Interim Results

Schroders PLC 1 September 2000 SCHRODERS PLC Half Year Results to 30th June 2000 * Profit before tax on continuing operations up 41% to £129.5 million (H1 1999, £92.0 million) * Asset management profit £82.5 million (H1 1999, £77.1 million) * Private equity profit £49.9 million (H1 1999, £14.9 million) * Funds under management £143.6 billion * Interim dividend maintained at 5.5p per share on reduced shareholders' funds Six months Six months Six months ended 30th ended 31st ended 30th June 2000 December 1999 June 1999 (unaudited) (unaudited) (unaudited) £mn £mn £mn Profit before tax Asset management 82.5 84.6 77.1 Private equity 49.9 25.6 14.9 Group interest income/(costs) (2.9) - - ===== ===== ===== Continuing operations 129.5 110.2 92.0 Profit on sale of Australian property business - 24.9 - Discontinued operations - investment banking 38.4 41.9 55.0 ===== ===== ===== 167.9 177.0 147.0 Tax (21.8) (43.7) (36.5) ===== ===== ===== Profit after tax 146.1 133.3 110.5 Minority interests (0.2) 0.6 0.2 ===== ===== ===== Profit attributable to shareholders 145.9 133.9 110.7 ===== ===== ===== An interim dividend of 5.5p per share (compared with 5.5p per share paid in 1999) will be paid on 26th October 2000 to shareholders on the register at 15th September 2000. MANAGEMENT REVIEW We are pleased to report on the half year results to 30th June 2000 and to comment on the progress we have made in the period under review. We are also taking the opportunity to restate the key elements of our strategy for the future of Schroders as an independent asset management company; we outlined these when we announced the sale of the investment bank in January and, in more detail, in our most recent Annual Report. The profit before tax from our core asset management business was £83 million (first half 1999, £77 million) while our private equity interests made an exceptionally strong contribution of £50 million (first half 1999, £15 million). After deducting Group interest income/(costs) of £3 million and adding the investment banking profits of £38 million to the date of sale, the profit before tax totalled £168 million, compared with £147 million in the comparable period of 1999. The profit attributable to shareholders was £146 million after a lower than normal tax charge of 13%; earnings per share were 49.3p. In line with the previously expressed intention, a maintained interim dividend of 5.5p per share on the reduced shareholders' funds has been declared and will be paid on 26th October 2000 to shareholders on the register at 15th September 2000. ASSET MANAGEMENT Higher markets than those in the first half of 1999 helped to raise revenues by 24%. Costs increased due to higher staff and marketing costs and, in particular, increased technology expenditure. Costs taken through the profit and loss account on e-enablement, outsourcing projects and development of our retail systems were £11 million in the first half (full year 1999, £6 million). We intend to focus an increasing proportion of our in-house technology expenditure on front-office systems while seeking 'best of breed' in procurement. In this connection, we were pleased to announce in August the outsourcing of our UK custody and fund administration services to The Chase Manhattan Bank. Funds under management increased to £143.6 billion from £142.6 billion at 31st December 1999, reflecting a restructuring of funds in the UK partly offset by gains overseas. INSTITUTIONAL FUND MANAGEMENT We are seeking to generate significant growth in our institutional fund management business from the expanding markets of Continental Europe and Asia Pacific. In the more mature markets of the UK and US we aim to broaden our product range and improve the competitiveness of existing products. Whilst competition remains intense in the UK, particularly from passive fund management, the development of our global research capabilities and the strengthening of our investment teams are both leading to a steady improvement in the competitiveness of our core products. A number of new products have also been launched and we are expanding our range of alternative investments (property, private equity and structured products) to meet increasing demand from institutional investors. In the period under review Continental Europe was our strongest area of growth. We opened new offices in Lisbon and Paris and increased our marketing resources in Amsterdam and Madrid. Net new funds derived predominantly from Italy and Scandinavia but our recent investment across the Continent should serve to expand the geographic base of our business. We have maintained our leading position in Japan amongst all non-Japanese pension managers and are