Henderson Group - FY12 results - copy of briefing

2012 Full Year results presentation - copy of briefing

27 February 2013

Henderson Group plc today holds its 2012 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

Good morning everyone here in our London office and good evening to those in Australia. Welcome to our 2012 full-year results presentation. Hopefully everyone on the webcast and teleconference can hear us clearly.

I will start with a quick overview of the results and the progress we have made against our key performance indicators. Shirley will delve into the financial results in more detail and then I will recap and outline our priorities for the rest of this year.

We're happy to take any questions you may have at the end of the presentation.

Slide 2 - FY12 overview

Looking at the positive start markets have had so far this year, it's easy to forget that 2012 started the same way. However, the early optimism last year was soon overshadowed by political and economic uncertainty that led to a downturn in global equity markets from the second quarter.

Throughout the year, volatility featured constantly with a number of political leadership changes and appointments taking place mixed in with further bailouts of banks, extended quantitative easing in the UK and the Fed's actions to help stimulate the US economy.

In the latter stages of 2012, markets enjoyed some respite with a generally upward path particularly after Mario Draghi's pledge in July to preserve the euro.

The uncertainty these events created posed a challenging sales environment, with Henderson experiencing renewed outflows given our relatively high exposure to Europe as well as to equities. This impacted both revenues and profit and we saw our underlying profit decline by 8% to £146.5 million. We did however, keep a tight rein on costs and were able to at least match the percentage fall in revenues with a similar percentage fall in costs.

Diluted earnings per share declined by only 6% to 11.7 pence as a lower tax charge for the year was offset by a higher share count.

Despite the fall in profits our operating margin held steady at 36%.

We managed employee costs tightly, enabling us to modestly reduce the compensation ratio to just over 41%. This was driven by lower variable compensation, in particular, lower performance fee bonuses.

Overall, the business remains in good health. The Board has therefore decided to recommend a final dividend for 2012 of 5.05 pence per share. That will bring the total dividend to 7.15 pence per share, an increase of 2%. We expect to pay this dividend on the 31st of May.

Investment performance overall is strong with 69% of funds either meeting or exceeding their benchmarks over three years and 73% over one year, both numbers up from the previous year.

Assets under management increased by 2%, to £65.6 billion as, although we saw net outflows, these were more than offset by positive market and FX movements. I will give a further breakdown on fund flows in slides to follow.

In terms of our balance sheet and financial strength, we have seen good progress on improving the overall strength of the business as we generated strong cash flows. We fully repaid our 2012 debt in May from existing resources and we recently cancelled our revolving credit facility. Overall, our activity in the year has left us with gross debt of only £150 million and a net cash position of £18 million.

Before I hand over to Shirley, I will take a closer look at the main KPIs we monitor.  

Slide 3 - Investment performance (asset weighted of funds measured)

Performance over three years continued to be strong. We saw significant improvements in some of our larger, core funds as markets improved towards the end of the year, resulting in our one year numbers improving from 59% at the end of 2011 to 73% at the end of 2012.

At an asset class level, performance in our fixed income funds continues to be excellent over all periods and our equity funds performed strongly in the second half resulting in an improvement in both our one and three year numbers. The performance in our property funds was weaker over one year largely as a result of two funds underperforming their benchmarks whereas over three years, performance improved as one fund in particular performed well after completing its investment programme.

Turning to the business lines shown at the top of this slide. In UK retail, performance over one year has improved.

Our European SICAV fund range continues to perform very strongly over all periods. Encouragingly, as clients are looking at Europe again, this performance has started to translate into new business growth.

The performance in the US mutual fund range has picked up significantly over one year as performance in the International Opportunities fund improved, finishing the year in the first quartile.

Our Investment Trust business had another good year with all but one of our trusts outperforming their benchmark.

Along with the industry, our absolute return funds were tested by the volatility in markets. However, performance picked up in the second half of the year with the vast majority of our funds being positive for the year. Henderson's absolute return funds returned 7% on average for the year on an asset weighted basis, beating the EuroHedge Composite Index which delivered 5%.

The Institutional business, as you can see here, continues to perform strongly with our fixed income range in particular having delivered excellent performance for our clients.Slide 4 - Fee margins

The total fee margin decreased 6% to 66 and a half basis points as a result of lower performance and transaction fees.

The management fee margin continued to improve and increased by 2% to 54 and a half basis points, largely due to a greater proportion of lower margin institutional outflows and an additional quarter of revenues from the Gartmore acquisition in 2011.

