Final Results
Schroders PLC
01 March 2005
Press Release 1st March 2005
Schroders plc
Announcement of Preliminary Results for the year ended 31st December 2004
(unaudited)
Substantial growth in profits
• Asset management profit before exceptional items £120.8 million
(2003: £60.5 million)
• Private equity profit £83.6 million (2003: £16.8 million)
• Profit before tax £191.0 million (2003: £65.0 million)
• Funds under management £105.6 billion (2003: £98.9 billion*)
• Total dividend 20.0 pence per share (2003: 18.5 pence)
*Restatement of assets predominantly due to the inclusion of additional Private
Banking funds previously omitted.
----------------------------- ---------- ----------
Year ended Year ended
31st December 31st December
2004 2003
£mn £mn
(restated)**
----------------------------- ---------- ----------
Asset management profit before exceptional 120.8 60.5
items
Exceptional items - profit on disposal of 2.6 2.4
business/subsidiary undertakings ---------- ----------
Asset management profit 123.4 62.9
Private equity 83.6 16.8
Group net income/(costs) (6.1) (4.4)
---------- ----------
Profit before tax and goodwill 200.9 75.3
Goodwill amortisation (9.9) (10.3)
---------- ----------
Profit before tax 191.0 65.0
---------- ----------
Basic earnings per share 46.0p 16.5p
Diluted earnings per share 45.7p 16.4p
---------- ----------
** The Group has adopted UITF Abstract 38 'Accounting for ESOP Trusts' during
the year. Comparative amounts, where necessary, have been restated.
Contacts:
Schroders
Michael Dobson Chief Executive +44 (0) 20 7658 6962
Jonathan Asquith Chief Financial Officer +44 (0) 20 7658 6565
Jo Godfrey Acting Head of Corporate +44 (0) 20 7658 2589
Communications
The Maitland Consultancy
William Clutterbuck +44 (0) 20 7379 5151
Management Statement
2004 was a successful year for Schroders, with increased revenues and
significantly higher profits in asset management, good investment performance
and exceptional returns from private equity.
The rise in asset management net revenues to £491.0 million (2003: £417.8
million) drove a substantial increase in asset management profit before
exceptional items, which doubled to £120.8 million (2003: £60.5 million).
Profits from private equity were £83.6 million (2003: £16.8 million), including
an exceptional gain of £47.8 million relating to the disposal of a private
equity investment by Internet Finance Partners. The exceptional gain of
£47.8 million includes £15.4 million of gains attributable to minority
interests.
Profit before tax and goodwill was £200.9 million (2003: £75.3 million) and
profit before tax was £191.0 million (2003: £65.0 million).
Group operating costs were £429.7 million (2003: £406.2 million). The increase
in costs was the result of higher staff costs principally from rising variable
compensation linked to growth in revenues and profits. This increase was partly
offset by a reduction in non-compensation costs.
Investment
We generated good investment performance across a range of key products during
the year, with two thirds of our institutional assets outperforming their
benchmarks over three years and two thirds of our EU domiciled mutual fund
assets returning more than the peer group median over the same period.
In 2004 we added to our product offerings in equities, fixed income and
alternatives, and we continued to invest in strengthening our portfolio
management and research capabilities.
Distribution
From an opening position of £98.9 billion* at the end of December 2003, Group
funds under management rose 6.8 per cent. to £105.6 billion during the period.
In retail, net sales for the year increased to £5.9 billion (2003: £4.2 billion)
and were well diversified geographically and by asset class. In the UK and
continental Europe net inflows were £4.1 billion and Schroders was rated number
one by FERI Fund Market Information for cross border net sales in 2004. In Japan
we had another strong year with net inflows of £1.3 billion, and a further £0.5
billion of net inflows elsewhere in Asia Pacific. Retail funds under management
ended the year at £30.2 billion (2003: £22.1 billion).
*Restatement of assets predominantly due to the inclusion of additional Private
Banking funds previously omitted.
In institutional we had net outflows during the year of £8.4 billion (2003: £4.3
billion), principally due to restructuring by UK institutions away from balanced
mandates. Two UK clients alone accounted for £3 billion of net outflows. But
while the historic book of business was turning over, we took on £8.5 billion of
new institutional mandates across regions and in a range of asset classes in
2004. Institutional funds under management ended the year at £69.1 billion
(2003: £71.4 billion).
Overall, the fourth quarter saw a net new business inflow of £0.8 billion,
reducing net outflows for the year as a whole to £1.8 billion (2003: £0.5
billion). The revenue effect of net business outflows in the year was outweighed
by higher margins, driven by the growing importance of retail in the business
mix.
