Henderson Group plc - Henderson Group - 1H12 results - copy of briefing

2012 interim results presentation - copy of briefing

14 August 2012

Henderson Group (Frankfurt: A0Q9SW - news) plc today holds its 2012 interim 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

Further information www.henderson.com or
Investor enquiries
Mav Wynn, Head of Investor Relations	+44 (0) 20 7818 5135 or
	+44 (0) 20 7818 5310
	mav.wynn@henderson.com or
	investor.relations@henderson.com
Bojana Flint, Deputy Head of Investor Relations	+44 (0) 20 7818 6117 bojana.flint@henderson.com

Andrew Formica

Good morning and good evening to those in Australia. Hopefully you have all enjoyed watching the Olympics hosted here in London this past fortnight. It was certainly a fantastic display by London and all the athletes who competed. Given Team GB's performance, particularly against my home nation, I intend to travel under my British passport for the next four years.

I would like to start with a quick overview of the first half focusing on the key business results and performance indicators. Shirley will delve into the financial results in more detail and then I will recap and say a few words on our priorities for the rest of the year. We're happy to take any questions you may have at the end.

Slide 2 - 1H12 overview

At the time of our full year results I spoke about our concerns for market levels and economic growth. Despite markets starting the year in a relatively buoyant mood, we remained cautious about the outlook. This caution was warranted and we saw, as the first half progressed, the eurozone crisis deepen, global growth slow and renewed uncertainty over parts of the global banking sector. As a result, investor demand for risk assets deteriorated throughout the half.

Given our predominantly European mix of both funds and clients we were impacted by these events with new business growth remaining under pressure. That said, despite these headwinds the Group's financial strength remained intact with good cost control, resulting in £79 million of underlying profit before tax.

Diluted earnings per share of 6.6 pence, was up on the second half, whilst slightly down from the first half of last year.

Our operating margin showed further improvement to just under 37% as we remained vigilant on costs, despite selectively investing in the business.

The compensation ratio was lower at 39% compared to 43.5% in the first half of last year, though comparable with the second half. This reflects both the benefit of a full half of Gartmore (LSE: GRT.L - news) and lower variable compensation driven by, in particular, lower performance fees in the period.

In line with our dividend formula, the Board has declared an interim dividend of 2.1 pence per share which will be paid to shareholders on 21 September.

Investment performance overall remained good with 66% of funds either meeting or exceeding their benchmarks over three years as at the end of June.

Assets under management remained relatively stable at approximately £64 billion as net outflows were largely offset by positive market and FX movements.

In terms of our balance sheet and financial strength, we continued to generate good cash flows and repaid our 2012 debt in full. This has left us with a small gross debt of £150 million and a modest net debt position.

Before I hand over to Shirley, I will take a closer look at how we've fared on the main KPIs we monitor.

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

Consultants and our clients look more to the three year or longer-term in the performance of investment funds and, as mentioned earlier, our performance on this basis continues to be good. The one year numbers are also showing improvement year-to-date.

At an asset class level, performance in our fixed income funds continues to be excellent over all periods and our equity funds have competitive performance over both periods. Lack of economic growth in the UK and Europe (Chicago Options: ^REURUSD - news) continues to impact Property performance.

Turning to our business lines at the top of this slide, in UK retail performance over three years remains strong whilst the shorter term numbers have improved this year.

We have a solid line-up in our European SICAV fund range and performance continues to be strong over all periods. However, the exposure in this channel to European equities, has meant our performance is not currently translating into new business growth.

The performance of our US mutual fund range, which was impacted by the underperformance of the International Opportunities fund in 2011, has steadily improved and our flagship fund is now top quartile showing a positive return of 6% year-to-date, compared to the index benchmark which was up just over 3%. It has recently retained its Morningstar (NasdaqGS: MORN - news) four star rating.

Along with the industry, our absolute return funds were tested by the volatility in markets. In aggregate, our absolute return funds have delivered a 1 year return of -3.5% whilst year-to-date they are up 1%, which is marginally lower but consistent with the European Long/Short index for the same periods. The weakest performance has been in some of our Asian funds although we have seen solid performance from our Credit and Global Multi-Strategy funds.

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

Slide 4 - Fee margins

Despite the more difficult trading conditions and macro backdrop we have continued to make progress on improving our overall group margins.

In the first half of this year, both the management fee margin and net margin improved as a result of the benefits of the Gartmore acquisition and our continued discipline on costs.

Our total fee margin fell slightly in the first half reflecting the lower level of performance fees earned in the period.

Overall, we expect to maintain the current management fee margin of 54 basis points for the second half of this year.