seeking licences to establish our own full service fund management companies in Korea and Taiwan. In July we formalised a co- operation agreement with the China Asset Management Company, a well- established domestic fund manager in China. The Hong Kong market is experiencing increasing competitive pressure but Singapore continues to exhibit a healthy flow of new business opportunities and Australia shows an improving trend. RETAIL FUND MANAGEMENT Our retail strategy is to develop a 'premium branded manufacturer' mutual fund business predominantly through organic growth. We also aim to grow our defined contribution (DC) pension business in the UK, Hong Kong and Japan. A major brand audit has been completed and new marketing campaigns will be rolled out across the Group by the end of the year. In May we announced the £60 million acquisition of Liberty International Pensions, now re-named Schroder Pensions, which will accelerate our DC ambitions in the UK. This will provide us with an insurance company vehicle, a passive fund management capability through a partnership with Hermes, together with state-of-the-art administration and enable us to offer a complete service to clients including actively managed and passive funds. At this stage in its development, Schroder Pensions is not yet profitable. As within the institutional arena, we are developing our retail business in Europe. In addition to a strong inflow of new business in Continental Europe we have seen a turnaround in the UK after a disappointing 1999, with a modest net inflow of assets and an increase in market share in the first half of 2000. We now have sales operations in 11 European countries through which to grow our business supported by a broad range of products. New product launches in 2000 include European Technology, FTSE 250, Medical Discovery, Emerging Europe, World Markets and Japan Defensive funds. A marketing campaign has been initiated in Japan through television and print media to mark the start of sales of our new retail products. Sales in Taiwan and Singapore have continued to make progress, while Hong Kong has experienced mixed results and Korea has shown modest growth. PRIVATE BANKING Although Schroders has long managed private client investment portfolios, our aim is to expand both the size and scope of our private banking business. We have applied for a banking licence in the UK to complement our existing private banking operations in Switzerland and Guernsey. Our new UK bank, once launched, will incorporate our existing UK private client investment management business, together with the private client loan and deposit activities previously conducted in J. Henry Schroder & Co. We also recently announced plans to create a joint venture in Austria in co-operation with Vienna Capital Partners which, subject to regulatory approvals, will provide asset management and related advisory services to high net worth individuals in Austria and Eastern Europe. Schroder Trust Bank based in Miami, provides the platform for the development of our Latin American business and we are reviewing the feasibility of expanding our facilities elsewhere, particularly in Asia. In the first half of 2000 all our private banking businesses delivered satisfactory results with a particularly strong performance by J. Henry Schroder Bank in Switzerland. PRIVATE EQUITY AND ALTERNATIVE INVESTMENTS The exceptionally strong contribution of £50 million from our private equity interests comprised carried interests and portfolio investment realisations of £33 million (of which £10 million arose through an associate company) and £17 million from the increased market valuation of the Group's holding in Schroder Ventures International Investment Trust plc. During the period, we established Internet Finance Partners to invest in internet-based wholesale financial services businesses. Quoted securities markets have reached valuation levels not matched in recent years and have exhibited increased correlation. As a result, both private and institutional investors have shown a greater interest in diversifying into less correlated assets such as property, private equity and structured investments. Schroders has a well established private equity associate in Schroder Ventures and a leading property management business in Schroder Properties. During the second half we will be launching a range of alternative investment products to meet institutional and private client demand for diversified exposure. We intend that these activities should grow to represent a material proportion of the Group's operations over time. CORPORATE ACTIVITY The divestment of the investment banking business to Salomon Smith Barney was completed