Private Banking
We had a positive year in Private Banking with net inflows of £0.7 billion
compared with an outflow of £0.4 billion in 2003. We continued to strengthen our
market position in key intermediary distribution channels in the UK and direct
sales improved across Europe. We also attracted a number of new charity
mandates. Our Swiss business performed well and overall Private Banking funds
under management ended the year at £6.3 billion (2003: £5.4 billion).
Governance
The new Combined Code on Corporate Governance formally applied to the Company
for the first time in 2004 and the Board is able to report substantial
compliance with the provisions of the Code.
We appointed two new non-executive Directors in 2004: Merlyn Lowther joined the
Board with effect from 1st April and Andrew Beeson from 1st October. David
Swensen will step down from the Board at the Annual General Meeting in April.
The Board thanks Mr Swensen for his contribution to the Company over the past
three years, and intends to appoint an additional non-executive Director in
2005.
Dividend
In the light of these results and the Group's strong financial position, the
Board has recommended an increased final dividend of 13.5 pence per share,
payable on 21st April 2005 to shareholders on the register at 29th March 2005,
which brings the total dividend for 2004 to 20.0 pence per share (2003: 18.5
pence).
Outlook
Profitability in 2004 increased significantly due to higher revenues in asset
management and exceptional private equity gains. Asset management net revenue
margins continued to improve as a consequence of the changing business mix and
averaged 49 basis points in 2004 (2003: 46 basis points). Net operating margins
in asset management were substantially higher at 11 basis points (2003: 5 basis
points).
We are focused on providing our clients with a superior service in terms of
investment performance, product innovation and client service, and as a result
growing revenues, margins and profitability. Whilst we do not expect the
exceptional private equity performance to be repeated in 2005, we see continued
momentum in our asset management business. Reflecting our long-term approach to
the development of the business, we will continue to seek growth opportunities
and invest in them as they arise.
Michael Dobson
Chief Executive
1st March 2005
Consolidated Profit and Loss Account
For the year ended 31st December 2004
2004 2003
(restated)
----------------------- ------- ----------------------------
Continuing Continuing Discontinued Total
operations operations operations
£mn £mn £mn £mn
----------------------- ------- ------- ------- -------
Net revenues 515.8 427.5 0.1 427.6
Gains on current asset 19.6 16.5 - 16.5
investments
Administrative expenses (415.2) (387.2) (0.4) (387.6)
Depreciation (4.6) (8.2) (0.1) (8.3)
Amortisation of (9.9) (10.3) - (10.3)
goodwill ------- ------- ------- -------
Group operating profit/ 105.7 38.3 (0.4) 37.9
(loss)
Share of operating profit 6.0 2.5 - 2.5
of associated ------- ------- ------- -------
undertakings
Total operating profit/ 111.7 40.8 (0.4) 40.4
(loss)
Profit on disposal of 2.6 - 2.4 2.4
business/subsidiary
undertakings
Profit on disposal of 47.8 - - -
fixed asset investments
Interest receivable and 28.3 24.7 0.1 24.8
similar income
Amounts written back to/ 1.3 (1.9) - (1.9)
(written off) fixed asset
investments
Interest payable and (0.7) (0.7) - (0.7)
similar charges ------- ------- ------- -------
Profit on ordinary 191.0 62.9 2.1 65.0
activities before tax ------- -------
Tax charge on profit on (41.4) (16.4)
ordinary activities ------- -------
Profit on ordinary 149.6 48.6
activities after tax
Minority interests (15.6) -
------- -------
Profit attributable to 134.0 48.6
shareholders
Dividends (57.8) (53.7)
------- -------
Profit/(loss) retained by 76.2 (5.1)
the Group for the ------- -------
financial year
Basic earnings per 46.0p 16.5p
share
Diluted earnings per 45.7p 16.4p
share ------- ------- ------- -------
-----------------------
Statement of Total Consolidated Recognised Gains and Losses
For the year ended 31st December 2004
----------------------------------- --------- ---------
2004 2003
£mn £mn
(restated)
----------------------------------- --------- ---------
Profit for the financial year 134.0 48.6
Exchange translation adjustments to foreign currency (8.0) (7.6)
net investments --------- ---------
Total recognised gains and losses relating to the 126.0 41.0
year ---------
Prior year adjustment relating to adoption of UITF (0.6)
Abstract 38 ---------
Total gains and losses recognised since last annual 125.4
report and financial statements ---------
Reconciliation of Movements in Consolidated Shareholders' Funds
For the year ended 31st December 2004
----------------------------------- --------- ---------
2004 2003
£mn £mn
(restated)
----------------------------------- --------- ---------
Profit for the financial year 134.0 48.6
Dividends (57.8) (53.7)
--------- --------
76.2 (5.1)
New share capital subscribed 5.4 4.8
Reduction in shares to be issued (4.9) (5.0)
Cancellation of non-voting ordinary shares (0.5) -
Transfer of own shares at cost to reserves at 1st - (61.7)
January 2003
Shares expensed but not unconditionally vested at 1st - 50.9
January 2003
Acquisition of own shares (8.9) (12.6)
Disposal of own shares 15.1 36.6
Reversal of unrealised losses on own shares taken in - 3.3
prior years
Shares expensed but not unconditionally vested (0.9) (26.3)
Exchange translation adjustments (8.0) (7.6)
--------- --------
Net increase/(decrease) in shareholders' funds 73.5 (22.7)
Equity shareholders' funds brought forward* 1,029.2 1,051.9
--------- --------
Equity shareholders' funds carried forward* 1,102.7 1,029.2
--------- --------
*2004 brought forward and 2003 carried forward figures were originally £1,039.6
million before deduction of £10.4 million prior year adjustment.