Slide 5 - AUM and fund flows in 1H12

New business growth has not met my expectations so far this year as both retail and institutional sales continue to suffer from the effects of the eurozone crisis and ongoing investor risk aversion. With around 80% of our assets under management sourced from clients in the UK and continental Europe and around 60% of our assets invested in these territories, it is a struggle to encourage clients to invest at present. This is despite, as shown on the previous slide, our solid investment performance.

It is important that we set out the reasons, as we see them, for the flows in the business because this links directly into the activities we have undertaken so far this year and I will say more about these shortly.

Despite solid gross flows, net sales growth in UK retail has been held back by advisers repositioning portfolios for their clients ahead of the implementation of the retail distribution review, due to come into effect in January next year. The timing and scale of these movements has exceeded our initial projections and is expected to continue through to the year end. We are making progress on positioning the Group to improve the position post RDR and I will touch later on what we've been doing.

Our US Mutual fund range got off to a reasonable start but, with eurozone concerns intensifying and US investors shunning equities, particularly European biased equities, our net flows in our US retail fund range are negative for the first half.

Our European retail SICAV range ended the half flat and, given the market backdrop, this is actually a good outcome. We have seen, however, clients continue to remain risk averse and more move from equities to bonds.

Turning to Institutional, net outflows have slowed from recent periods however clients continue to rebalance their portfolios either into global mandates or where they have been subject to pension buy-out arrangements. Given the strong performance we've delivered to institutional clients, reflected in both the client returns as well the performance fees we earned in the period, it is clearly a disappointing position to be in. At the end of June, we had a positive net pipeline of client commitments. But given the uncertain timings of when flows actually occur it's hard to predict what the net position may look like for the rest of this year.

Taking a closer look at absolute return funds. Outflows continued in 2012 due to some underperformance mentioned earlier and the lower demand for Europe, Japan (EUREX: FMJP.EX - news) and Asian strategies. Our equity long/short range typically focuses on capital preservation during such turbulent market conditions and most of the funds have done a good job in this challenging environment and are well positioned for a rebound.

This remains a priority growth area for us and we continue to focus on developing new products, strengthening our current range and diversifying into other strategies.

The positive net flows in Property are largely as a result of the acquisition of Horizon Investment Management France, a privately owned French property asset management business. That added approximately £180 million to our assets under management. We also made some investments on behalf of our clients and launched new funds such as our "Silk Road" Chinese designer outlet mall fund. Together these inflows more than offset asset disposals which we made realising profits for our clients.

It is worth noting that, given a large proportion of our assets in property are held in long term closed ended funds, we face fund expiries periodically. Leading up to these expiries, we engage with our clients in order to determine the best solution for them at that time. We recently agreed a seven year extension for our flagship £650 million UK Shopping Centre Fund, originally due to expire in 2014. The fund life will now run through to 2021, with a redemption window available to clients in 2017.

Slide 6 - Long-term strategy remains unchanged

We all recognise the challenges the world faces with economic growth impacted by corporates deleveraging instead of investing and the risk of sovereign default weighing heavily on markets. However we have not and will not sit back and just wait for an improvement. As with all periods of uncertainty, in time they will pass and opportunities will present themselves. We have used this time to continue to invest and strengthen the business.

Our long-term strategic goal remains the same and that is to deliver new business growth of 5% or more from our underlying business. We are clearly not currently meeting that objective but it remains our priority and there are many activities centred around five strategic objectives to position the business to meet this in the medium term. Of course the only way we will do this is to keep our clients at the centre of what we do and deliver investment performance which meets their expectations.

There has been a lot of activity within the Group this past six months focused on improving the position of the business towards delivering on new business growth. We have done this by developing products and forming partnerships to meet client demand, invested in talent and also tried to make it easier for our clients to do business with us.

Slide 7 - Key (NYSE: KEY - news) activities year-to-date

Looking at products first, you can see here the number of new products developed so far this year. Touching on a few. Together with Sesame Bankhall Group - the largest restricted adviser network in the UK, we launched the Optimum range. This is a risk constrained RDR compliant fund range ideally suited for their client base.

In the US, we launched the All Asset Fund - the first of a suite of multi asset funds we are developing for retail clients. The Dividend and Income builder fund - launched this month - will further diversify our US Mutual fund offering.

We converted an existing fund into a Global Equity Income Fund - a product for which we see demand across all our distribution channels and an area where we have considerable expertise with decades of know-how from our highly regarded team.

In hedge funds we launched the new Multi-Manager Diversified Fund, a more risk focussed long/short offering taking the best ideas of all our managers in this field.

And we expanded our fixed income offerings with the Total Return Bond Fund and the Multi Asset Credit Fund and we are soon to launch a Euro High Yield Bond Fund following on the success of our European Corporate Bond Fund.

