Henderson Group - HY13 results - transcript

2013 interim results presentation - transcript

9 August 2013

Henderson Group plc held its 2013 interim results briefing on 8 August 2013.

A copy of the transcript is attached.

Henderson Group plc

47 Esplanade

St Helier

Jersey JE1 0BD

Registered in Jersey

No. 101484

ABN 67 133 992 766

Andrew Formica, Chief Executive

Welcome to Henderson's 2013 first half results. Morning to all those here in our London offices and also afternoon to those joining by phone from Australia. I'm joined today by our new Chief Financial Officer, Roger Thompson. We have a short presentation that we'll go through and then I'm very happy to throw over to questions you might have.

I'd like to give you first an overview of the key highlights of the results and then to update you on the strategic initiatives that we've been working on here at Henderson over the last six months. Roger will then cover the financial highlights of the results in much more detail.

Turning to the key highlights of the first half. In terms of looking at profit before tax it was a record first half underlying profit for us of £101m. This was up 22% on what we delivered the same period last year and that was helped by the performance fees of £57.5m that we earned in the period.

In terms of the cost discipline of Henderson, we continue to maintain a strong cost discipline across the Group and this is evidenced by the improved operating margin which has increased to 38.8% for the period.

Looking at the investment performance, our three year investment performance has improved to 73% of our funds at or exceeding their benchmarks. On a one year basis it's also strong at 70%. Obviously sustained strong investment performance is a good lead indicator of flows so it's particularly pleasing to see the investment performance coming through in the Group.

And looking at flows one of the key highlights was the return to positive net retail flows with approximately £600m of net positive flows in the first half. This was helped by UK retail having positive flows for the second quarter of £150m.

Finally, looking at the assets under management this has increased by 7% to just under £68bn.

Before I drill into what we've been focusing on for the last six months I thought it might be important for us to just look back over what the Group's done over the last five years.

If we turn to pre the financial crisis what you saw with Henderson was very much primarily a European Equity, Fixed Income and Property business that had one large client that represented around 40% of the assets under management. The business back then had much lower margins and lower profits than what you see today.

During the crisis we took advantage of the opportunities that presented themselves in the marketplace and diversified the Group considerably especially getting a greater balance between Retail and Institutional. We also focused on expanding our absolute return fund range. That was particularly through the acquisition of Gartmore and this is an area we see will feature more prominently in client portfolios going forward.

The acquisitions of New Star and Gartmore also enabled us to improve margins and profitability at the Group which we're also starting to see come through in the results today.

Looking at the last 12 to 18 months what we've been doing is bedding down those acquisitions. We've also been simplifying the business to better focus on the core product areas and these include global and multi-asset products, two areas we see of increasing importance for the Group going forward.

We've also established strategic relationships and you've heard me talk in the past about the relationships we set up last year with Sesame Bankhall and Intrinsic as well as the recently announced TIAA tie up. Throughout all of this we've maintained a very strong cost discipline and this has enabled us to invest in the business to set us up for future growth.

So if I now look to going forward for the next six months and beyond what you will see us do is invest in our overseas operations as we seek to increase the scale in those long established international businesses. We've been in Asia and America now for nearly two decades and the platform we have there is very strong and what you'll see is us continuing to allocate resources both to distribution and investment talent as we seek to build those out.

We're also enhancing our existing range with a particular focus on income and absolute return products. This is a particular area of strength for us here at Henderson and also something we see as important in terms of client portfolios on a forward looking basis. So together with the strong investment performance that we've been delivering on behalf of our clients this will lead to sustained positive net flows across the business and also across the geographic regions that we invest in. This will ultimately lead to value for all of our stakeholders, whether it's our clients, our staff or you our shareholders.

As we all know, as you've heard me say many times before here at Henderson, the stated mission is to be a trusted global asset manager focused on delivering excellent investment performance and service for our clients. To achieve this what we've been doing over the last 12 months is to focus on these four areas: to make sure we've simplified and focused the business; to continue to focus on delivering the strong investment performance which will lead to improved flows; to also make sure that from a financial perspective we deliver a very strong financial position for the Group; which enables us to invest in the business to position us for growth.