Consolidated Balance Sheet
31st December 2004
2004 2003
£mn £mn £mn £mn
(restated) (restated)
-------------------------- -------- -------- -------- -------
Fixed assets
Intangible assets - goodwill 14.6 24.5
Tangible assets 7.5 10.1
Associates 54.9 49.9
Other investments 64.9 66.7
-------- --------
141.9 151.2
Current assets
Debtors due after more than one year 226.9 266.2
Debtors due within one year 515.3 499.9
Investments 1,369.3 1,245.0
Cash and balances with banks 444.2 462.9
-------- --------
2,555.7 2,474.0
Creditors - amounts falling due within (1,386.3) (1,350.6)
one year --------
--------
Net current assets 1,169.4 1,123.4
-------- -------
Total assets less current liabilities 1,311.3 1,274.6
Creditors - amounts falling due after (170.0) (213.0)
more than one year
Provisions for liabilities and charges (27.2) (32.4)
-------- -------
Net assets 1,114.1 1,029.2
-------------------------- -------- -------- -------- -------
Capital and reserves
Called up share capital 297.0 296.3
Share premium account 26.7 22.0
Shares to be issued - 4.9
Capital reserves 160.5 130.8
Profit and loss account 618.5 575.2
-------- -------
Equity shareholders' funds 1,102.7 1,029.2
Minority interests 11.4 -
-------- -------
Total shareholders' funds 1,114.1 1,029.2
-------------------------- -------- -------- -------- -------
Consolidated Cash Flow Statement
For the year ended 31st December 2004
2004 2003
£mn £mn
(restated)
--------------------------------- -------- --------
Net cash inflow from operating activities 134.9 129.9
Dividends/distributions received from associates 0.2 -
Returns on investments and servicing of finance
-------- --------
Interest received 29.4 26.2
Interest paid (0.7) (0.7)
Dividends/distributions paid to minority interests (4.4) -
-------- --------
Net cash inflow from returns on investments and 24.3 25.5
servicing of finance
Taxation
-------- --------
United Kingdom corporation tax (paid)/recovered (1.5) 0.2
Overseas tax paid (17.0) (9.4)
-------- --------
Total tax paid (18.5) (9.2)
Capital expenditure and financial investments
-------- --------
Tangible fixed assets - purchases (3.4) (1.6)
- disposals 1.0 0.6
Fixed asset investments - purchases (59.4) (63.5)
- disposals 57.2 49.6
- exceptional item 42.2 -
-------- --------
Net cash inflow/(outflow) from capital expenditure 37.6 (14.9)
and financial investments
Acquisitions and disposals
-------- --------
Associated undertakings - acquisitions - (4.2)
- disposals - 0.4
Subsidiaries/business - disposals 2.8 27.0
- cash disposed - (21.8)
-------- --------
Net cash inflow from acquisitions and disposals 2.8 1.4
Dividends paid (56.4) (53.4)
-------- --------
Net cash inflow before use of liquid resources and 124.9 79.3
financing
Management of liquid resources
Net cash outflow from management of liquid (17.7) (157.3)
resources
Financing
-------- --------
Purchase of non-voting ordinary shares for (0.6) -
cancellation
New share capital subscribed 0.6 -
Acquisition of own shares (8.9) (12.6)
Disposal of own shares - 10.3
-------- --------
Net cash outflow from financing (8.9) (2.3)
-------- --------
Increase/(decrease) in cash 98.3 (80.3)
-------- --------
Notes to the Accounts
Basis of Preparation
The preliminary results for the year ended 31st December 2004 are unaudited. The
financial information included in this statement does not constitute the Group's
statutory accounts for the years ended 31st December 2003 or 31st December 2004.