In property, I already mentioned Horizon (Euronext: HOR.NX - news) and Silk Road, the result of a JV in China. We also entered into a JV in Italy to strengthen our property capabilities there, initially investing Italian client money in core European markets.

We have made a number of key hires so far this year. First (OTC BB: FSTC.OB - news) up, Phil Wagstaff joined as Global Head of Distribution responsible for all of our distribution efforts ensuring our teams across the globe work as one, focussed on our clients. He has already strengthened his team with a new head of Retail in Asia and a new MD for our Japanese business and we recently opened an office in Australia led by Rob Adams. On the investment side, Matt Beesley joined to head up our Global Equity franchise and John Feeney will lead a new initiative offering clients exposure to real estate debt, an embryonic but promising new market for us. We will continue to invest in quality people and expect to strengthen the team further as we move through the rest of the year.

We completed a number of key business partnerships. In the UK market, I mentioned the Sesame Bankhall JV. This is an exciting development as we see the restricted advice segment of the market growing significantly in a post- RDR world and Sesame Bankhall is well positioned to thrive in this environment. Together with the clean share classes we have already launched, we are well positioned for the post-RDR world by providing a range of products and solutions to the adviser market and their clients.

We have continued with our efforts to simplify our fund range which, in so doing, makes it easier for clients to deal with us. We have done this across our UK and European retail and Absolute return fund ranges. In the last 12 months we have closed or merged nearly 40 funds.

Slide 8 - Key activities year-to-date

Each of these activities in turn link directly to our five strategic objectives as you can see here. Every one is in support of new business growth and getting us closer to our long-term strategic goal. There are other activities currently underway and I will say more on this at the end of the presentation.

I will now hand over to Shirley.

Slide 9

Thank you Andrew. I'd first like to say that the financial results show a resilient business with improvements in our key ratios, continued cost control whilst also investing in the business. 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 to demonstrate how we manage the business.

Slide 10 - Underlying profit before tax

As you can see on this slide, our underlying profit before tax was £79 million in the first half. This was 9% lower than the first half last year, for despite having the benefit of Gartmore for an extra quarter we had lower performance fees, lower markets and net outflows over the period.

Given the flexibility in our operating costs - especially in variable remuneration - we were able to offset around two-thirds of the £30.2 million decline in total fee income

Slide 11 - Income drivers

Turning to the income drivers…

Management fees, which accounted for 80% of total fee income, increased by 2% to £178.8 million, principally due to an extra quarter of Gartmore. This was partly offset by lower average equity markets, as well as net outflows from our retail and institutional businesses.

Transaction fees were stable at £23.3 million. Given the sale of the Hermes JV and other smaller items, we saw transaction fees fall £3.6 million compared to the second half of last year. The recurring element of transaction fees, which is linked to fees we earn on UK retail funds, accounted for over 60% of transaction fees.

In line with my comments at the full year results we earned substantially less in performance fees compared to the same period last year and I will go into more detail on the next slide.

Slide 12 - Sources of performance fees

Performance fees from Institutional clients were lower than first half 2011 but once again the biggest contributor given the diverse client and mandate mix.

The contribution from Henderson SICAVs and Absolute return funds was significantly reduced primarily due to lower market levels compared to the first half of last year resulting in most funds being below their high water marks at the point of performance measurement.

As at 30 June, 81% of the Offshore Absolute Return Funds assets under management has a performance fee opportunity, of which 73% were above or within 5% of their high watermarks. And 77% of Investment Trust assets under management has a performance fee opportunity, of which 97% were above their high watermarks or do not have a high watermark requirement. 64% of SICAV AUM has a performance fee opportunity, of which 69% were above or within 5% of their high watermarks. Investment Trusts and the majority of SICAVs also have to beat their benchmarks to crystallise a performance fee.

Property and private equity performance fees were higher contributing £4.7 million with our flagship UK shopping centre fund contributing to most of the performance fee.

Of our total fund range, 38% of our assets under management have the potential to earn a performance fee. That said, the outlook for performance fees for the rest of this year looks challenging and it would be prudent to expect these fees to be in single digits given market levels and the current profile and timing of fund year-ends.

Slide 13 - Total (Other OTC: TTFNF.PK - news) income and operating expenses

This slide highlights how we continue to manage our cost base in line with our total income. As Andrew pointed out we have continued to invest in the business, and we have done this within an environment where we have controlled costs overall. You can clearly see here variable staff costs have reduced in a large part as a result of lower performance fee bonuses paid.

