Henderson Group - 2011 Results - copy of briefing

2011 Full Year results presentation - copy of briefing

29 February 2012

Henderson Group plc today holds its 2011 Full Year results briefing.

A copy of the briefing is attached.

Henderson Group plc

47 Esplanade

St Helier

Jersey JE1 0BD

Registered in Jersey

No. 101484

ABN 67 133 992 766

Slide 1 - Overview and corporate activity FY11

Good morning and good evening to those in Australia. Thank you for joining us today as we present Henderson Group's 2011 full year results.

The ASX Appendix 4E, which contains our audited accounts and business review, and this presentation are available on our website.

I will start with an overview of the results and then cover strategic developments we undertook in 2011 including the Gartmore acquisition.

Shirley will follow with the financial results and Gartmore in more detail.

Then I will look at our key performance metrics and how we are tracking against those and within a broader industry context. I will end by recapping a few points and outline our priorities for the rest of this year.

We are happy to take your questions at the end of this briefing.

Slide 2 - FY11 overview

In what was a volatile and uncertain environment, we capitalised on opportunities, managed what was within our control and extracted many efficiencies from combining Gartmore with Henderson. In so doing, we produced a record financial result with underlying profit before tax up 58% to £159 million and diluted earnings per share up over 30% to 12.4 pence per share. This is the strongest set of results we have reported since our demerger from AMP in 2003.

The increase in income, driven largely by Gartmore, helped improve the management fee margin by 11% to 53 basis points.

Our operating margin improved 21% to 36.3%. This was due to integrating Gartmore at a higher operating margin than our own, higher performance fees and continued cost control.

On the dividend, the Board is recommending a final dividend of 5.05 pence per share. This will take the total dividend for 2011 to 7 pence per share, nearly 8% higher than 2010. This is in line with our progressive dividend policy and demonstrates our confidence in the business to continue generating good cash flows.

Investment performance remained good over three years with 66% of funds either meeting or exceeding their benchmarks. One year figures suffered slightly following lower estimated Property performance and volatile markets in the second half of 2011. 

Against what is a strong set of financial results I am obviously disappointed with the headline number for net fund flows. Putting this into some context, two-thirds of the outflows relate to the Henderson Institutional book where we saw significant outflows from lower margin accounts. That said, I want to see positive net fund flows and we have made a number of changes and investments to support this. I will spend more time on flows later on.

As regards our financial strength - we continued to generate positive operating cash flows and the net effect of debt refinancing and repayments is that we maintained our prudent gearing ratios. Shirley will say more on this later.

However before I hand over to Shirley, I would like to touch on some of the corporate activity we undertook in 2011. It is fair to say that the Gartmore acquisition has exceeded our expectations and to illustrate the benefits of the acquisition we will show you in the next couple of slides our analysis of the asset and revenue retention levels.

Slide 3 - Asset retention above expectations

Here we breakdown the fund flows on the Gartmore book since the announcement of the acquisition last January. By retaining key staff, communicating clearly and regularly with our clients, and integrating Gartmore swiftly and seamlessly, we held onto 86% of the assets. The high asset retention contributed to the good revenue generation and retention illustrated on the next slide.

Slide 4 - Good asset retention drives income

Excluding performance fees and focusing on the recurring management and transaction fees, the revenue run-rate of the Gartmore business at the time of announcement was £132 million per annum.

Looking just at the impact of net flows, we estimate that we retained around 89% of management and transaction fees.

After taking into account market movements, we estimate a run-rate at the end of 2011 of £106 million. As the markets have improved since December, this run-rate has also improved.

In addition to the recurring revenues we acquired, we already have and expect to continue earning performance fees on the ex Gartmore funds.

There are also opportunities to improve the revenue side of our combined business through an enhanced product offering, especially in our absolute return fund range. And with increased scale comes additional operational benefits for us to exploit.

Slide 5 - Divestments enable focus on core business

The Gartmore acquisition was clearly the headline corporate event of last year for us. However, in line with our strategy, we also exited a number of non-core legacy businesses which had in total £4 billion of assets under management.

The disposals consisted of the liquid assets fund we transferred to DB Advisors, we sold New Star Institutional Managers to the management team and their partner Connor Clarke and Lunn and we sold the Hermes GPE JV back to Hermes.

These disposals have resulted in a number of efficiency gains and improved our risk profile - benefits which offset the modest loss of revenue.

We also restructured certain parts of the business. Late last year we parted ways with the currency team, we changed the way we support our SRI capability and reviewed the way we manage our multi-strategy funds. These actions improved the efficiency of the Group and helped simplify and streamline the business paving the way for reinvestment where we have gaps.

