Final Results
Schroders PLC
02 March 2004
Press Release 2nd March 2004
Schroders plc
Announcement of Preliminary Results for the year ended 31st December 2003
(unaudited)
A year of good progress
•Underlying asset management profit £81.0 million (2002: £77.0 million)
•Profit before goodwill £75.9 million (2002: £29.5 million)
•Profit before tax £65.6 million (2002: £18.9 million)
•Funds under management £98.3 billion (2002: £86.2 billion*)
•Total dividend unchanged at 18.5 pence per share
* Adjusted to exclude £2.1 billion from funds under management on the completion
of the sales of Schroder Hermes and Schroder Pensions in January and February
2003.
----------------------------- ---------- ----------
Year ended Year ended
31st December 31st December
2003 2002
£mn £mn
----------------------------- ---------- ----------
Underlying asset management profit 81.0 77.0
Project expenditure (16.4) (33.2)
Redundancy costs (4.1) (13.7)
---------- ----------
Asset management profit before exceptional 60.5 30.1
items
Exceptional items - net profit/(loss) on 2.4 (5.4)
sale of subsidiary undertakings ---------- ----------
Asset management profit before goodwill 62.9 24.7
Private equity 16.8 12.9
Group net income/(costs) (3.8) (8.1)
---------- ----------
Profit before goodwill 75.9 29.5
Goodwill amortisation (10.3) (10.6)
---------- ----------
Profit before tax 65.6 18.9
---------- ----------
Basic earnings per share 16.7p 8.8p
Diluted earnings per share 16.6p 8.8p
---------- ----------
Contacts:
Schroders
Michael Dobson Chief Executive +44 (0) 20 7658 6962
Jonathan Asquith Chief Financial Officer +44 (0) 20 7658 6565
Julian Samways Head of Corporate Communications +44 (0) 20 7658 6166
The Maitland Consultancy
William Clutterbuck +44 (0) 20 7379 5151
Management Statement
2003 was a year of good progress with higher profits, better investment
performance and reduced net business outflows.
Despite the rise in equity markets from the second quarter of 2003, average
market levels were lower than in 2002. Driven by lower costs, underlying asset
management profit, before project expenditure and redundancy costs, rose 5.2 per
cent. to £81.0 million (2002: £77.0 million). Asset management net revenues were
£417.8 million, down 5.1 per cent. from £440.4 million in the previous year.
Profit from private equity was £16.8 million (2002: £12.9 million) as we
benefited from carried interests and realisations from Schroder Ventures funds,
the rise in the share price of Schroder Ventures International Investment Trust
plc (SVIIT) and the realised gain from the sale of 5.9 per cent. of SVIIT in
March 2003.
Group costs at £406.2 million were £63.9 million lower than the previous year
and £113.8 million lower than in 2001.
Profit before goodwill was £75.9 million (2002: £29.5 million) and profit before
tax was £65.6 million (2002: £18.9 million).
Funds Under Management
From an opening position of £86.2 billion at the end of December 2002, adjusted
to exclude £2.1 billion on the completion of the sales of Schroder Hermes and
Schroder Pensions in January and February 2003 respectively, funds under
management rose 14.0 per cent. to £98.3 billion during the period. Net business
outflows were £0.5 billion, an improvement from the net outflows of £2.2 billion
in 2002.
In September a simpler management structure was introduced to extend the
improvement in investment performance and combine the Group's business
development and client service skills across institutional and retail. Asset
management now operates through four divisions: Investment, Distribution,
Private Banking and Infrastructure.
Investment
During 2003, we continued to invest in strengthening our portfolio management
and research capabilities. None of the cost reduction achieved over the past two
years has been at the expense of our investment platform. This year we expect to
spend more on portfolio management and research than we did in either 2002 or
2003.
We generated good investment performance across a range of key products during
the year, including UK equities, specialist European equities, Pacific Basin
equities and international fixed income. Our UK multi-asset pooled fund has also
outperformed its benchmark over three and five years. However, further
improvement is required in some other asset classes.