The financial information for the year ended 31st December 2003 is derived from
the statutory accounts for that year which have been delivered to the Registrar
of Companies and include the Independent Auditors' report on those accounts
which was unqualified. The Independent Auditors' report on the statutory
accounts for the year ended 31st December 2004 has not yet been signed. Those
accounts are expected to be dispatched to shareholders on 17th March 2005, and
will be delivered to the Registrar of Companies after the Annual General Meeting
to be held at 31 Gresham Street, London, EC2V 7QA on 19th April 2005.
Accounting Policies
In preparing the financial information included in this statement there have
been no material changes to the accounting policies (except for the adoption of
UITF Abstract 38 'Accounting for ESOP Trusts') previously applied by the Group
in reporting its statutory accounts for the year ended 31st December 2003.
Segmental Reporting - by Class of Business
The Group has three continuing classes of business: asset management, private
equity and Group net income/(costs). Asset management principally comprises
investment management and private banking, including advisory services, property
and other alternative assets; private equity principally comprises private
equity, venture capital and buy-out funds; Group net income/(costs) represents
the return on the investment of the Group's liquid capital, Group central costs
and provisions, and big ticket leasing.
2004
£mn
-------------------- -------- -------- -------- --------
Asset Private Group Total
management equity net
income/
(costs)
-------------------- -------- -------- -------- --------
Net revenues 491.0 23.3 1.5 515.8
Gains on current asset 9.0 7.2 3.4 19.6
investments
Administrative expenses (383.0) (3.0) (29.2) (415.2)
Depreciation (4.1) - (0.5) (4.6)
Amortisation of goodwill (9.9) - - (9.9)
-------- -------- -------- --------
Group operating profit/(loss) 103.0 27.5 (24.8) 105.7
Share of operating profit of 0.2 5.8 - 6.0
associated undertakings -------- -------- -------- --------
Total operating profit/(loss) 103.2 33.3 (24.8) 111.7
Profit on disposal of 2.6 - - 2.6
business
Profit on disposal of fixed - 47.8 - 47.8
asset investments
Interest receivable and 8.0 1.3 19.0 28.3
similar income
Amounts written back to fixed 0.1 1.2 - 1.3
asset investments
Interest payable and similar (0.4) - (0.3) (0.7)
charges -------- -------- -------- --------
Profit/(loss) on ordinary 113.5 83.6 (6.1) 191.0
activities before tax -------- -------- -------- --------
Total shareholders' funds 496.8 175.8 441.5 1,114.1
-------- -------- -------- --------
2003
£mn
(restated)
---------------- ------ ------- ------- ------ ------- ------ ------- -------
Asset Asset Total Private Group Total Total Total
management management asset equity net continuing discontinued
continuing discontinued management income/ operations operations
operations operations (costs)
---------------- ------ ------- ------- ------ ------- ------ ------- -------
Net revenues 417.7 0.1 417.8 6.4 3.4 427.6 427.5 0.1
Gains on current asset 5.2 - 5.2 10.9 0.4 16.5 16.5 -
investments
Administrative (360.2) (0.4) (360.6) (2.2) (24.8) (387.6) (387.2) (0.4)
expenses
Depreciation (8.0) (0.1) (8.1) - (0.2) (8.3) (8.2) (0.1)
Amortisation of (10.3) - (10.3) - - (10.3) (10.3) -
goodwill ------ ------- ------- ------ ------- ------ ------- -------
Group operating profit 44.4 (0.4) 44.0 15.1 (21.2) 37.9 38.3 (0.4)
/(loss)
Share of operating 0.2 - 0.2 2.3 - 2.5 2.5 -
profit of associated ------ ------- ------- ------ ------- ------ ------- -------
undertakings
Total operating profit 44.6 (0.4) 44.2 17.4 (21.2) 40.4 40.8 (0.4)
/(loss)
Profit on disposal of - 2.4 2.4 - - 2.4 - 2.4
subsidiary
undertakings
Interest receivable 6.4 0.1 6.5 1.2 17.1 24.8 24.7 0.1
and similar income
Amounts written off (0.1) - (0.1) (1.8) - (1.9) (1.9) -
fixed asset
investments
Interest payable and (0.4) - (0.4) - (0.3) (0.7) (0.7) -
similar charges ------ ------- ------- ------ ------- ------ ------- -------
Profit /(loss) on 50.5 2.1 52.6 16.8 (4.4) 65.0 62.9 2.1
ordinary activities ------ ------- ------- ------ ------- ------ ------- -------
before tax