I will now hand over to Shirley …

Thank you Andrew, I am delighted to present these financial results, as you mentioned, our strongest since the demerger from AMP some eight years ago.

Slide 7 - Underlying profit before tax

As you can see on this slide, our underlying profit before tax was £159.2 million in 2011. This was 58% higher than in 2010.

Over 50% of the growth in total fee income flowed through to underlying profit.

Much of this growth and improvement came from Gartmore which I will illustrate in the next few slides.

Slide 8 - Improvement in operating margin

The overall Group operating margin improved significantly from 30% to 36.3%. We were able to achieve the cost efficiencies from the Gartmore acquisition by the 30th of June, adding this business at an operating margin of above 50%.

We estimate that of the 6.3 percentage points improvement in the operating margin, 4.3 was a result of the speedy and efficient integration of Gartmore. The remainder came from both improvements in the Henderson standalone business and from extracting further efficiencies from combining the two.

Over the medium term, we still think we should be able to move towards an operating margin of 40%.

Slide 9 - Significant EPS accretion

As Andrew mentioned, our diluted earnings per share improved by 31% from 9.5 pence to 12.4 pence per share.

We estimate that just over half of the improvement came from Gartmore with the remainder again coming from the standalone Henderson business and the benefits from operating the combined business more efficiently.

Slide 10 - Financial benefits from Gartmore achieved

We also measure the financial success of this acquisition by comparing the Group's cost of equity, which is 11.7%, and our weighted average cost of capital, which is 11.5%, to the return on equity and return on invested capital respectively.

These returns are based on the share price at announcement; on annualised management and transaction fees earned and on actual performance fees earned in the year.

In both instances the returns achieved exceeded our hurdle rates by a significant margin.

So in summary, Gartmore has been a financial success in the short period of ownership. As it is now fully integrated we will not be able to disaggregate Gartmore from the existing business going forward.

Slide 11 - Drivers of net increase in total fee income

Turning to the combined business and delving further into the drivers of the net increase in total fee income of £114.7 million…

Management fees, which account for 76% of total fee income, contributed to just over two-thirds of the increase. This was primarily due to the take-on of Gartmore assets. The largest contributors to management fees were UK retail, SICAVs, Institutional Property funds and offshore absolute return funds.

We earned nearly 50% more in performance fees compared to 2010 and this accounted for 20% of the increase in total fee income. Performance fees from absolute return funds, the AlphaGen funds in particular, and from SICAVs showed the biggest year on year increase. I will say more on performance fees on the next slide.

Transaction fees accounted for 12% of the increase in total fee income. The fees we earn on UK retail funds accounted for about 55% of these fees. Fees from this range are recurring in nature and based on AUM levels.

Slide 12 - Sources of performance fees

Taking a closer look at performance fees - performance fees from Institutional clients were lower albeit from a different and wider client mandate mix.

As I just mentioned, absolute return funds and SICAVs were the main contributors to the £22.4 million increase. Seven of our absolute return funds accounted for around 90% of the performance fees earned there. In the SICAVs, Pan European Equity and Global Technology were the main contributors.

On offshore absolute return funds, around 15% of assets under management were at or above their high watermark and a further 47% were within 5% of their high watermark as at 31 January.

The SICAVs and Investment Trusts have to beat their benchmarks and post a positive return since the last performance fee was earned. The increased volatility in the second half of 2011, with many funds having first half year ends, has caused many of these funds to be below their high watermarks. So given this volatility it is better look at funds that are within 5% or higher of their high watermarks. In the case of Henderson SICAVs and Investment Trusts, 61% of assets under management respectively were within this range at 31 January.

Of our total fund range, 42% of our assets under management have the potential to earn a performance fee. That said, 2012 will pose a more challenging outlook for performance fees. It would be prudent to expect these fees to be substantially lower than in 2011 given recent market levels and the current profile and timing of fund year-ends.

Slide 13 - Total income and operating expenses

This slide highlights how we manage our cost base in line with our income. It also shows that we controlled costs throughout the Gartmore integration process.

Looking at the full year numbers, operating expenses, the red line, increased approximately £50 million or 20% of which £39 million was staff costs. Variable staff costs, which move in line with income earned and provide a flexible cost base for the business, accounted for £26 million of the increase. Higher performance fee share and short-term incentives were offset by lower sales related incentive payments. Fixed staff costs rose by £13 million due to the impact of Gartmore staff for three quarters, other headcount increases and salary inflation.