on 1st May. Under the Scheme of Arrangement shareholders received an initial £891 million (£3.00 per share) and assuming finalisation of the completion accounts, a small additional consideration, currently expected to be 4.5p per share will be sent in due course to those shareholders on the register at 17th April 2000. The United Kingdom tax authorities have recently confirmed that section 703 of the Income and Corporation Taxes Act 1988 is not applicable to the distributions. Other corporate activity included the sale of Schroder Leasing, our small ticket leasing business, the purchase of the outstanding 35% minority interest in Schroder Asseily in July and, more recently, the transfer out of the Group of the management of Schroder European Property Fund for which we are due to receive NLG 29 million (£8.1 million). The Group also repaid US$250 million of debt capital raised in 1999. Meanwhile the credit ratings of Schroders plc have been reaffirmed or raised: Short Term Long Term Fitch IBCA F1 A Standard & Poor's A1 A+ (previously A) The Group's capital reserves now stand at approximately £1.1 billion. As previously stated, the Board will consider how much of this amount, if any, is in excess of expected capital requirements. CONCLUSION We expect the second half year to produce much lower private equity profits but a positive contribution from net Group interest income. The profits of the core asset management business will depend on stock market levels and on our investment performance. We have, as a Group, been through profound change since the turn of the year and we would like to thank our employees, who currently number some 2,950, for their commitment and dedication over the past few months. We are committed to increasing the number of Schroder shares owned by our employees so as to align more closely the interests of employees and shareholders. In this connection, the Group is introducing a deferred compensation scheme under which allocations to approximately 130 employees are being made. The total number of shares allocated under this scheme is 3.1 million and the charge against profits in the half year under review was approximately £5 million; similar charges will occur in the succeeding five half years. We will be writing to shareholders on this and other planned compensation plans. Asset management is now the principal business of Schroders. Our strategy is to establish Schroders as one of the world's leading asset managers by maintaining and developing our position as a domestic or specialist international manager in the principal savings markets of the world, serving institutional, retail and private banking clients. We intend to expand our business in Continental Europe and Asia Pacific to match more closely in size that in the Americas whilst maintaining our leading position in the UK. Our goal is to be a top ten player in each of our market segments and to focus on profitability and potential for growth in earnings rather than size for size's sake. Our clients, moreover, will always come first and strong investment performance is our top priority. Peter Sedgwick David Salisbury Chairman Chief Executive 1st September 2000 CONSOLIDATED PROFIT AND LOSS ACCOUNT Six months ended 30th June 2000 Continuing Discontinued operations operations Total (unaudited) (unaudited) (unaudited) £mn £mn £mn Net interest income 10.7 50.2 60.9 Net fees and commissions 280.2 163.8 433.0 Net dealing income 4.4 41.3 45.7 Other operating income 54.9 (0.4) 54.5 ----- ----- ----- Operating income 350.2 254.9 594.1 Operating expenses (215.7) (217.0) (421.7) Depreciation and amortisation (15.2) (3.6) (18.8) ----- ----- ----- Operating profit 119.3 34.3 153.6 Profit on sale of the investment banking business (see note 1) - 4.1 4.1 Profit on sale of the Australian property business - - - Income from shares in associated undertakings 10.2 - 10.2 ----- ----- ----- Profit on ordinary activities before tax 129.5 38.4 167.9 Tax (see note 2) (32.6) 10.8 (21.8) ----- ----- ----- Profit on ordinary activities after tax 96.9 49.2 146.1 Minority interests (0.2) - (0.2) ----- ----- ----- Profit attributable to shareholders 96.7 49.2 145.9 Dividend (16.3) - (16.3) ----- ----- ----- Retained profit 80.4 49.2 129.6 ===== ===== ===== Basic earnings per share 32.7p 49.3p Diluted earnings per share 32.6p 49.2p Dividend per share 5.5p The comparative figures shown in the segmental analysis on page 1 are those reported in the prior year (with the exception of private equity which is now shown separately) and differ from those shown above principally because of the treatment of certain Group related items, in particular Group interest and costs. CONSOLIDATED PROFIT AND LOSS