We added to our product offerings during the year with a US tax-exempt fixed
income capability which has started well, two further single strategy hedge
funds, new property and private equity funds and a range of structured products.
Distribution
Overall net outflows of institutional funds were £4.3 billion, down from £5.4
billion in 2002. Institutional funds under management ended the year at £71.2
billion.*
The net outflow was due in part to underperformance in some asset classes but,
as importantly, to restructuring by clients in the UK and elsewhere from
balanced and multi-asset mandates to specialist mandates. The latter was the
major factor underlying a net outflow in the UK of £3.7 billion.
There was a net outflow of £1.5 billion from our Americas business, due to weak
international equity performance. We saw good net inflows in continental Europe
of £1.1 billion and a small net outflow in Asia Pacific with the 'daiko henjo'
effect in Japan, as corporate pension plans returned assets to Government
schemes, offsetting strong new business flows elsewhere.
Net retail sales were £4.2 billion, against £3.5 billion in 2002. Retail funds
under management ended the year at £22.1 billion.*
Retail fund performance continued to be strong with two-thirds of UK and
Luxembourg domiciled retail assets above the peer group median. This is
reflected in the high proportion of our funds rated by Standard & Poors, the 37
awards won by our funds around the world and our being named as Investment
Management House of 2003 by Financial Times Fund Ratings.
New retail business flows were well diversified geographically. In the UK and
continental Europe net sales were £2.6 billion. In Japan we had another strong
year with net sales of £900 million, and a further £700 million of net inflows
elsewhere in Asia Pacific.
Investor demand for more actively managed funds is growing and we have followed
the success of our UK Alpha fund with the launch of other Alpha products in
European and Japanese asset classes. We have also seen a high level of interest
in our multi-manager offering.
* See Note at end of section
Private Banking
Net outflows during the year, including the transfer of a small book of business
to another private bank, amounted to £0.4 billion. Private banking funds under
management ended the year at £5.0 billion*.
The Private Bank provides solutions-led, bespoke asset management and banking
services predominantly for high net worth individuals. In 2003 we strengthened
our client relationship, marketing and banking teams and introduced new
administration systems in London and Zurich which will shortly be extended to
the Channel Islands.
The Private Bank is now positioned to deliver superior risk adjusted returns and
a broader range of specialist banking products supported by an efficient systems
platform. The benefits of this are starting to come through in terms of business
flows and revenues.
Board Changes
Andrew Sykes leaves the Board in March 2004 and he goes with the Board's thanks
and good wishes after 25 years with the Group.
In November 2003, in the context of the revised Combined Code on Corporate
Governance, we announced that Charles Sinclair and Nicholas Ferguson, who have
served as non-executive Directors since 1990 and 2001 respectively, will retire
from the Board at the 2004 Annual General Meeting in April. The Board would like
to thank them for their major contribution to the Group.
We also announced in November that Sir Peter Job, who joined the Board in 1999
as a non-executive Director, had been appointed as the Senior Independent
Director.
Dividend
The Board has declared a final dividend of 13 pence per share, payable on 26th
April 2004 to shareholders on the register at 26th March 2004, which brings the
total dividend to 18.5 pence per share, unchanged on 2002.
Outlook
We are now half way through a four year turnaround programme under a new
management team, designed to deliver strong investment performance, positive net
new business flows and higher profitability. Investment performance has improved
markedly but there is further work to do. Net business outflows in 2003 were
down on the previous year, although this was in part due to certain expected
client withdrawals being deferred to 2004. Meanwhile the cost base has been
reduced significantly which has resulted in increased profitability.
* See Note at end of section
The reorganisation of the firm is now complete and the emphasis is on extending
the improvement in investment performance, developing new products and
distribution channels, and growing revenues. In an increasingly competitive
environment and with higher levels of client turnover than the industry has seen
historically, inflows and outflows of business can be sizeable and their timing
unpredictable. Nonetheless, as Schroders celebrates its 200th anniversary year,
we expect the improving trend in net business flows and financial performance to
continue.