We would expect 2012 fixed staff costs to be slightly lower than the 2011 second half run-rate, as the benefit of the cost saving measures taken in the last quarter of 2011 come through, but offset by selective investment in the business and some salary inflation.

Slide 14 - Operating margin and compensation ratio

Turning to our KPIs, our compensation ratio, that is the pink line, has reached its lowest level and our operating margin is at its highest level of the past five years. This demonstrates that, as we've grown, the underlying profitability of the business has also improved.

The scale benefits of Gartmore enabled us to reduce the compensation ratio to 41.6% in 2011 from 44.4%. We expect a compensation ratio of around 40% is achievable however, this is dependent on both the level of net sales and the performance fees generated and therefore the share paid out to staff.

As previously mentioned, the operating margin improved from 30% to 36.3% and we expect it to continue to move towards 40% in the medium term.

Slide 15 - Continued cost discipline

Looking at other operating expenses, i.e. non-employee related costs, most of the increase from £92.4 million to £103.8 million is as a result of the Gartmore acquisition as more funds and higher headcount required additional administration and support.

Office expenses were lower in the second half of 2011 as some long standing disputes were resolved in our favour and offset other costs we would have paid. So in thinking of this cost line going forward, you should assume that the first half is a more likely run-rate.

Other expenses increased mostly as a result of business development spend on our brand and marketing support for our core retail and institutional businesses. There were a number of smaller impacts such as an increase in irrecoverable VAT.

Except for office expenses, we would expect full year 2012 other operating expenses overall to be in line with the 2011 second half run rate.

Slide 16 - Non-recurring items

The one-off integration costs of £69.7 million are in line with what we said at the time of announcing the acquisition. After tax, this cost falls to £34.5 million.

We incurred £6 million of restructuring costs in Q4 as part of cost saving measures we took in response to the market volatility in the second half. This is the first such exercise since 2008. As a result of this restructuring exercise, a number of roles were removed across the organisation. This demonstrates our continued focus on controlling our costs whilst we also invest selectively in the business.

During the year we reviewed the void property provision in respect of properties acquired through the New Star acquisition. As a result of improved sub-letting arrangements, £6.5 million of the provision was released and is recognised as a non-recurring item.

Slide 17 - Tax, earnings and dividend per share

The effective tax rate on underlying profit was 21.1% compared to 20.5% in 2010. This rate is slightly higher due to the impact of Gartmore, a predominantly UK business.

The main reason for the underlying effective tax rate being lower than the pro-rata UK corporate tax rate of 26.5%, is the net favourable effect of different statutory tax rates applying to profits generated by non-UK subsidiaries.

Underlying earnings per share, both on a diluted and basic basis, showed healthy increases of 31% and 29% respectively.

And Andrew has already spoken about the increase in the dividend.

Slide 18 - Summary of cash flow

On this slide we provide you with an overview of our cash flow. We generated £161.5 million of underlying cash flows.

We had £57.8 million non-recurring cash outflows, including integrating Gartmore, repaid £43.2 million of Gartmore net debt and received £116.7 million from the new debt issued in March.

We made dividend payments of £69.9 million, whilst the purchase of own shares was offset by cash from unclaimed capital distributions.

Overall, the net debt to EBITDA ratio remains low at 0.2 times.

We have confidence in the business' ability to continue generating strong cash flows and as such, we will repay the £142.6 million debt due in May 2012 from our existing cash resources.

Slide 19 - Financial position - debt, equity and ratios

Looking at the financial strength of the business.

We issued £150 million of senior, unrated, fixed rate notes in March which, along with the combined Group's cash, was used both to repay Gartmore's debt and extinguish £32.4 million of the existing 2012 Notes.

The gross debt position at 31 December was £292.6 million. The £200 million facility entered into to facilitate the Gartmore acquisition has been cancelled. This leaves a £75m revolving credit facility available, entered into in January last year, which has not been drawn and which expires in April 2014.

As shown on the previous slide, we saw strong cash generation in the business and unrestricted cash balances increased by £110.4 million. The net debt position remained small at £28 million as at 31 December.

The balance sheet is healthy with prudent gearing ratios and there has been no significant change in these ratios following the Gartmore acquisition.

I will now hand back to Andrew.

Thanks Shirley.

I would like to turn now to some of our key performance indicators.

Slide 21 - Investment performance (asset weighted of funds measured)

Turning first to investment performance which includes Gartmore over all periods. As I mentioned earlier, total asset weighted performance continues to be good over three years although one year figures suffered slightly due to the estimated Property performance.