Total shareholders' 440.2 - 440.2 118.6 470.4 1,029.2 1,029.2 -
funds ------ ------- ------- ------ ------- ------ ------- -------
Consolidated Cash Flow Statement
2004 2003
£mn £mn
(restated)
--------------------------- --------- ---------
Reconciliation of total operating profit to
net cash flow from operating activities
Total operating profit 111.7 40.4
Depreciation of tangible fixed assets 4.6 8.3
Amortisation of goodwill 9.9 10.3
Decrease/(increase) in debtors 32.2 (105.7)
(Decrease)/increase in creditors (8.5) 246.3
Decrease in debt securities in issue (6.4) (55.6)
Gain on sale on tangible fixed assets - (0.1)
Share of operating profit of associated (6.0) (2.5)
undertakings
Provision for liabilities and charges 2.2 3.1
Gains on current asset investments (19.6) (16.5)
Other non-cash movements 14.8 1.9
--------- ---------
Net cash inflow from operating activities 134.9 129.9
--------- ---------
2004 2003
£mn £mn
(restated)
--------------------------- --------- ---------
Reconciliation of net cash flow to movement
in net funds
Increase/(decrease) in cash in the year 98.3 (80.3)
Cash outflow from redemption/issue of 6.4 55.6
certificates of deposit
Cash outflow from increase in liquid 17.7 157.3
resources --------- ---------
Changes in net funds resulting from cash 122.4 132.6
flows
Non-cash movements in liquid resources (10.4) (2.6)
Non-cash movements in debt securities 8.2 -
Net funds at 1st January * 1,659.0 1,529.0
--------- ---------
Net funds at 31st December * 1,779.2 1,659.0
--------- ---------
*2004 brought forward and 2003 carried forward figures were originally £1,669.4
million before deduction of £10.4 million prior year adjustment.
Reconciliation of movements in cash
----------------------- --------- ----------- ------------
2004 Cash flow 2003
£mn £mn £mn
----------------------- --------- ----------- ------------
Cash and balances with banks - 300.8 95.8 205.0
repayable on demand
Cash and balances with banks - 143.4 257.9
other --------- ------------
Cash and balances with banks 444.2 462.9
--------- ------------
Exchange adjustments 2.5
-----------
Increase in cash 98.3
-----------
Tax on profit on ordinary activities
2004 2003
£mn £mn
(restated)
--------------------------- --------- ---------
Profit on ordinary activities before tax 191.0 65.0
---------- ---------
Profit on ordinary activities before tax 57.3 19.5
multiplied by corporation tax at the UK
standard rate of 30% (2003: 30%)
Effects of:
Non-taxable income less expenses not (1.0) 11.2
deductible for tax purposes
Impact of profits/losses arising in 1.5 2.2
jurisdictions with higher tax rates
Impacts of profits/losses arising in (30.6) (16.9)
jurisdictions with lower tax rates
Movements in tax losses (0.6) 1.1
Timing differences - fixed assets (2.5) (4.5)
Other timing differences 7.1 1.5
UK tax - prior year adjustments 0.6 0.6
Foreign tax - prior year adjustments (1.0) 0.1
UK tax on profits of overseas entities 0.4 0.5
---------- ---------
Current tax charged for the year 31.2 15.3
Deferred tax - origination and reversal of 10.2 1.1
timing differences ---------- ---------
Tax charge on profit on ordinary 41.4 16.4
activities ---------- ---------
Five year financial summary
2004 2003 2002 2001 2000+
£mn £mn £mn £mn £mn
(restated)
-------- -------- -------- -------- --------
Profit/(loss) on ordinary 191.0 65.0 18.9 (8.1) 275.3
activities before tax
Tax (41.4) (16.4) 7.7 (12.6) (53.8)
-------- -------- -------- -------- --------
Profit/(loss) on ordinary 149.6 48.6 26.6 (20.7) 221.5
activities after tax
Minority interests (15.6) - (0.5) 0.1 (0.2)
-------- -------- -------- -------- --------
Profit/(loss) attributable 134.0 48.6 26.1 (20.6) 221.3
to shareholders -------- -------- -------- -------- --------
Earnings per share
Basic earnings/(loss) per 46.0 16.5 8.8 (7.0) 74.6
share (pence)
Diluted earnings/(loss) 45.7 16.4 8.8 (7.0) 74.2
per share (pence)
Dividends
Cost (£mn) 57.8 53.7 53.3 53.9 54.1
Pence per share 20.0 18.5 18.5 18.5 18.5
Total shareholders' funds 1,114.1 1,029.2 1,051.9 1,112.5 1,161.2
(£mn)
Net assets per share 383 350 355 372 391
(pence)
------------------- -------- -------- -------- -------- --------
+ Includes the investment banking business sold in April 2000.