Fixed staff costs increased by 12% to £51.8 million compared to the same period last year, reflecting an additional quarter of Gartmore in our cost base and higher pension costs. Our fixed staff costs would have fallen by £1.5 million in the first half of 2012 compared to the second half of 2011 but were offset by a higher accounting charge, not a cash cost, as a result of Henderson Group Pension Scheme trustee shifting from risk seeking to risk reducing assets. The increase in fixed staff costs of £1.6 million, reflects the higher pension cost and new hires, as Andrew outlined, partially offset by the benefit of cost reduction actions taken late last year.

Slide 14 - Compensation ratio and operating margin

Looking at the impact on our key ratios, the operating margin improved further as a result of stable management fee margins and the benefit of lower variable staff costs and continued cost control.

Lastly, the scale benefits of acquisitions, restructuring actions we undertook in the second half of 2011 and lower performance fee bonuses enabled us to further reduce the compensation ratio to 39.2%. We continue to expect a compensation ratio of around 40% this year.

Slide 15 - Continued cost discipline

Turning to other operating expenses, i.e. non-employee related costs, as you can see we have managed these well despite an extra quarter of Gartmore and inflationary pressures.

Compared to the second half of last year other operating expenses decreased by approximately £1 million. As guided, office expenses increased to first half 2011 year levels whilst other expenses improved as the Group settled historical VAT claims with HMRC.

Overall, I would expect the first half to be a good indicator of the likely run-rate of other operating expenses in the second half.

Slide 16 - Financial position - debt, equity and ratios

Looking at the financial strength of the business.

We generated good operating cash flows during the period, repaid £152.6 million of gross debt and interest and made dividend payments.

The gross debt position fell to only £150 million. Our net debt position is modest at £62.2 million and, as it was impacted by dividend and bonus payments in the first half, I would expect it to reduce substantially in the second half of this year as strong operational cash generation continues.

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 consolidated capital waiver in due course.

We have included a slide in the appendix showing detail on tax and tax rates but just briefly, our effective tax rate on underlying profits of 10% was much lower than our usual effective tax rate of 20%. The lower rate this year is predominantly due to benefits resulting from the efficient use of tax losses following the Gartmore acquisition.

We currently expect the effective tax rate to remain low for this year. Given the nature of some of the tax items recognised in 2012 we would expect the ETR in future years to move back closer to 20%.

I will now hand back to Andrew.

Slide 17

Andrew Formica

Thanks Shirley.

So just to recap on some of the key points.

Slide 18 - Key points from 1H12 - recap

Although it was a challenging environment in which to generate positive net flows, management and net fee margins improved, we managed our costs and as a result our operating margin and compensation ratio also improved.

Investment performance is good with most of our core funds performing well.

The business continues to generate good cash flows and we are working towards being in a positive net cash position.

Slide 19 - Summary of key activities in FY12

We are investing in our business this year and earlier I outlined examples of a number of activities undertaken this year.

The retail side of our business is an important component of the future growth of the business. It is highly profitable and has strong long term growth prospects driven by the pressures for individuals to take greater responsibilities for their long term savings needs.

We are preparing the business for a post-RDR world and our new share classes and fund rationalisation has positioned our fund range to meet this. In addition we continue to explore opportunities to position the business in new channels, like we have done with the joint venture with Sesame Bankhall. RDR still remains uncertain in the full form and impact it will take and it will be some time yet before we have a fuller picture. It is likely to impact the adviser side far more than the investment management side, but as these are our key relationships to our clients we are working hard with them to help them prepare for RDR and position us best to meet their needs as their business models adapt.

We continue to expand and diversify our product ranges in both the US and Europe, incorporating more defensive funds, and funds with reduced exposure to Europe. This is not to say that Europe is less of a priority to us as a group - far from it - but we are already well served with high quality and performing product in this area, and we need to be prepared should the current crisis continue.

We continue to develop our global business lines. To complement the hires we have made in Global Equities we expect to strengthen our Fixed Income, Emerging markets and multi asset capabilities over the coming months. We continue to engage with new managers to expand our absolute return proposition for clients.

We have successfully added new relationships, particularly in UK retail and Property, over the period and we continue to work with firms we know well to develop business relationships and ventures which strengthen the proposition for our clients.

Our distribution reach has been strengthened under Phil Wagstaff and he will keep improving how we interact with our clients making sure they have the access they need and it is easy doing business with us. Many of the IT projects underway are designed specifically to improve client access and reporting.

Finally, as we at Henderson have shown in the past it is an ongoing priority of ours to remain vigilant on our cost base and in these times it is no less prevalent.

Market conditions remain uncertain, but I am confident about our long-term strategy and outlook for the business.

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

Slide 21 - Questions and answers

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