Michael Miles Michael Dobson
Chairman Chief Executive
2nd March 2004
Note
* During the year £3.5 billion of sub-advisory assets were transferred from
Institutional to Retail to reflect more closely the underlying source of this
business. In Asia, £0.3 billion was transferred from Private Banking to
Institutional. Of the £2.1 billion adjustment to reflect the sales of Schroder
Hermes and Schroder Pensions, £1.5 billion was classified as institutional
assets and £0.6 billion as retail assets. These changes have been reflected as
appropriate throughout this announcement.
Consolidated Profit and Loss Account
For the year ended 31st December 2003
2003 2002
---------------------- ----------- ------------- --------- ---------- ------------ ---------
Continuing Discontinued Total Continuing Discontinued Total
operations operations operations operations
£mn £mn £mn £mn £mn £mn
---------------------- ----------- ------------- --------- ---------- ------------ ---------
Net revenues 427.5 0.1 427.6 471.2 1.4 472.6
Gains/(losses) on 17.1 - 17.1 (5.1) - (5.1)
current asset
investments
Administrative (387.2) (0.4) (387.6) (421.2) (6.2) (427.4)
expenses
Depreciation (8.2) (0.1) (8.3) (30.5) (1.6) (32.1)
Amortisation of (10.3) - (10.3) (10.6) - (10.6)
goodwill
----------- ------------- --------- ---------- ------------ ---------
Group operating 38.9 (0.4) 38.5 3.8 (6.4) (2.6)
profit/(loss)
Share of operating 2.5 - 2.5 7.7 - 7.7
profit of
associated
undertakings
----------- ------------- --------- ---------- ------------ ---------
Total operating 41.4 (0.4) 41.0 11.5 (6.4) 5.1
profit/(loss)
Provision for loss - - - - (6.3) (6.3)
on sale of
subsidiary
undertakings
Profit on disposal - 2.4 2.4 0.9 - 0.9
of subsidiary
undertakings
Interest receivable 24.7 0.1 24.8 22.0 0.8 22.8
and similar
income
Amounts written off (1.9) - (1.9) (3.3) - (3.3)
fixed asset
investments
Interest payable (0.7) - (0.7) (0.3) - (0.3)
and similar
charges ----------- ------------- --------- ---------- ------------ ---------
Profit/(loss) on 63.5 2.1 65.6 30.8 (11.9) 18.9
ordinary activities
before tax
----------- ------------- ---------- ------------
Tax (charge)/credit (16.4) 7.7
on profit/(loss) on
ordinary
activities
--------- ----------
Profit on ordinary 49.2 26.6
activities after
tax
Minority - (0.5)
interests --------- ---------
Profit attributable 49.2 26.1
to shareholders
Dividends (53.7) (53.3)
--------- ---------
Loss retained by (4.5) (27.2)
the Group for the --------- ---------
financial year
Basic earnings per 16.7p 8.8p
share
Diluted earnings 16.6p 8.8p
per share
---------------------- ----------- ------------- --------- ---------- ------------ ---------
Statement of Total Consolidated Recognised Gains and Losses
For the year ended 31st December 2003
----------------------------------- --------- --------
2003 2002
£mn £mn
----------------------------------- --------- --------
Profit for the financial year 49.2 26.1
Exchange translation adjustments to foreign (7.6) (14.0)
currency net investments --------- --------
Total recognised gains and losses 41.6 12.1
--------- --------
Reconciliation of Movements in Consolidated Shareholders' Funds
For the year ended 31st December 2003
----------------------------------- --------- --------
2003 2002
£mn £mn
----------------------------------- --------- --------
Profit for the financial year 49.2 26.1
Dividends (53.7) (53.3)
--------- --------
(4.5) (27.2)
New share capital subscribed 4.8 3.0
Reduction in shares to be issued (5.0) (3.0)
Cancellation of non-voting ordinary shares - (19.4)
Exchange translation adjustments (7.6) (14.0)
--------- --------
Net decrease in shareholders' funds (12.3) (60.6)
Equity shareholders' funds brought forward 1,051.9 1,112.5
--------- --------
Equity shareholders' funds carried forward 1,039.6 1,051.9
--------- --------
Consolidated Balance Sheet