Operating and Financial Review
Overview
Schroders is a global provider of fund management services for institutional,
retail and private clients. Our operations have a broad geographical span
covering the main financial centres of the world, with 34 offices divided
organisationally between the Americas, Europe and Asia Pacific. The management
of international assets is concentrated in two locations, with a further ten
primarily responsible for domestic assets, and the balance acting as sales
offices. We are committed to an integrated approach to the management of the
business, designed to achieve maximum leverage of our intellectual and
operational resources across geographical regions and asset classes.
Over recent years we have tightened our focus on asset management, outsourcing
administrative functions to specialist third party suppliers and disposing of
non-core activities. Within the asset management field, our products cover a
wide range of asset classes and client segments, but the management of equity
portfolios still dominates the mix, with 69 per cent. of client investments in
equities at the end of 2004. Schroders' client profile continues to diversify,
with Retail and Private Banking clients now accounting for 35 per cent. (2003:
28 per cent.) of funds under management and 55 per cent. (2003: 49 per cent.) of
net revenues in 2004. Revenues for 2003 and 2004 are now stated before fund
management charges previously paid by Retail and Private Banking to
Institutional.*
Most of Schroders' income derives from fund management services sold through
third party or institutional distribution channels. The principal exception to
this rule is in Private Banking, where the retention of direct distribution
capacity to individual clients and the provision of banking and trust services
to supplement the core fund management offering, are central to the business
model.
Results
Group profit before tax of £191.0 million for 2004 compares with a profit of
£65.0 million in 2003. Group net revenues were £515.8 million (2003: £427.6
million), whilst total costs before goodwill were £419.8 million (2003: £395.9
million). Exceptional items contributed £50.4 million (2003: £2.4 million). Net
interest receivable and movements in the value of fixed and current asset
investments generated a net profit of £48.5 million (2003: £38.7 million),
whilst goodwill amortisation was £9.9 million (2003: £10.3 million). In
addition, the Group's share of operating profits in associated undertakings was
£6.0 million (2003: £2.5 million).
The Group's profit attributable to shareholders after tax and minority interests
was £134.0 million (2003: £48.6 million).
Basic and diluted earnings per share were 46.0 pence and 45.7 pence respectively
(2003: 16.5 pence and 16.4 pence respectively).
*In the functional reorganisation undertaken in September 2003, the Investment
function previously reported as part of Institutional was split off into a
separate division. As a result internal fund management charges are no longer
paid by Retail and Private Banking to Institutional and 2003 net revenues by
distribution channel have been restated accordingly.
Asset management
Net revenues in asset management rose to £491.0 million from £417.8 million.
Asset management costs before goodwill were £387.1 million in 2004 (2003: £368.7
million). The sale of the Group's U.S. small cap equity business in Boston
generated an exceptional asset management gain of £2.6 million during the year,
whilst net interest receivable and movements on asset management fixed and
current asset investments generated a net profit of £16.7 million (2003: £11.2
million). Asset management profit before goodwill was £123.4 million (2003:
£62.9 million).
Private equity
The Group's private equity profit increased from £16.8 million in 2003 to £83.6
million in 2004. The largest item under this heading was the exceptional gain
(before minority interests) of £47.8 million relating to the disposal of a
private equity investment by Internet Finance Partners, a controlled limited
partnership. The private equity profit also included a mark-to-market gain of
£6.3 million on the Group's holding in SVG Capital plc (formerly known as
Schroder Ventures International Investment Trust plc). In addition, other flows
included direct distributions totalling £11.7 million from the sale of
investments by Permira Europe I, a private equity fund in which the Group has
direct and indirect interests.
Minority interests in the Internet Finance Partners disposal amounted to £15.4
million, which is reflected in the Group's profit attributable to shareholders.
Group net income/(costs)
Group net income/(costs) comprises income on the Group's liquid capital less
Group costs and provisions - that is those costs not directly attributable to
the other segments - and the results of the leasing business (before any tax
credits, which are taken through the tax line). Losses within the segment
increased to £6.1 million (2003: £4.4 million), as improved returns from the
management of the Group's liquid capital were outweighed by increased costs due
to the implementation of new financial systems across the Group, increased costs
for surplus office space and a rise in compensation costs within the segment.