On all of these measures significant progress has been made over the last six months and these areas have resulted in improved topline performance, a strengthened capital position and it is leading to overall enhanced value for our shareholders.

If I drill down into each of these areas in a little more detail. So starting on how we've been simplifying and focusing the business. You will recall last year we talked about how to streamline the business and we reshaped the way we structured the business. And this has enabled us to increase both the focus and also the speed of execution across the Group.

The recently announced TIAA Henderson Global Real Estate joint venture also enables us now to focus on our key capabilities whilst still maintaining our exposure to real estate through that joint venture. We have now realigned the business around our core franchises of Global Equities, European Equities, Absolute Return, Multi-Asset and Global Fixed Income.

Turning to investment performance, obviously investment performance is very important for us here at Henderson. And we continue to deliver very strong investment performance for our clients. Looking at our Fixed Income funds 81% of our Fixed Income funds on a three year basis are exceeding their benchmark, and that's 73% for Equities. And for Equities it rises to 81% on a one year basis.

We've also produced positive retail flows for the first time since the first half of 2011. UK retail in particular has delivered a solid second quarter of net inflows. And actually looking at retail in general for the seven months of the year up to the end of July the gross sales we've achieved in retail have now exceeded what we achieved in all of 2012 with UK and US retail flows ahead of where they were in all of 2012, and Europe just slightly behind. And on Institutional while it had a difficult period in the first half I'm very encouraged by the Institutional pipeline of opportunities that we see as we look forward in this next half.

Looking at the financial performance of the Group, the strong financial performance that is coming through is evident by the results that we've put out today and I'll leave Roger to talk a bit more on these in his section shortly.

And finally we continue to position the business for growth. For example, with TIAA and the tie up in our global real estate business we're also exploring other areas to work with them and strategic opportunities we can do outside of property, given their strong depth and understanding of the US market, an increasingly important market for us. They can be a valuable partner as we seek to expand in that region.

Our other strategic partnership with Sesame Bankhall and Intrinsic that we spoke about last year are beginning to show really good signs of growth. And the recent acquisition of a 33% stake in 90 West is really establishing the foundation of our Australian business that again we started just over a year ago.

We've also launched new products in the last half associated with the recent acquisition we've done on Northern Pines, in which we took a 50% stake in a US long/short manager. And then more recently, the US credit team where we hired a team that joined us in February, and in April we launched a US high yield fund. That fund in the first four months of being up and running is currently number one in its category and is actually delivering a positive overall return where high yield funds since the same period are actually negative. So it's building a very strong base which will form the foundations of future success for us.

And finally on a particularly pleasing note we also announced today that we've agreed new terms with Phoenix. This extends and deepens our relationship between both our organisations where the relationship has been very strong now in terms of how we work together and is based on a bedrock of very strong investment performance. We've delivered excellent performance for them across all their product range and the new terms really reflect that relationship.

The new terms themselves are backdated to begin to apply from the beginning of this year and so the impact of those terms are reflected in our first half revenues and also our closing run rate management fees. The new IMA we signed with them extends the agreement to a minimum of nine months until the end of 2015 and that will actually move onto a rolling two year notice period with them which doesn't start until the 1st January 2014. At present there are no assets under management with them that are under notice of withdrawal.

Turning to investment performance this is obviously a key delivery in terms of what we do for our clients and a focus here at Henderson. What I've tried to do here is show the investment performance set around our five core investment capabilities. As you can see here investment performance across all these capabilities is strong, but rather than look at them in this aggregate level I thought it might be even better if we drilled down into some of the core funds in each of these areas to give you an idea of where the focus is for the business and what will ultimately drive future success here for the Group.

So starting with our Global Equity franchise, and starting at the top with Global Equity Income. Global Equity Income is one of the key strengths of the firm. And you can see here our UK onshore fund has performed very well this last year. You may recall I spoke about how we were converting a UK equity income fund to a global franchise. That was literally just over 12 months ago and you can see here, since having done that, the strong performance that's coming through in that. In the US as well our best selling fund in our US range was our Global Equity Income fund.