59% and 66% of funds overall exceeded their benchmarks over one and three years respectively. Looking at the various asset classes 53% and 71% of Equity funds and 79% and 87% of Fixed Income funds were achieving or beating their benchmarks over one year and three years respectively. The estimated Property performance was 48% and 23% respectively where the effects of the property downturn in 2008/2009 continue to impact the longer term numbers.

Performance over one year in UK retail has slightly weakened as a couple of our larger funds have underperformed more recently. However, over three years performance remains strong.

After a short period of under performance last year, our SICAVs are again performing strongly over all periods.

The performance of the US mutuals continues to be impacted by the underperformance of the International Opportunities fund. Having steadily improved in the first nine months of 2011, the fund suffered in the market turmoil of the fourth quarter to post a disappointing one year return. Since inception of this fund, returns are extremely good and I have confidence in the fund manager line-up and we have seen an improvement in fund performance so far in 2012.

Along with the industry our absolute return funds were tested by the volatility in markets last year. Over longer periods performance is strong and year-to-date we have seen a rebound in a number of the funds.

The Institutional business, as you can see here, continues to perform very well.

Slide 22 - Fee margins

This slide shows you the progress in fee margins we have made over the past three years.

The significant improvements are the result of a change in the mix of our assets under management as we have increased the retail and absolute return components, strong performance fees and also two successful acquisitions.

The total and net fee margins will vary depending, in part, on the level of performance fees we generate so they will come under pressure if, as Shirley highlighted, performance fees are down substantially this year. Looking at the management fee margin, I expect we could maintain the current level given the mix of our business and where we see sales growth coming from.

Slide 23 - Net flows in FY11

This slide shows our net flows in retail and institutional in the first and second half of last year. As I mentioned earlier, it was a disappointing result as clients, driven by the market uncertainty, sought to reduce exposure to risk assets across the board.

Starting with retail flows, 2011 was a year of two halves, with the Henderson funds in net inflow in the first half but then turning into net outflow in the second as market conditions deteriorated. The outflows were predominantly from our SICAV and US Mutual funds. Encouragingly, the Henderson UK retail book remained relatively stable and delivered full year net inflows of £283 million. Net of previously notified Gartmore outflows, this would have been broadly flat for the combined book.

In Institutional, we lost a few long-standing, lower margin mandates where clients, despite strong performance, rebalanced their portfolios. It was a combination of clients reducing their European exposure, the maturing and unwinding of CDOs and a small number of clients changing asset allocations to global mandates. Unfortunately in the fourth quarter, we received notification of a total of £1 billion outflows which left in that quarter and offset the net client commitments we had at the end of the third quarter. This is particularly disappointing as many of the mandates were delivering strongly, as you saw in the investment performance slide, and we received significant performance fees from these clients. Whilst currently the pipeline in institutional is looking flat we expect that notified redemptions are likely to go out before notified wins are funded.

Slide 24 - Net flows in FY11

Taking a closer look at absolute return, flows turned negative in the fourth quarter asclients in general reduced their allocation to equity long/short strategies. This has carried forward into the early part of this year. Flows in the non equity long/short funds such as our Agriculture and Credit funds have remained stable.

Property had net inflows throughout the year albeit at a slower pace in the second half. Although we did not see a similar level of net inflows in the second half this does mask a significant amount of activity - we were involved in over 90 asset deals last year and we continued selling assets to realise successful exits for our clients.

Slide 25 - Property AUM movement 2009 - 2011

Taking a closer look at property, here we illustrate the level of activity that underlies the changes in our property AUM. You can see how the pipeline of client commitments has been invested over the past two years, as well as additional new equity raised offset by distributions to our clients as we realised returns for them. Now, turning to the next slide….

Slide 26 - Movement in Property pipeline

We show that property client commitments remained largely unchanged from the end of 2010 to the end of 2011 at £1.4 billion. As we invested approximately half the client commitments during the year, we raised an even greater level of additional commitments.

Again, this demonstrates that we continued to raise new equity, through eight funds or segregated accounts, and we also put the pipeline to work. Overall we purchased 53 and sold 38 properties last year. We will continue to deploy these client commitments over the next few years.

Slide 27 - UK retail quarterly net flows

In the next few slides we take a look at our net flows as a percentage of beginning AUM compared to that of the industry.

A key focus of our strategy over the past three years has been to build our UK retail business. Doing two acquisitions over that period will naturally disrupt your business and, in these markets, it is likely to take longer to demonstrate persistent net sales growth.