Pensions
Pensions have been accounted for in accordance with SSAP 24, with a net cost of
£9.8 million (2003: £11.4 million) relating to the Group's UK defined benefit
scheme. Under FRS 17 the market value of the assets of the scheme is £389.2
million and the deficit on the scheme is £21.2 million. The FRS 17 charge for
the year would have been £4.9 million.
Funds under management
Funds under management (FUM) increased by £6.7 billion from £98.9 billion at
31st December 2003 (adjusted for £0.6 billion of funds previously omitted,
primarily within Private Banking) to £105.6 billion at 31st December 2004, of
which £8.8 billion arose from the appreciation of clients' assets, principally
due to higher equity markets. Inflows from new and existing clients were £25.9
billion, of which £17.4 billion was from Retail and Private Banking clients.
Total Institutional Retail Private
Banking
£bn £bn £bn £bn
--------------- -------- -------- -------- --------
31st December 2003 98.3 71.2 22.1 5.0
Transfers and 0.6 0.2 - 0.4
adjustments -------- -------- -------- --------
31st December 2003 98.9 71.4 22.1 5.4
restated
Disposals (0.3) (0.3) - -
Transfers - (0.5) 0.3 0.2
Market movement 8.8 6.9 1.9 -
Net asset gains/ (1.8) (8.4) 5.9 0.7
(losses) -------- -------- -------- --------
31st December 2004 105.6 69.1 30.2 6.3
--------------- -------- -------- -------- --------
Commentary
The results in 2004 show a year of strong improvement, with Group profit before
tax up nearly 300 per cent. on the prior year and more importantly the profit
from the asset management business before exceptional items almost doubled in
the year. Asset management net revenue margins improved from 46 basis points to
49 basis points, while the ratio of asset management costs to net revenues
improved from 88 per cent. to 79 per cent.
Overall the Group continues to see strong inflows in higher margin areas of the
business; Retail continues to perform well with net inflows of £5.9 billion in
2004, up from £4.2 billion in 2003, whilst Private Banking secured net inflows
of £0.7 billion in 2004, against net outflows of £0.4 billion in 2003. Even if
markets had not appreciated during the year, annualised revenues in asset
management would have gone up, with higher margin net business gains in Retail
and Private Banking outweighing net losses in Institutional.
Revenues
Net revenues have increased by over 20 per cent. to £515.8 million in 2004,
whilst the business mix has continued to shift from Institutional to Retail and
Private Banking. Retail and Private Banking now represent 55 per cent. of net
revenues compared to 49 per cent. in 2003, driven by strong Retail inflows in
continental Europe and Japan and Private Banking inflows in both the UK and
Switzerland.
Costs
Total costs before goodwill increased by 6.0 per cent. to £419.8 million in
2004. Within this figure were substantial rises in staff costs, principally
increased variable compensation linked to higher revenues and profitability,
offset by reductions in operational and other non-compensation costs. After a
sustained period of staff reductions, we have commenced a modest expansion in
the workforce to take advantage of new opportunities in the market and respond
to an increased level of business.
Earnings momentum
Schroders has continued to demonstrate a positive trend in earnings in 2004. The
Group opened the year with an estimated net asset management margin of 9 basis
points (calculated as 2003 asset management net revenue divided by 2003 average
FUM less 2003 asset management costs divided by 2004 opening FUM). By the end of
the year the equivalent ratio had climbed to an estimated 12 basis points,
illustrating the positive impact of rising markets, changing business mix and a
focus on reducing operating cost margins.
Market trends and related risks
The year saw a steady improvement in the economic environment reflected in
improving market levels and Schroders benefited from this improvement. Markets
aside, underlying momentum within the asset management industry remains strong,
with the growing worldwide focus on the gaps in existing pensions provision
likely to provide a strong stimulus to savings in the coming years.
Schroders retains a relatively high level of operational gearing and profits
would clearly be exposed in the short term to a decline in equity markets from
their current levels. The impact of market-related risks on profits is
controlled by managing total compensation to a reducing proportion of operating
revenues. This mechanism, combined with a continued focus on the level of
non-compensation expenses, provides strong underpinning to the management of the
cost:income ratio. Balancing cost disciplines with the need to invest in the
business requires a close alignment of the interests of staff and shareholders.
