 billion at 31st December 2004, ofwhich £8.8 billion arose from the appreciation of clients' assets, principallydue to higher equity markets. Inflows from new and existing clients were £25.9billion, of which £17.4 billion was from Retail and Private Banking clients. Total Institutional Retail Private Banking £bn £bn £bn £bn--------------- -------- -------- -------- --------31st December 2003 98.3 71.2 22.1 5.0Transfers and 0.6 0.2 - 0.4adjustments -------- -------- -------- --------31st December 2003 98.9 71.4 22.1 5.4restatedDisposals (0.3) (0.3) - -Transfers - (0.5) 0.3 0.2Market movement 8.8 6.9 1.9 -Net asset gains/ (1.8) (8.4) 5.9 0.7(losses) -------- -------- -------- --------31st December 2004 105.6 69.1 30.2 6.3--------------- -------- -------- -------- -------- CommentaryThe results in 2004 show a year of strong improvement, with Group profit beforetax up nearly 300 per cent. on the prior year and more importantly the profitfrom the asset management business before exceptional items almost doubled inthe year. Asset management net revenue margins improved from 46 basis points to49 basis points, while the ratio of asset management costs to net revenuesimproved from 88 per cent. to 79 per cent. Overall the Group continues to see strong inflows in higher margin areas of thebusiness; Retail continues to perform well with net inflows of £5.9 billion in2004, up from £4.2 billion in 2003, whilst Private Banking secured net inflowsof £0.7 billion in 2004, against net outflows of £0.4 billion in 2003. Even ifmarkets had not appreciated during the year, annualised revenues in assetmanagement would have gone up, with higher margin net business gains in Retailand Private Banking outweighing net losses in Institutional. RevenuesNet revenues have increased by over 20 per cent. to £515.8 million in 2004,whilst the business mix has continued to shift from Institutional to Retail andPrivate Banking. Retail and Private Banking now represent 55 per cent. of netrevenues compared to 49 per cent. in 2003, driven by strong Retail inflows incontinental Europe and Japan and Private Banking inflows in both the UK andSwitzerland. CostsTotal costs before goodwill increased by 6.0 per cent. to £419.8 million in2004. Within this figure were substantial rises in staff costs, principallyincreased variable compensation linked to higher revenues and profitability,offset by reductions in operational and other non-compensation costs. After asustained period of staff reductions, we have commenced a modest expansion inthe workforce to take advantage of new opportunities in the market and respondto an increased level of business. Earnings momentumSchroders has continued to demonstrate a positive trend in earnings in 2004. TheGroup opened the year with an estimated net asset management margin of 9 basispoints (calculated as 2003 asset management net revenue divided by 2003 averageFUM less 2003 asset management costs divided by 2004 opening FUM). By the end ofthe year the equivalent ratio had climbed to an estimated 12 basis points,illustrating the positive impact of rising markets, changing business mix and afocus on reducing operating cost margins. Market trends and related risksThe year saw a steady improvement in the economic environment reflected inimproving market levels and Schroders benefited from this improvement. Marketsaside, underlying momentum within the asset management industry remains strong,with the growing worldwide focus on the gaps in existing pensions provisionlikely to provide a strong stimulus to savings in the coming years. Schroders retains a relatively high level of operational gearing and profitswould clearly be exposed in the short term to a decline in equity markets fromtheir current levels. The impact of market-related risks on profits iscontrolled by managing total compensation to a reducing proportion of operatingrevenues. This mechanism, combined with a continued focus on the level ofnon-compensation expenses, provides strong underpinning to the management of thecost:income ratio. Balancing cost disciplines with the need to invest in thebusiness requires a close alignment of the interests of staff and shareholders.Schroders has considerably increased the proportion of total staff compensationdelivered in the form of equity over the last four years. We rely on this andother measures to maintain an appropriate focus on profitability, particularlyat a senior level. We believe that our remuneration policies mitigate the inevitable risks in thecurrent more robust recruitment environment, and will help us to retain our keystaff. In common with all other listed UK Groups, Schroders is undertaking thetransition to International Financial Reporting Standards (IFRS) for its 2005financial statements. Whilst the Group remains on track to make the transitionto IFRS, it is likely that the change will create concerns over comparability ofresults both