Management fee margins will be impacted by market levels and margins attached to net flows. However, we expect our management fee margins to remain stable and our closing run-rate of 54 basis points is a reasonable proxy for 2013.

Slide 5 - AUM and fund flows in FY12

New business growth did not meet our expectations as both retail and institutional sales suffered from a combination of the effects of the eurozone crisis, investors' risk aversion to many asset classes and, in a few cases, weaker performance.

In our equity fund ranges, we saw positive net sales across a number of funds, most notably in our Technology funds, Global Property Equities fund and the Global Equity income fund in the US and some of our European funds including the European Special Situations, European Property Equities, and the European Focus fund. Otherwise, we saw redemptions as clients continued to favour fixed income funds over equities.

In our fixed income funds we had strong net sales in the Horizon Euro Corporate Bond fund and also in credit - the All Stocks Credit and Credit Alpha were particular standouts. We did however see outflows as several of our long standing institutional clients adopted a buy-out model for their investment portfolio, despite, or maybe because of, having had excellent returns from their investments.

Property saw positive flows and I will cover this in more detail shortly, whilst Private Equity saw monies returned to clients from some of our older funds. Both Property and Private Equity experienced negative foreign exchange movements leading to reduced assets on a sterling basis.

Slide 6 - Net flows in FY12 - retail and institutional

Taking a closer look at retail flows, we had our best ever year of gross flows across the retail business. This is encouraging and the best-selling funds were our Euro Corporate Bond, Global Technology, Global Equity Income, Credit Alpha and European Special Situations.

That said, net sales growth in UK retail was held back by the impact of the Retail Distribution Review as advisers repositioned their clients' portfolios ahead of its implementation on the 1st of January this year. As mentioned before, we have taken a number of steps to protect and grow our UK retail business. Although it is hard to predict exactly how this regulatory change will play out and how business models will respond, we believe that we are well placed by forming alliances with key decision makers and having adjusted our fund range over the year. There are more regulatory changes to come and so it is probably too early to factor in any significant change in our UK retail flows just yet. The FSA has delayed its final rules on platforms to later this year as it clarifies the tax treatment of rebates and payments to platforms. Therefore platforms will have until early 2014 to comply.

Our US Mutual fund range was negatively impacted by eurozone concerns resulting in net outflows last year.

Flows in our European retail SICAV range ended the year strongly resulting in this fund range recording net inflows for the year. Although these inflows were predominantly into fixed income products, it is encouraging to see that our equity funds are starting to benefit from improved market sentiment towards Europe and equities more generally.

Henderson is still one of the leading investment trust managers and we had net inflows of £54 million there.

In Institutional we continue to see good gross sales in fixed income, however net flows were impacted by clients rebalancing their portfolios either into global mandates or where they have been subject to pension buy-out arrangements. Our performance continues to be strong and, together with additional capabilities we now have in place or are in the process of establishing, we expect to grow the business here.

Slide 7 - Net flows in FY12 - absolute return funds and property

Taking a closer look at absolute return funds. Outflows continued in 2012, and even though the second half was tough, outflows slowed in the fourth quarter. Over the year underperformance by hedge funds in general and lower demand for equity long/short strategies saw the industry experience outflows. On our fund range, performance improved over the year and client demand for long/short strategies is beginning to return.

The positive net flows in Property are largely as a result of the equity raised for a new German Logistics Fund and fund launches, for example, our "Silk Road" Chinese designer outlet mall fund as well as the acquisition of Horizon Investment Management France.

I will now hand over to Shirley.

Thank you Andrew.

The 2012 results show a business demonstrating good cost control whilst continuing to invest in areas we believe will contribute to our future growth.

You can see the detailed profit and loss in the Appendix, but I will focus on the underlying profit numbers and touch on some of the other line items.

Slide 9 - Underlying profit before tax

As you can see on this slide, our underlying profit before tax was £146.5 million in 2012, 8% lower than 2011. The benefits of having revenues from Gartmore for an extra quarter and reduced expenses were offset by lower performance and transaction fees and the impact of net outflows in 2011 and 12 on management fees.

Given the flexibility in our operating costs - especially in variable compensation - we were able to at least match the percentage fall in revenues with a similar percentage fall in costs.

Taking a closer look at the income drivers…

Management fees were resilient and account for over 80% of total fee income decreasing by less than 2% or £5.3 million to £355.2 million, principally due to net outflows. This was partly offset by an additional quarter of Gartmore management fees.