So far this year, without knowing the industry position but looking at our own experience, the position remains challenged with clients retaining a degree of caution. In the UK we are seeing good gross flows, however net flows have been negative at around £100 million per month. A significant proportion of these outflows have been from the Multi-manager range and Strategic bond where short term performance has suffered. However, the managers have good long term performance and are well regarded, hence we expect to see an improvement.

In addition to delivering good or improving investment performance, an improvement in the eurozone and market levels generally should benefit our sales.

As regards the Retail Distribution Review, we believe this could result in the larger, well recognised groups benefitting as advisors increasingly limit the number of managers that they partner with. To that end, we have signed up with a network of representatives from the advisory market and we will continue to invest in our brand.

Slide 28 - European retail quarterly net flows

On slide 28 you can see that over time our net European flows are better than the industry average. Whilst this range is the most volatile part of our business, it has also contributed handsomely to performance fees in the past and attracts on average a higher management fee margin.

More recently, the chart shows a slowing for both Henderson and the industry in the rate of decline. So far this year we have seen positive net flows which have substantially neutralised the outflows we have seen in the UK OEIC range.

Given our strong fund manager line-up and investment performance in our SICAV fund range, we are in a good position to benefit should this positive client demand continue.

Slide 29 - US retail quarterly net flows

Our US mutual fund range represents a very small portion of the overall industry but that said, you can see on this slide that our flows largely follow the industry trend. We sell predominantly EAFE or European product into the US so given the concerns around the eurozone, the decline in net sales in 2011 stands to reason. Clearly there are performance issues in our largest fund but this alone is not the cause of the net outflows.

We are currently in the process of launching an all asset fund continuing the diversification of our product in this market. We believe this product will tap into US investors demand for a more all weather product, with lower exposure to equity markets.

January saw modest outflows from this book and February is flat.

Slide 30 - Absolute return fund flows

Industry data for European absolute return fund flows is only available on a half yearly basis. We have chosen the European long short equity index as the most representative of our book of business. This shows that we have seen a greater level of inflows than the industry over the past three years. And looking at performance…

Slide 31 - Absolute return fund performance

…both the Henderson and Gartmore fund ranges have outperformed the industry over the last three years. You can also see here the differences in the two ranges, with the legacy Henderson funds typically having higher volatility compared to the legacy Gartmore range.

Slide 32 - Key points from FY11 - recap

So just to recap the key points …

2011 was an exceptional year financially for Henderson where we capitalised on opportunities, controlled our cost base and extracted many efficiencies to produce strong profit growth of 58%.

We have good investment performance and we saw good flows into absolute return funds, property and Henderson UK retail.

Our fee and our operating margins are trending in the right direction and we have maintained a prudent capital position with strong cash generation in the business.

The Gartmore acquisition has already made a significant contribution to our business and has exceeded our expectations.

Against a volatile and uncertain environment, we have been strengthening and increasing overall efficiency of the business.

Slide 33 - Strategy and priorities for FY12

Our business model is a simple one. We have the client at the centre of everything we do. As such, we are focused on delivering the right product, good investment performance and a quality service. To do this, we have to ensure we have the right people in place, aligned with our shareholders and clients.

If we get this right, we will achieve our strategic objectives. In UK retail we are now well positioned to grow the business. Our SICAV fund range has excellent performance and good product, positioning us well to grow in European retail. In our US Mutual fund business we need to address performance issues as well as broaden the product offering away from European biased equity products. This supports one of our key efforts in 2012 - to expand and grow our absolute return and global products.

You should take comfort from the fact that we are always focused on running the business efficiently and even more so in challenging times. We have made a number of adjustments to our business in the latter part of last year and we remain vigilant about increasing efficiency across the Group.

You will recall I spoke earlier about looking hard at a number of our investment capabilities. Recognising the need to continue to invest in areas such as absolute return and global products, we have realised savings to support these initiatives through the review and simplification of other parts of the business. The divestment of non-core activities, along with a focus on overall costs, enable us to make these investments without incurring an increase in the overall cost base as Shirley has highlighted.

We also believe that by fostering strategic relationships with clients, suppliers and distributors, we can accelerate our growth and enhance the profitability of the Group.

Market conditions remain uncertain, but I am confident about the outlook for the Group. We have succeeded in strengthening both our business and client offerings and are well equipped to continue to deliver good returns for our investors through this volatility. As always, our focus is on delivering the best product and service to our clients, and creating value for our shareholders.

Slide 34 - 2011 full-year results

That concludes the formal part of the briefing. We'll now take questions from the floor and then I will hand over to the operator.

Wrap up after Q+A

Thank you for your time today and if you have any further questions please don't hesitate to contact us.