Looking at the other fund, the Global Focus Fund this is our mainstream Global Equity fund. We're making really good progress in building out our Global Equity franchise. And Matt Beasley joined us over 12 months ago to take over the Focus Fund following the acquisition of Gartmore. You can see the longer term track record the difficult performance which Gartmore had had in that fund. Since Matt's come on board, the fund is at 17th percentile in the last 12 months, and more recently it's even been top decile in the last quarter.

Turning to European Equity, a core strength for the business, you can see here the top quartile performance across some of our key fund ranges. The European Select Opportunities Fund, the OEIC / onshore fund, is 16th percentile over one year. Our flagship offshore Pan European Equity fund, the Horizon fund, the SICAV, is 13th percentile over one year. And that fund was the largest contributor to performance fees in the period through the SICAV range.

Looking at Absolute Return Fund, again they've shown very strong performance over the last 12 to 18 months. Looking at some of our more important funds, Tucana, which is our European concentrated absolute return fund, is up 15% in the last 12 months and Octanis, which is our UK absolute return fund, is up 14% over the same period.

Our UK small cap long/short fund, Volantis, has generated 17% return for the last 12 months and this fund was the largest contributor to performance fees coming through from the hedge fund range that you see in the results. The strong performance there has also enabled us to launch a sister fund, Volantis Catalyst, which we launched earlier this year.

Turning to Multi-Asset, it's an increasingly important part of our business and I'm very pleased that our flagship fund the Multi-Manager Distribution is now 15th percentile year to date and showing a very strong recovery in investment performance there.

And finally, looking at our Global Fixed Income business our European Corporate Bond Fund, the SICAV fund, was a fund we launched in December 2009 and since launch it is the second best fund within its category. It is also the best selling fund in our SICAV range over that period.

Also Credit Alpha, which you can see at the bottom with consistently strong performance over a long period, is one of the key drivers of the return to improved performance in our UK retail business.

So I now turn to flows, starting here with Institutional. In Institutional we were impacted in the first quarter by two large mandates which I previously discussed. In the second quarter we also saw outflows of nearly £600m. These have, however, now been matched by inflows which we'd won but hadn't funded until after the period-end and funded in July. Notwithstanding this, it's been a difficult half for our Institutional business, but as we now look forward the current pipeline and the RFPs that we're seeing would show encouraging signs as we look forward for the second half.

If I now look to Retail, I'm encouraged by the improvement in net retail flows and you can see that demonstrated by the nearly £600m of net inflows that we had in the first half. Our US range has solidly built across this period showing good growth in each of the months. Our offshore SICAV range has experienced strong growth over the first half though this was tempered in June where the wobble in markets did see clients look to reduce some of their exposure. I'm pleased to say that July has seen a return to positive growth in that channel as clients have got clearly more settled with what markets are doing.

And looking into a little bit more detail on UK retail, our UK retail range saw positive net inflows of £150m in the second quarter. This was driven by flows into Credit Alpha, European Special Situations Equity Fund and UK Property Unit Trust, so quite broad based flows there. As well we saw good flows coming in from our new joint ventures with Sesame Bankhall and Intrinsic.

Overall I'd also say that the momentum we've seen in the second quarter in Retail has so far continued in July and August. For now I'd like to hand over to Roger who'll cover in a bit more detail the financial results and then I'll just wrap up at the end before taking questions. Thank you.

Roger Thompson, Chief Financial Officer

Thanks, Andrew. Good morning to you all and hello to those on the phone. Before I start I just wanted to add my welcome to you today. I'm delighted to have joined Andrew and the strong team here at Henderson and I really look forward to meeting many of you over the next few months.

Andrew's talked about the positive momentum and the strategy of the business. I'm now going to take you through the current results that the strategy is delivering and the financial strength from which we expect to be able to deliver sustained growth into the future. You can see the P&L in the appendix but I'm going to start by talking through the underlying profit figures and then touch on some of the underlying line items to demonstrate how we're managing the business.