Transaction fees decreased by 14% or £7.4 million over the year, largely due to the disposal of the Hermes private equity JV and other one-off fees recognised in 2011, combined with lower structured credit advisory fees in 2012. We still expect that, on average, around 60% of transaction fees will be recurring in nature.

In line with my previous comments, 2012 was a more challenging year for performance fees. We earned £33.9 million, substantially less than in 2011 and I will go into more detail on the next slide.

The reduction in net finance expenses is principally due to the repayment of the £143 million 2012 Notes in full offset in part by an extra quarter's interest on our 2016 notes.

Slide 10 - Sources of performance fees

The impact of lower markets in the first half was most evident in the lower performance fees earned from our absolute return funds and European SICAVs. These fund ranges, together accounted for an approximately £30 million decline in performance fees from 2011.

Institutional clients contributed about 20% less than in 2011 as clients redeemed some mandates that previously earned performance fees. That said, in 2012 we sourced these fees from a larger number of institutional clients than in 2011.

The vast majority of our Offshore Absolute Return Funds, Investment Trusts and SICAV funds with a performance fee potential, are close to generating performance fees based on current market levels.

Of our total fund range, approximately 40% of our assets under management have the potential to earn a performance fee. Performance fees are difficult to predict, especially in volatile markets, but given our diversity we currently expect 2013 performance fees to be at least in line with the 2012 level, due to the recent improvements in markets and our continued strong performance.

Slide 11 - Total income and operating expenses

This slide highlights how we continue to manage our cost base in line with our total income. As already mentioned, we continue to invest in the business, and we have done this within an environment where we have controlled costs well.

Total operating expenses decreased by £26.7 million mainly due to lower staff costs, plus investment administration and other expenses.

Fixed staff costs increased by 6% to £102.3 million. The restructuring action we took at the end of 2011, net of new hires for our growth initiatives, offset the impact of an additional quarter of Gartmore staff. However, due to an increase in the accounting charge for pension costs of nearly £5 million, as the Scheme trustee shifted from return seeking to risk reducing assets, fixed staff costs rose. You may be aware that in 2013, the accounting rules for pensions will change with the charge being split across staff costs and finance income with the calculation methodology also changing.

Ignoring the impacts of the change in pension accounting, due to the actions we took late last year, fixed staff costs should reduce in 2013 even after absorbing the cost of any additional hires to support our growth initiatives.

Variable staff costs declined by £26 million or 25% to £77.6 million mostly as a result of lower performance fee and other short-term bonuses, reflecting lower performance fees earned and overall business performance.

Slide 12 - Compensation ratio and operating margin

Looking at the impact on our key ratios. As Andrew mentioned, the operating margin held steady as lower variable staff costs and continued cost control substantially offset the impact of lower fee income, in particular lower performance fees. We continue to believe that the business is capable of achieving an operating margin of approximately 40% over time. This will obviously depend on flows and market levels. Given the current position of the business we do not anticipate any significant change in operating margin, either way, in the short term.

Although the compensation ratio increased in the second half, it has reduced year-on-year. Looking to 2013, we don't expect our compensation ratio to reach our medium term goal of 40%. We expect this ratio to stay relatively consistent with 2012 levels, but this is of course dependent on a number of factors including net fund flows, market levels and performance fee quantum and mix.

Slide 13 - Continued cost discipline

Turning to non-staff costs, as you can see we have managed these well and, compared to last year, these costs decreased by 6% or £6.7 million. This was a particularly good outcome given an extra quarter of Gartmore costs in 2012 and was due to lower investment administration charges and lower other expenses as a result of reduced discretionary spend and historical VAT claims which the Group settled with HMRC.

Overall, in 2013 we will continue to manage our expenses in line with the previous year.

Slide 14 - Non-recurring items

As regards non-recurring items, we have recognised a net credit as non-recurring costs were more than offset by the recognition of £26.6 million net management fees relating to the private equity fund, PFI II.

The settlement of issues with claimants, who are investors in the PFI II fund, meant that the Group was able to recognise management fees of £3 million in the second half of 2012 and, as part of the non-recurring item, fees prior to June 2012. We anticipate these fees being paid on wind up of the fund, September 2016 per the fund agreements, hence all fees are recognised net of discounting and costs.

£9.1 million of costs have been incurred and associated with the reorganisation of the Group, enabling us to reduce fixed staff costs and also to invest in areas of the business where we see most growth potential. We expect to achieve a two year net payback on the restructuring charge through reduced fixed staff costs.

The Financial Services Compensation Scheme has increased the one-off levy in relation to 2010/2011 and the Group has recognised this additional charge of £2.5 million.