31st December 2003
2003 2002
£mn £mn £mn £mn
-------------------------- -------- -------- -------- -------
Fixed assets
Intangible assets - 24.5 35.0
goodwill
Tangible assets 10.1 17.8
Investments 116.6 100.5
-------- --------
151.2 153.3
Insurance assets attributable - 2,134.6
to unit linked
policyholders+ -------- -------
151.2 2,287.9
Current assets
Debtors due after more than 266.2 262.1
one year
Debtors due within one year 499.9 409.0
Investments 1,245.0 889.6
Own shares 10.4 7.5
Cash and balances with 462.9 736.4
banks -------- --------
2,484.4 2,304.6
-------- --------
Creditors - amounts falling (1,350.6) (1,098.5)
due within one year
-------- --------
Net current assets 1,133.8 1,206.1
-------- -------
Total assets less current 1,285.0 3,494.0
liabilities
Creditors - amounts falling (213.0) (256.6)
due after more than one
year
Insurance liabilities - (2,134.6)
attributable to unit linked
policyholders+
Provisions for liabilities (32.4) (50.9)
and charges -------- -------
Net assets 1,039.6 1,051.9
-------------------------- -------- -------- -------- -------
Capital and reserves
Called up share capital 296.3 295.7
Share premium account 22.0 17.8
Shares to be issued 4.9 9.9
Capital reserves 130.8 129.4
Profit and loss account 585.6 599.1
-------- -------
Total shareholders' funds 1,039.6 1,051.9
-------------------------- -------- -------- -------- -------
+ Since the sale of Schroder Hermes and Schroder Pensions during the first
quarter of 2003, the Group no longer has insurance assets/liabilities
attributable to unit linked policyholders.
Consolidated Cash Flow Statement
For the year ended 31st December 2003
2003 2002
£mn £mn
-------------------------------------------------- -------- --------
Net cash inflow from operating activities 129.9 78.7
Dividends/distributions received from associates - 0.5
Returns on investments and servicing of finance
-------- --------
Interest received 26.2 21.1
Interest paid (0.7) (0.3)
-------- --------
Net cash inflow from returns on investments and 25.5 20.8
servicing of finance
Taxation
-------- --------
United Kingdom corporation tax recovered 0.2 8.6
Overseas tax paid (9.4) (13.2)
-------- --------
Total tax paid (9.2) (4.6)
Capital expenditure and financial investments
-------- --------
Tangible fixed assets -purchases (1.6) (91.1)
-disposals 0.6 104.3
Fixed asset investments -purchases (63.5) (52.9)
-disposals 49.6 53.5
-------- --------
Net cash (outflow)/inflow from capital expenditure (14.9) 13.8
and financial investments
Acquisitions and disposals
-------- --------
Associated undertakings -acquisitions (4.2) (1.3)
-disposals 0.4 -
Subsidiaries -acquisitions - (0.5)
-cash disposed (21.8) (2.1)
-disposals 27.0 3.3
-------- --------
Net cash inflow/(outflow) from acquisitions and 1.4 (0.6)
disposals
Dividends paid (53.4) (53.5)
-------- --------
Net cash inflow before use of liquid resources and 79.3 55.1
financing
Management of liquid resources
Net cash outflow from management of liquid (159.6) (97.7)
resources
Financing
Purchase of non-voting ordinary shares for - (19.4)
cancellation -------- --------
Decrease in cash (80.3) (62.0)
-------- --------
Notes to the Accounts
Basis of Preparation
The preliminary results for the year ended 31st December 2003 are unaudited. The
financial information included in this statement does not constitute the Group's
statutory accounts for the years ended 31st December 2002 or
31st December 2003.
The financial information for the year ended 31st December 2002 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 2003 has not yet been signed. Those
accounts are expected to be dispatched to shareholders on 19th March 2004, and
will be delivered to the Registrar of Companies after adoption at the Annual
General Meeting to be held at 31 Gresham Street, London, EC2V 7QA on 24th April
2004.