Our underlying profit before tax was 22% up on a year ago. Performance fees dominated the growth in revenues in the first half, but management fees also grew as market rises more than offset the 2012 outflows. Fixed compensation and other expenses fell in aggregate by around 9% on a year ago, improving the underlying profit figure as the effect of the focus and the rationalisation that we talked about last year.

Variable compensation rose due to both portfolio managers sharing in the underlying performance fees generated as well as increased variable compensation due to the higher profits. The end result, record underlying profits of £101.1m.

Focusing on the revenue, total income is up 14.5% to £268m. Management fees which accounted for around 70% of our total fee income rose 4% to £186m, benefitting from the higher average markets offset by 2012 outflows. Even though the first half flows were in aggregate net negative the revenue on those flows were actually marginally positive due to the product and client mix.

And as Andrew has mentioned, the first half management fees incorporate the new fee agreement with Phoenix. Reflecting on the ongoing nature of the business and as part of our simplified AUM of flow disclosures, our Phoenix assets will now be included within our institutional line rather than split out separately. We have included our old classification of assets in the appendix for one last time.

Transaction fees were in line with the second half of last year at £20m, and I would expect them to be broadly similar for the second half of this year. As we stated in our trading update we earned substantially more in performance fees compared to the same period of last year.

Andrew's talked about the strong investment performance which we've generated for our clients. This, combined with favourable markets has resulted in significant performance fees across the range, notably in our pan European SICAV, our offshore Absolute Return funds and in our UK Absolute Return and Credit Alpha OEICs. I would also note the diversity of the fees across the product range with the performance fees in the first half coming from 78 different funds showing strength across the franchise.

Of our total fund range 42% of our AUM has the potential to earn a performance fee, but as we noted in our trading update the calendarisation of year-ends of funds with performance fees is weighted towards the first half, so we wouldn't expect such a strong second half. I'd probably expect performance fees for the second half this year to be significantly less than the first half but more than the second half of last year.

Andrew referred earlier to 2005 where one captive insurer made up 40% of our AUM. Our business is now well diversified between retail and institutional, with retail making up around 60% of our revenue, and as you can see it's well split between UK funds, SICAVs, US Mutuals and Investment Trusts. This diversity shows both the strength and quality of our revenue flow but also the opportunity for us to grow globally.

As Andrew's shown there is also strength and depth in our product range with our focus on Global Equity, European Equity, Absolute Return, Multi-Asset and our strong Global Fixed Income business. And that diversification has led to growing fee margins over the last four years. Performance fees have driven our total fee margin up to 76.6 basis points this half with our underlying management fee margin dipping only slightly to 54 basis points and that includes the revised Phoenix commercials. The chart on the right shows a net margin of 29.4 basis points on an annualised basis which is a 70% increase since 2010 demonstrating the improved quality of the AUM.

Moving away from revenue, this slide highlights how we continue to manage our cost base in line with our total income. As Andrew's pointed out, we've continued to invest in the business and have done this within an environment where we've controlled costs overall. I'd like to note two particular items on this slide, our fixed staff costs, which is the relatively flat light blue line at the bottom, has reduced every half since the second half of 2011 and is up only 18% since the first half of 2010 which was before the Gartmore acquisition and which is supporting a revenue increase of 49%.

Our variable staff cost, the orange line, is indeed variable, and moves in line with our revenues, showing peaks in the first half of 2011 and the first half of 2013.

The result is a compensation ratio operating in a narrow range and with revenue increases coming through to the bottom line giving an increased operating margin for the first half of 38.8%. Given our exceptional performance fees in the first half I'd probably expect the second half operating margin to fall back more towards our 2012 levels.

The compensation ratio of 43.6% is driven higher than last year, in part due to performance fee payments, but also due to the positive forward looking indicators such as investment performance and flows which influence our variable compensation. And given the positive trends which we've talked about I'd probably expect the full year figure to be similar to the first half.