We increased the void property provision, recognised on the acquisition of Gartmore, by £1.2 million as our original estimates for sub-letting have proved slightly challenging in the current letting market.

Slide 15 - Tax, and earnings and dividend per share

Our tax charge of £19.5 million which resulted in an effective tax rate on underlying profits of 13.3%, was lower than our usual effective tax rate of around 20%, and lower than the pro rata UK corporation tax rate of 24.5%.

As in previous years, this is as a result of the net favourable effects of different statutory tax rates that apply to profits generated by non-UK subsidiaries. For 2012 only, the rate is lower due to the use and recognition of previously unrecognised tax losses. We expect our ETR to move back to the more usual level, around 20%, in 2013 but this will depend on where profits are sourced from.

As we announced at the end of last year, the UK government's Controlled Foreign Company reform means that the Group's tax position and effective tax rate are now unaffected by having a UK tax resident parent company.

Slide 16 - Summary of cash flow

Moving to the balance sheet, you will note that the Group has moved into a net cash position for the first time since 2008. As mentioned in previous years, December is the cash high point prior to the payment of the final dividend and bonuses. However, we do expect the Group will continue to generate strong operating cash flows through the whole of 2013.

We had operational cash flow of £139 million, paid dividends of around £78 million and repaid £142.6 million of debt and net interest payments of £15.5 million. This leaves us with a gross debt position of £150 million. We have also cancelled the £75 million revolving credit facility which we entered into in 2011 when we acquired Gartmore.

Given our net cash position we remain comfortable with our gross debt ratios, which have also halved.

Our focus remains, subject to external factors, to repay the 2016 Notes and to strengthen our capital base through the economic cycle so that we can operate without the FSA consolidation capital waiver in due course.

I will now hand back to Andrew.

Thanks Shirley.

So just to summarise some of the key points from 2012…

Slide 18 - Key points from FY12

It was a challenging environment for us making it difficult to generate positive net fund flows. That said, we remained focused on delivering strong investment performance to our clients and I am pleased to see an overall improvement in investment performance across the business in 2012. We also continued to apply our rigorous discipline in managing our costs.

We generated strong cash flows enabling us to move into a net cash position. However it wasn't just about cost management. We also restructured and reorganised the business in December, simplifying it so that we are more focused on our core growth areas. This has enabled us to streamline our business, resulting in quicker decision making and enabling us to redirect resources towards those capabilities which we expect will deliver growth.

We have made a number of investments which, over time, will result in Henderson being a more global business with stronger investment and distribution capabilities.

For example, we have moved ahead in globalising our fixed income franchise and hired a US credit specialists team just this month. Based in Philadelphia, the new team, formerly employed by Delaware Investments, will develop US credit products for Henderson and will be integrated with our UK based credit team and be a vital component of our global offering. Hiring this team allows us to satisfy increasing client demand for global credit products, from high yield through to investment grade. This also now provides US domestic product to sell through our strong US distribution team.

Absolute return is an important part of our growth strategy and we recognise that clients increasingly want lower volatility together with absolute returns. Expanding our absolute return product range with the acquisition of a 50% interest in Northern PinesCapital, a US long/short equity fund manager, helps us extend and diversify our absolute return product range and provides further solutions for our clients. The firm is based in Boston and the fund has a similar investment strategy to other funds in our AlphaGen range. Using our infrastructure and distribution, we expect to grow the AUM of this fund as we promote it to our existing client base in the US, Europe and Asia.

Turning to a part of the world that is close to my heart, we have made significant progress in moving ahead with our growth ambitions in Australia. Our approach to expanding our footprint is centred firstly around developing a distribution hub in Sydney. To this end, we hired Matt Gaden to head up our distribution efforts. Later on we plan to have both fund management and product capability on the ground. We also made two senior hires in Asia as we increase our distribution efforts in this region. In October, we hired a new chief executive of our Japanese business and a new Head of Retail Distribution, Asia ex Japan.

Slide 19 - Recent fund flows and pipeline

I would like to now turn briefly to our recent fund flow and pipeline position.

It is disappointing that so far this year we've had outflows from our Institutional business, primarily due to one large account, a previous Gartmore client, who had been invested in an underperforming mandate. Since our acquisition, performance has improved, however the client has redeemed their investment. In the absence of that our current pipeline in Institutional is modestly positive with notable wins in Global Credit and Multi-Asset Credit.