over time and between different groups as the market seeks tounderstand the new basis of accounting. The Group believes that the transitioncan only be managed by clear and open communication with the market of theimpact of the change on group results. To this end we have already provided aninitial analysis of the impact on the Group net asset position at 1st Januaryand 30th June 2004 and the financial results for the six months ended 30th June2004. The Group will continue this communication process by publishing areconciliation of the Group's 2004 results between UK GAAP and IFRS in thesecond quarter of this year with the first results produced by the Group underIFRS being the interim results for the period to 30th June 2005. Capital allocation and liquidityEquity shareholders' funds at 31st December 2004 were £1.10 billion. 2004 2003 £mn £mn (restated)----------------- ----------- ------------Asset management 357 342Surplus: ----------- ------------Liquid funds 356 458Third party hedge funds 123 15Private equity 164 119Other Schroder funds 107 58Leasing 9 32 ----------- ------------ 759 682Group 11 18Proposed dividends (39) (38) ----------- ------------ 1,088 1,004Goodwill 15 25 ----------- ------------ 1,103 1,029----------------- ----------- ------------ The table above sets out management's view of the allocation of capital betweenthe different activities in the Group. On the basis of this analysis, theGroup's holding companies have some £759 million of surplus capital available tofund dividends, acquisitions or investment opportunities. Liquid funds areinvested in cash, bank deposits or segregated money market and bond portfolios.With the exception of private equity, the great majority of surplus capital isheld directly in sterling instruments or hedged back into sterling. The increasein the private equity figure in the year largely relates to cash realisationsfrom Internet Finance Partners either held in escrow or awaiting distribution atthe year end. Schroders carries no significant borrowings on the balance sheet and workingcapital requirements are largely confined to the maintenance of regulatorycapital and the funding of fee receivables billed in arrears. Cash flowsA significant proportion of the cash flows reflected in the financial statementsrelate to the Private Banking businesses. Stripping these out leaves threesignificant non-operating items: (i) cash inflows during the year relating tothe disposal of a fixed asset investment (£42.2 million); (ii) cash inflowsduring the year relating to net interest received (£28.7 million); and (iii)cash outflows during the year relating to payment of dividends (£56.4 million). Corporate actionsThere were no major Group corporate actions in 2004. Credit Ratings Short term Long term------------------ ---------- ----------Fitch IBCA F1 A+------------------ ---------- ----------Standard & Poor's A1 A------------------ ---------- ---------- Currency exposureAllowing for the effect of foreign exchange hedges, approximately 94 per cent.of the Group's capital is invested in four currencies: sterling, U.S. dollars,euros and Swiss francs. 81 per cent. of the Group's capital is in sterling. DividendsThe Directors recommend an increased final dividend of 13.5 pence per share,bringing dividends for the year to 20.0 pence per share or £57.8 million whichwill be 2.3 times covered by the Group's profit attributable to shareholders. Performance measurementThe primary measures of the Group's performance for the asset managementbusiness are the asset management costs: net revenues ratio, 79 per cent. (2003:88 per cent.)*; net revenues on average funds under management, 49 basis points(2003: 46 basis points)*; and asset management costs on average funds undermanagement, 38 basis points (2003: 41 basis points)*. Analyst presentationThe presentation to analysts and investment managers will take place today at09.00 GMT, 31 Gresham Street, London EC2V 7QA. It can be viewed live atwww.schroders.com. Jonathan AsquithChief Financial Officer 1st March 2005 *Primary measures adjusted to include project and redundancy costs and prior year restatement of funds under management. Forward-looking statementsThis preliminary announcement contains certain forward-looking statements withrespect to the financial condition, results of operations and businesses ofSchroders plc. These statements and forecasts involve risk and uncertainty becausethey relate to events and depend upon circumstances that will occur in the future.There are a number of factors that could cause actual results or developments todiffer materially from those expressed or implied by these forward-lookingstatements and forecasts. Nothing in this announcement should be construed as aprofit forecast.---------------------------------------------------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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