In other costs we've continued to show strong discipline in our non staff operating expenses, down in each line item compared to the first half of 2012, but broadly in line with the second half and I would expect the full year to be below the full year of 2012. As an example we've continued to rationalise our third party administrators, generating annualised savings of around £2m.

We've included in the appendix a slide showing detail on our tax and tax rates but in summary our effective tax rate on underlying profits is 13%. It's lower than the UK corporation tax rate due to several small one off items and profits generated in countries with lower tax rates than the UK.

We currently expect the ETR to be similar for the full year, but given the nature of some of the items recognised in 2013 we expect the ETR in future years to move higher but probably still be beneath the UK rate.

Looking at the financial strength of the business, net cash on 30th June is £16.7m giving consecutive halves of a positive net cash position.

Particularly pleasing, operating and other cash flows in the first half of £53.9m include the payments of annual variable compensation which largely accounts for the difference to the higher figure of the second half of last year. I'd expect to see further increases in our net cash position in the second half of this year and further improvements again in 2014 given increasing organic cash generation as well as the proceeds from the TIAA Henderson Global Real Estate transaction. Our focus remains to strengthen our capital base so we can operate without the FCA consolidated capital waiver in due course. And we're making good progress on that, being well ahead of our original expectations at the time of the Gartmore acquisition, and will move another step forward with the proceeds from the TIAA Henderson JV.

In summary, this is a strong and in many cases, a record set of results for the Group which flow through to the shareholder. Total income £268m, up 14.5% from the first half of last year. Underlying profits £101m, up 22% over last year and equal to the full year figure of 2010 before the Gartmore acquisition. Record diluted EPS of eight pence up 14%, and up 77% since the first half of 2010 showing how that revenue and profit accrues to the shareholder.

The chart on the right shows the progressive nature of the dividends over the past few years. In accordance with our policy we're announcing an interim dividend today equal to 30% of last year's full year payout, 2.15 pence. The Board will of course discuss the full year dividend towards the end of the year.

I'm delighted to have joined and to be able to present the results of such a strong business showing strong foundations, confidence and momentum. I'd be delighted to take any questions you have at the end, but for now I'll pass you back to Andrew.

Andrew Formica, Chief Executive

Thank you, Roger. Just to recap if we look at what are the priorities for us here at Henderson for the rest of this year, the first thing obviously is to continue to build on the momentum that is coming through in these results that we're seeing in the first half, particularly in terms of investment performance which is very pleasing and is starting to lead to flows. So you should expect to see that focus on business as usual. The TIAA Henderson transaction is clearly a significant transaction for us here in the business and certainly for our property business, and it will take quite a bit of time and we're due to complete at the end, probably some time in Q1 2014. So far things are progressing well, feedback from clients has been very positive but there is still a lot to do so you should expect us to give you more update on that at our full year results.

Looking at what we're doing in terms of supplementing investment capabilities and areas of gaps in our business that we look to fill, in particular we're looking to add investment capabilities in US and Asian equities with people located on the ground in the local markets. As well in the US with the credit hires we put in place earlier in the year, we're looking to expand that team and add an additional investment grade credit capability to that business. So you'll see us having more resource in the US and Asia.

And finally, as you'd expect from us here at Henderson we'll continue to maintain diligence on our costs and discipline in terms of how we manage the business because that enables us to continue to invest in the platform and in particular our distribution reach across the globe.

So just to recap on the first half results we've clearly delivered some strong investment performance on behalf of our clients and this is beginning to translate to improving flows and you can already see that coming through in the retail side of our business. Through the restructure of the business that we put in at the back end of last year and now with the joint venture of our property business we've really simplified and focused the way we run the business and organise the business. As well the actions of recent times and the acquisitions of the past are showing through via a much stronger financial performance and this is enabling us to have strength in the balance sheet, delivering improved operating performance as well and obviously the cash generation of the Group is clearly coming through. And with all that we continue to invest in the business to enable us to position ourselves for growth in the years ahead so laying the foundations for what will be the future success of the business.

So at that point I'd like to pause and thank you obviously for the attention so far. I'd like to hand over to take questions from the floor first and then I'll hand over to the operator to take any questions from those dialling in.