Our property team has recently wound up a 10-year old fund for our clients as the fund had reached the end of its life. As such, Property is likely to have net outflows in the first quarter of around £200 million but still has a pipeline of around £900 million of uninvested client commitments.

Most of you will already be aware of the recent announcements by the boards of Henderson Asian Growth Trust and Henderson Fledgling Trust where they have decided to move away from Henderson. Partially offsetting that the board of SVM Global has recommended shareholders appoint Henderson to manage the trust going forward. The net effect of these is likely to see a reduction in our Investment Trusts assets by c£200 million in the first half.

Our absolute return funds have benefited from improved performance and sentiment and so far this year we have matched pre-notified redemptions with new inflows.

Turning to flows in our retail business, these are positive so far this year, driven predominantly by our European retail SICAV range. Our US Mutual fund range has also returned to positive flows on the back of good performance and improved client sentiment. UK OEICs continue to experience outflows, but at a reduced rate to last year.

Slide 20 - Investment capabilities

This slide gives you an overview of the areas of key strengths of our business. Our new business structure is built around these capabilities.

Private Equity contains our three main areas of Asian direct investing, Fund of Funds and Infrastructure. In Property we are well known for our management of retail shopping centres and outlet malls as well as central offices in the major European cities. In the US we have developed a successful franchise in the multi-family housing market - apartments to you and me.

Our fixed income teams are grouped around Diversified Fixed Income and Rates, Global Credit, Retail Fixed Income and Secured Credit.

A more extensive restructure took place in Equities where we consolidated our management under four key business areas.

These are Absolute Return, European Equities, Global Equities, and Multi-Asset. Looking at each in a bit more detail…

·; We are increasingly seeing clients shift their emphasis from relative return solutions to absolute return focus. We are focused on improving investment performance and further expanding our product offering under the leadership of the Hedge Fund Executive Management Committee. The Northern Pines interest we acquired is testimony to our commitment to grow this area.

·; European Equities is one of our key franchises and despite being out of favour in 2012, I expect it to play a big part in our future success. Our fund managers, led by John Bennett, have outstanding records and I believe current conditions offer attractive return opportunities for the patient investor.

·; Clients are increasingly looking for global solutions and our new Global Equities team will refresh our product range and develop it for the future. We have consolidated our activities in this area under the leadership of Stephen Peak. We already have well established credentials in Global Income, Global Technology and Global Property Securities and have invested in our Global Equities capability. We have also brought together our Asian and Emerging Markets teams to create a unified Global Emerging Market offering.

·; We have added more funds and talent to our Multi-Asset team as we see this as another important pillar in providing clients with solutions to their investment needs. We have developed innovative new products for UK retail clients to suit the post RDR world. Bill McQuaker has been expanding his team to support him in our asset allocation decisions here.

Slide 21 - Focus areas for FY13

So, looking forward to 2013, the business is moving in the right direction. I am confident that the changes and investments we made in 2012 will result in an improved outlook for growth in the business.

At the heart of our success rests our clients. Our focus is on extending the trust and partnership with them and to that end our new advertising campaign - with the focus on Knowledge Shared - is seeking to support this.

Looking at net sales, our focus is on returning to positive sales growth. So far this year, as I highlighted before in our retail business we are moving in the right direction but there is still more work to do. For example, in the UK we will continue to work with our joint venture partners, such as Sesame Bankhall, to deliver products that address clients' and advisers' needs in a post-RDR world. And in the US we will continue to develop domestic fund offerings to support our established International products. We will shortly launch a US high yield fund to be managed by our new Philadelphia-based team.

I also expect us to benefit from our strong European franchise as client demand returns and investors consider Europe as an attractive investment market. You will also see us continue to expand and diversify our product ranges to lessen our overall exposure to Europe.

We will continue to work with firms and individuals we know well to develop business relationships and ventures, especially in property and UK retail, which will further strengthen our proposition for clients.

We have responded proactively to recent regulatory changes and focused on being prepared for those already in train and those due to be implemented soon. For example, the Alternative Investment Funds Management Directive and the additional changes to be implemented later this year as part of the Retail Distribution Review. Of course, the increasing regulatory environment will add increasing costs to us and the industry. However, this is a small price to pay to deliver an improved and trusted governance structure and increased confidence in our industry.

Finally, it has always been a priority of ours to remain vigilant on costs and you should expect nothing less in the year ahead.

Given all we have achieved last year, and how we have positioned ourselves I am confident about our outlook.

Hopefully this has given you a good overview and I'm now happy to take questions from the floor and from the operator.

Slide 22 - Questions and answers