ACCOUNT Six months ended 31st December 1999 Continuing Discontinued operations operations Total (unaudited) (unaudited) (unaudited) £mn £mn £mn Net interest income 10.1 54.8 64.9 Net fees and commissions 250.4 326.5 576.9 Net dealing income 2.2 49.2 51.4 Other operating income 33.7 0.7 34.4 ----- ----- ----- Operating income 296.4 431.2 727.6 Operating expenses (189.9) (364.3) (554.2) Depreciation and amortisation (25.7) (4.7) (30.4) ----- ----- ----- Operating profit 80.8 62.2 143.0 Profit on sale of the investment banking business (see note 1) - - - Profit on sale of the Australian property business 24.9 - 24.9 Income from shares in associated undertakings 9.1 - 9.1 ----- ----- ----- Profit on ordinary activities before tax 114.8 62.2 177.0 Tax (see note 2) (20.5) (23.2) (43.7) ----- ----- ----- Profit on ordinary activities after tax 94.3 39.0 133.3 Minority interests (0.3) 0.9 0.6 ----- ----- ----- Profit attributable to shareholders 94.0 39.9 133.9 Dividend (38.0) - (38.0) ----- ----- ----- Retained profit 56.0 39.9 95.9 ===== ===== ===== Basic earnings per share 31.8p 45.3p Diluted earnings per share 31.6p 45.1p Dividend per share 13.0p CONSOLIDATED PROFIT AND LOSS ACCOUNT Six months ended 30th June 1999 Continuing Discontinued operations operations Total (unaudited) (unaudited) (unaudited) £mn £mn £mn Net interest income 12.6 53.2 65.8 Net fees and commissions 223.2 303.3 526.5 Net dealing income 1.1 36.3 37.4 Other operating income 18.6 4.6 23.2 ----- ----- ----- Operating income 255.5 397.4 652.9 Operating expenses (155.8) (338.3) (494.1) Depreciation and amortisation (14.0) (4.0) (18.0) ----- ----- ----- Operating profit 85.7 55.1 140.8 Profit on sale of the investment banking business - - - (see note 1) Profit on sale of the Australian property business - - - Income from shares in associated undertakings 6.2 - 6.2 ----- ----- ----- Profit on ordinary activities before tax 91.9 55.1 147.0 Tax (see note 2) (21.0) (15.5) (36.5) ----- ----- ----- Profit on ordinary activities after tax 70.9 39.6 110.5 Minority interests 0.4 (0.2) 0.2 ----- ----- ----- Profit attributable to shareholders 71.3 39.4 110.7 Dividend (15.9) - (15.9) ----- ----- ----- Retained profit 55.4 39.4 94.8 ===== ===== ===== Basic earnings per share 24.2p 37.5p Diluted earnings per share 24.1p 37.4p Dividend per share 5.5p CONSOLIDATED BALANCE SHEET 30th June 31st December 2000 1999 (unaudited) (audited) £mn £mn Fixed assets Intangible assets - goodwill 15.0 16.8 Tangible assets 109.5 123.3 Investments in associates 24.5 22.0 ======== ======== 149.0 162.1 Current assets Cash and balances with banks 791.7 1,426.8 Debtors 604.6 4,924.6 Investments 605.2 6,112.4 Prepayments and accrued income 110.5 212.2 Other assets 122.7 564.2 ======== ======== 2,234.7 13,240.2 Current liabilities - amounts falling due within one year Deposits by banks 215.9 939.2 Creditors 927.6 9,335.2 ======== ======== 1,143.5 10,274.4 Net current assets 1,091.2 2,965.8 ======== ======== Total assets less current liabilities 1,240.2 3,127.9 Creditors - amounts due after more than one year 75.9 1,694.6 Provisions for liabilities and charges 41.5 60.6 ======== ======== Net assets 1,122.8 1,372.7 ======== ======== Capital and reserves Called up share capital 296.9 295.4 Reserves 823.8 1,075.0 -------- -------- Equity shareholders' funds 1,120.7 1,370.4 Minority interests 2.1 2.3 ======== ======== 1,122.8 1,372.7 ======== ======== CONSOLIDATED CASH FLOW STATEMENT The format and definitions of the cash flow statement required by Financial Reporting Standard FRS1 are not wholly appropriate to the operations of the Group. In particular, the disposal of the investment banking business has resulted in significant movements in operating assets and liabilities. 30th 31st June December 2000 1999 (unaudited) (unaudited) £mn £mn Net cash outflow from ordinary activities before tax (992.5) (376.8) Dividends received from associates - 0.1 Return on investments and servicing of finance (2.9) (6.3) Taxation (20.4) (58.0) Sales/(purchases) of fixed assets 0.7 (63.0) Proceeds on disposal of investment banking business 540.7 - Net cash inflow from other acquisitions and disposals - 4.5 Equity dividends paid to shareholders (38.0) (49.6) Financing (122.7) 156.7 ======= ======= Decrease in net cash (635.1) (392.4) ======= ======= RECONCILIATION OF MOVEMENT IN NET CASH At 1st Exchange January Movement At 30th 2000 Cash flow (un- June 2000 (unaudited) (unaudited) audited) (unaudited) £mn £mn £mn £mn Cash and balances with banks 1,426.8 (635.1) 791.7 Debt 6.97% Guaranteed senior notes repaid (US$ 250mn) (154.1) 158.8 (4.7) - ======= ======= === ===== 1,272.7 (476.3) (4.7) 791.7 ======= ======= === ===== CASH FLOW FROM ORDINARY