Accounting Policies
In preparing the financial information included in this statement there have
been no material changes to the accounting policies previously applied by the
Group in reporting its statutory accounts for the year ended
31st December 2002.
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.
2003
---------------- £mn
---------------------------------------
------ ------- ------- ------ ------- ------- ------- -------
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 5.2 - 5.2 10.9 1.0 17.1 17.1 -
asset
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 44.4 (0.4) 44.0 15.1 (20.6) 38.5 38.9 (0.4)
profit/(loss)
Share of 0.2 - 0.2 2.3 - 2.5 2.5 -
operating profit ------ ------- ------- ------ ------- ----- ------- -------
of associated
undertakings
Total operating 44.6 (0.4) 44.2 17.4 (20.6) 41.0 41.4 (0.4)
profit/(loss)
Profit on - 2.4 2.4 - - 2.4 - 2.4
disposal of
subsidiary
undertakings
Interest 6.4 0.1 6.5 1.2 17.1 24.8 24.7 0.1
receivable and
similar income
Amounts written (0.1) - (0.1) (1.8) - (1.9) (1.9) -
off fixed asset
investments
Interest payable (0.4) - (0.4) - (0.3) (0.7) (0.7) -
and similar ------ ------- ------- ------ ------- ----- ------- -------
charges
Profit/(loss) on 50.5 2.1 52.6 16.8 (3.8) 65.6 63.5 2.1
ordinary ------ ------- ------- ------ ------- ----- ------- -------
activities
before tax
Shareholders' 440.2 - 440.2 118.6 480.8 1,039.6 1,039.6 -
funds ------ ------- ------- ------ ------- ----- ------- -------
2002
---------------- £mn
---------------------------------------
------ ------- ------- ------ ------- ------- ------- -------
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 439.0 1.4 440.4 5.7 26.5 472.6 471.2 1.4
(Losses)/gains (1.7) - (1.7) 2.5 (5.9) (5.1) (5.1) -
on current asset
investments
Administrative (395.1) (6.2) (401.3) (1.0) (25.1) (427.4) (421.2) (6.2)
expenses
Depreciation (12.7) (1.6) (14.3) - (17.8) (32.1) (30.5) (1.6)
Amortisation of (10.6) - (10.6) - - (10.6) (10.6) -
goodwill ------ ------- ------- ------ ------- ------ ------- -------
Group operating 18.9 (6.4) 12.5 7.2 (22.3) (2.6) 3.8 (6.4)
profit/(loss)
Share of - - - 7.7 - 7.7 7.7 -
operating profit ------ ------- ------- ------ ------- ------ ------- -------
of associated
undertakings
Total operating 18.9 (6.4) 12.5 14.9 (22.3) 5.1 11.5 (6.4)
profit/(loss)
Provision for - (6.3) (6.3) - - (6.3) - (6.3)
loss on disposal
of subsidiary
undertakings
Profit on 0.9 - 0.9 - - 0.9 0.9 -
disposal of
subsidiary
undertakings
Interest 7.1 - 7.1 1.3 14.4* 22.8 22.0 0.8
receivable and
similar income
Amounts written - - - (3.3) - (3.3) (3.3) -
off fixed asset
investments
Interest payable (0.1) - (0.1) - (0.2) (0.3) (0.3) -
and similar ------ ------- ------- ------ ------- ------ ------- -------
charges
Profit /(loss) 26.8 (12.7) 14.1 12.9 (8.1) 18.9 30.8 (11.9)
on ordinary ------ ------- ------- ------ ------- ------ ------- -------
activities
before tax
Shareholders' 440.6 24.2 464.8 124.1 463.0 1,051.9 1,027.7 24.2
funds ------ ------- ------- ------ ------- ------ ------- -------
*Contains £0.8 million income relating to discontinued operations.