Schroders has considerably increased the proportion of total staff compensation
delivered in the form of equity over the last four years. We rely on this and
other measures to maintain an appropriate focus on profitability, particularly
at a senior level.
We believe that our remuneration policies mitigate the inevitable risks in the
current more robust recruitment environment, and will help us to retain our key
staff.
In common with all other listed UK Groups, Schroders is undertaking the
transition to International Financial Reporting Standards (IFRS) for its 2005
financial statements. Whilst the Group remains on track to make the transition
to IFRS, it is likely that the change will create concerns over comparability of
results both over time and between different groups as the market seeks to
understand the new basis of accounting. The Group believes that the transition
can only be managed by clear and open communication with the market of the
impact of the change on group results. To this end we have already provided an
initial analysis of the impact on the Group net asset position at 1st January
and 30th June 2004 and the financial results for the six months ended 30th June
2004. The Group will continue this communication process by publishing a
reconciliation of the Group's 2004 results between UK GAAP and IFRS in the
second quarter of this year with the first results produced by the Group under
IFRS being the interim results for the period to 30th June 2005.
Capital allocation and liquidity
Equity shareholders' funds at 31st December 2004 were £1.10 billion.
2004 2003
£mn £mn
(restated)
----------------- ----------- ------------
Asset management 357 342
Surplus:
----------- ------------
Liquid funds 356 458
Third party hedge funds 123 15
Private equity 164 119
Other Schroder funds 107 58
Leasing 9 32
----------- ------------
759 682
Group 11 18
Proposed dividends (39) (38)
----------- ------------
1,088 1,004
Goodwill 15 25
----------- ------------
1,103 1,029
----------------- ----------- ------------
The table above sets out management's view of the allocation of capital between
the different activities in the Group. On the basis of this analysis, the
Group's holding companies have some £759 million of surplus capital available to
fund dividends, acquisitions or investment opportunities. Liquid funds are
invested in cash, bank deposits or segregated money market and bond portfolios.
With the exception of private equity, the great majority of surplus capital is
held directly in sterling instruments or hedged back into sterling. The increase
in the private equity figure in the year largely relates to cash realisations
from Internet Finance Partners either held in escrow or awaiting distribution at
the year end.
Schroders carries no significant borrowings on the balance sheet and working
capital requirements are largely confined to the maintenance of regulatory
capital and the funding of fee receivables billed in arrears.
Cash flows
A significant proportion of the cash flows reflected in the financial statements
relate to the Private Banking businesses. Stripping these out leaves three
significant non-operating items: (i) cash inflows during the year relating to
the disposal of a fixed asset investment (£42.2 million); (ii) cash inflows
during the year relating to net interest received (£28.7 million); and (iii)
cash outflows during the year relating to payment of dividends (£56.4 million).
Corporate actions
There were no major Group corporate actions in 2004.
Credit Ratings
Short term Long term
------------------ ---------- ----------
Fitch IBCA F1 A+
------------------ ---------- ----------
Standard & Poor's A1 A
------------------ ---------- ----------
Currency exposure
Allowing for the effect of foreign exchange hedges, approximately 94 per cent.
of the Group's capital is invested in four currencies: sterling, U.S. dollars,
euros and Swiss francs. 81 per cent. of the Group's capital is in sterling.
Dividends
The Directors recommend an increased final dividend of 13.5 pence per share,
bringing dividends for the year to 20.0 pence per share or £57.8 million which
will be 2.3 times covered by the Group's profit attributable to shareholders.
Performance measurement
The primary measures of the Group's performance for the asset management
business are the asset management costs: net revenues ratio, 79 per cent. (2003:
88 per cent.)*; net revenues on average funds under management, 49 basis points
(2003: 46 basis points)*; and asset management costs on average funds under
management, 38 basis points (2003: 41 basis points)*.
Analyst presentation
The presentation to analysts and investment managers will take place today at
09.00 GMT, 31 Gresham Street, London EC2V 7QA. It can be viewed live at
www.schroders.com.
Jonathan Asquith
Chief Financial Officer
1st March 2005
*Primary measures adjusted to include project and redundancy costs and prior
year restatement of funds under management.
Forward-looking statements
This preliminary announcement contains certain forward-looking statements with
respect to the financial condition, results of operations and businesses of
Schroders plc. These statements and forecasts involve risk and uncertainty because
they relate to events and depend upon circumstances that will occur in the future.
There are a number of factors that could cause actual results or developments to
differ materially from those expressed or implied by these forward-looking
statements and forecasts. Nothing in this announcement should be construed as a
profit forecast.
----------------------------------------------------
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Friday, 31st May 2024
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