ACTIVITIES BEFORE TAX 30th 31st June December 2000 1999 Notes (unaudited) (unaudited) £mn £mn Profit on ordinary 167.9 324.0 activities before tax Depreciation of tangible assets and 18.8 48.4 amortisation of goodwill (Profit)/loss on sale (1.1) 0.2 of fixed assets and investments Decrease in other operating assets 3(a) 9,534.1 4.0 Decrease in other 3(b) (10,575.1) (719.4) operating liabilities Net provision against securities held for investment - 1.4 Interest on corporate debt 2.7 7.6 Profit on disposal of associated undertaking - (2.8) Profit on disposal of the investment banking business before transaction costs(see note 1) (129.6) - Profit on sale of the Australian property business - (24.9) Profit from associated undertakings (10.2) (15.3) ======== ======= Net cash flow from operating activities (992.5) (376.8) ======== ======= NOTES TO THE ACCOUNTS The figures and financial information for the year 1999 have been restated into a Schedule 4 to the Companies Act 1985 format from their previous Schedule 9 format following the disposal of the investment banking business. The audited Schedule 9 format financial statements for 31st December 1999 have been delivered to the Registrar of Companies and included the auditors' report which was unqualified. The half year figures are non-statutory and have not been audited. In the opinion of the Directors, disclosure of turnover is most appropriately represented by net interest income, net fees and commissions, net dealing income and other operating income. This represents an adaptation of the profit and loss account format laid down in Schedule 4. The disposal of the investment banking business has materially impacted the presentation of the accounts for the half year ended 30th June 2000 and distorted comparison with prior periods, particularly the consolidated balance sheet and cash flow statement. 1. DIVESTMENT OF THE INVESTMENT BANKING BUSINESS Reconciliation of profit on disposal to premium paid by Salomon Smith Barney Holdings Inc. £mn Premium US$ 900mn 569.7 Amount of premium paid directly to shareholders (433.6) ===== Amount of premium received by Schroders 136.1 Profit on sale of Schroder Leasing 49.0 ===== 185.1 Write back of goodwill (55.5) ===== 129.6 Transaction costs (pre-tax) (125.5) Profit on disposal of the ===== investment banking business 4.1 ===== Six months Six months 2. TAX ended ended 30th June 31st December 30th June 2000 1999 1999 (unaudited) (unaudited) (unaudited) £mn £mn £mn UK tax 10.3 26.3 24.1 Overseas tax 11.5 17.4 12.4 ==== ==== ==== 21.8 43.7 36.5 ==== ==== ==== The low tax charge for the first half of 2000 is largely attributable to the inclusion of non-taxable profits on the sale of the investment banking business and on private equity returns. 3. CONSOLIDATED CASH FLOW STATEMENT 30th June 31st December 2000 1999 (unaudited) (unaudited) £mn £mn 3(a) Decrease in other operating assets Decrease/(increase) in debtors 4,320.0 (864.8) Decrease in investments 5,507.2 624.5 Decrease in other assets 431.7 255.7 Decrease/(increase) in prepayments and accrued income 101.7 (11.4) Less: net asset value of the investment banking business sold (355.7) - Reduction in capital via Scheme of arrangement (470.8) - ======== ======== Decrease in other operating assets 9,534.1 4.0 ======== ======== 3 (b) Decrease in other operating liabilities (Decrease)/increase in creditors falling due within one year (8,366.8) 201.2 Decrease in deposits by banks (723.3) (448.3) (Decrease)/increase in provisions for liabilities and charges (19.1) 2.4 Decrease in creditors due after more than one year (1,465.9) (474.7) -------- -------- Decrease in other operating liabilities (10,575.1) (719.4) ======== ======== STATEMENT OF TOTAL CONSOLIDATED RECOGNISED GAINS AND LOSSES £mn Profit for the period 145.9 Exchange translation adjustments to foreign currency net investment 25.5 ----- Total recognised gains and losses 171.4 ===== RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS £mn Profit for the period 145.9 Dividend (16.3) ======= 129.6 Exchange translation adjustments 25.5 Reduction in capital via Scheme of Arrangement (470.8) New share capital subscribed 10.5 Goodwill written back to profit and loss account 55.5 ------- Net decrease in shareholders' funds (249.7) At 1st January 2000 1,370.4 ------- At 30th June 2000 1,120.7 ======= The Interim Report will be posted to shareholders within the next week. Further copies are available from the Company Secretary at 31 Gresham Street, London EC2V 7QA. Press Enquiries to: D.M. Salisbury N.R. MacAndrew Chief Executive Chief Financial Officer 31 Gresham Street, London EC2V 7QA Tel: +44 (0) 20 7658 6000

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