Consolidated Cash Flow Statement
2003 2002
£mn £mn
--------------------------- --------- ---------
Reconciliation of total operating profit to net
cash flow from operating activities
Total operating profit 41.0 5.1
Depreciation of tangible fixed assets 8.3 32.1
Amortisation of goodwill 10.3 10.6
(Increase)/decrease in debtors (105.7) 66.4
Increase/(decrease) in creditors 246.3 (44.7)
(Decrease)/increase in debt securities in issue (55.6) 13.8
(Gain)/loss on sale on tangible fixed assets (0.1) 1.9
Share of operating profit of associated (2.5) (7.7)
undertakings
Provision for liabilities and charges 3.1 4.8
(Gains)/losses on current asset investments (17.1) 5.1
Other non-cash movements 1.9 (8.7)
--------- ---------
Net cash inflow from operating activities 129.9 78.7
--------- ---------
2003 2002
£mn £mn
--------------------------- --------- ---------
Reconciliation of net cash flow to movement in net
funds
Decrease in cash in the year (80.3) (62.0)
Cash outflow/(inflow) from redemption/issue of 55.6 (13.8)
certificates of deposit
Cash outflow from increase in liquid resources 159.6 97.7
--------- ---------
Changes in net funds resulting from cash flows 134.9 21.9
Non-cash movements in liquid resources 5.5 (17.3)
Loan notes issued for non-cash consideration - 7.7
Opening net funds 1,529.0 1,516.7
--------- ---------
Closing net funds 1,669.4 1,529.0
--------- ---------
Reconciliation of movements in cash
For the year ended 31st December 2003
2003 Cash flow 2002
£mn £mn £mn
----------------------- --------- ----------- ------------
Cash and balances with banks - 205.0 (79.2) 284.2
repayable on demand
Cash and balances with banks - 257.9 452.2
other --------- ------------
Cash and balances with banks 462.9 736.4
--------- ------------
Exchange adjustments (1.1)
-----------
Decrease in cash (80.3)
-----------
Tax on profit on ordinary activities
2003 2002
£mn £mn
---------------------------- ---------- ---------
Profit on ordinary activities before tax 65.6 18.9
---------- ---------
Profit on ordinary activities before tax 19.7 5.7
multiplied by corporation tax at the UK standard
rate of 30% (2002: 30%)
Effects of:
Expenses not deductible for tax (including 11.0 3.7
goodwill amortisation and losses not recognised
for deferred tax)
Impact of profits/losses arising in jurisdictions 2.2 0.6
with higher tax rates
Impacts of profits/losses arising in (16.9) (7.3)
jurisdictions with lower tax rates
Movements in tax losses 1.1 0.4
Timing differences - fixed assets (4.5) (0.9)
Other timing differences 1.5 2.2
UK tax - prior year adjustments 0.6 6.5
Foreign tax - prior year adjustments 0.1 6.7
UK tax on US profits 0.5 2.1
---------- ---------
Current tax charged for the year 15.3 19.7
Deferred tax - origination and reversal of timing 1.1 (27.4)
differences ---------- ---------
Tax charge/(credit) on profit/(loss) on ordinary 16.4 (7.7)
activities ---------- ---------
Five year financial summary
2003 2002 2001 2000++ 1999++
£mn £mn £mn £mn £mn
-------- -------- -------- -------- --------
Profit/(loss) 65.6 18.9 (8.1) 275.3 324.0
before tax
Tax (16.4) 7.7 (12.6) (53.8) (80.2)
-------- -------- -------- -------- --------
Profit/(loss) after 49.2 26.6 (20.7) 221.5 243.8
tax before minority
interests
Minority - (0.5) 0.1 (0.2) 0.8
interests -------- -------- -------- -------- --------
Profit/(loss) for 49.2 26.1 (20.6) 221.3 244.6
the year -------- -------- -------- -------- --------
Earnings per
share
Basic earnings/ 16.7 8.8 (7.0) 74.6 82.8
(loss) per share
(pence)
Diluted earnings/ 16.6 8.8 (7.0) 74.2 82.5
(loss) per share
(pence)
Dividends
Cost (£mn) 53.7 53.3 53.9 54.1 53.9
Pence per share 18.5 18.5 18.5 18.5 18.5
Shareholders' funds 1,039.6 1,051.9 1,112.5 1,161.2 1,370.4
(£mn)
Net assets per 351 355 372 391 464
share (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. Its operations have a broad geographical span
covering the main financial centres of the world, with 35 offices divided
organisationally between the Americas, Europe and Asia Pacific. The management
of international assets is now concentrated in two locations, with a further
nine responsible for domestic assets only 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 its intellectual and
operational resources across geographical regions and asset classes.
Over recent years Schroders has tightened its focus on asset management,
outsourcing administrative functions to specialist third party suppliers and
disposing of non-core activities. Within the asset management field, the
products cover a wide range of asset classes and client segments, but the
management of equity portfolios still dominates the mix, with 68 per cent. of
client investments in equities at the end of 2003. Schroders' client profile
continues to diversify, with retail and private banking clients now accounting
for 28 per cent. (2002: 24 per cent.) of funds under management and 43 per cent.
(2002: 36 per cent.) of net revenues in 2003 which are stated after internal
fund management charges 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
The Group profit before tax of £65.6 million for 2003 compares with a profit of
£18.9 million in 2002. The profits of the asset management business before
goodwill rose from £24.7 million in 2002 to £62.9 million in 2003. The private
equity business contributed a profit of £16.8 million compared with a profit of
£12.9 million in 2002 and Group net income/(costs) saw net costs fall to £3.8
million in 2003 compared with £8.1 million in 2002.
Basic and diluted earnings per share were 16.7 pence and 16.6 pence respectively
(2002: both 8.8 pence).
Asset Management
Net revenues in asset management before exceptional items fell from £440.4
million to £417.8 million. The underlying profit from the core asset management
business was £81.0 million (2002: £77.0 million), a rise of 5.2 per cent. from
2002. Asset management costs (excluding amortisation of goodwill) decreased from
£415.6 million in 2002 to £368.7 million in 2003.
Underlying asset management costs (administrative expenses and depreciation less
project and redundancy costs) fell by 5.6 per cent. from £368.7 million to
£348.2 million. Project expenditure was down 50.6 per cent. from £33.2 million
to £16.4 million with a number of key strategic projects completed or
approaching completion. Project expenditure comprises the costs associated with
(i) the replacement programme for certain of the Group's core I.T. systems, and
(ii) certain key Group outsourcing projects. Our outsourcing of UK institutional
custody and administration services to JP Morgan Chase Bank is expected to start
realising financial benefits in 2004. Implementation of an agreement with
International Financial Data Services to outsource the transfer agency function
for the UK retail business signed in June 2002 was completed in the first
quarter of 2003. The sales of Schroder Pensions and Schroder Hermes negotiated
in 2002 were completed in early 2003. Redundancy costs fell by £9.6 million to
£4.1 million.
Private Equity
The Group's private equity profit of £16.8 million (2002: £12.9 million) was
strongly influenced by the Group's holding in Schroder Ventures International
Investment Trust plc, with the sale of part of the holding in the first half of
2003 combined with a mark to market gain on the remainder leading to a profit of
£10.7 million. Among other flows, further distributions were received from the
sale of Homebase by Permira Europe II in 2002, a private equity fund in which
the Group has direct and indirect interests. Interests in certain other venture
funds were written down by £1.8 million.
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). An improvement in the income
earned on the Group's surplus capital and a reduction in Group costs were
principally responsible for the reduction in the loss in this business segment.
Pensions
Pensions have been accounted for in accordance with SSAP 24 with a net cost of
£11.4 million (2002: £0.5 million) relating to the Group's UK defined benefit
scheme. Under FRS 17 the market value of the assets of the scheme is £353.7
million and the deficit on the Scheme is £20.1 million. The FRS 17 charge for
the year would have been £7.6 million.
Funds Under Management
Total Institutional Retail Private
Banking
£mn £mn £mn £mn
--------------- -------- -------- -------- --------
31st December 2002 88.3 70.7 12.4 5.2
Sale of Schroder Hermes/ (2.1) (1.5) (0.6) -
Schroder Pensions
Functional reorganisation - (3.2) 3.5 (0.3)
-------- -------- -------- --------
31st December 2002 86.2 66.0 15.3 4.9
restated
Transfers - (0.3) 0.3 -
Market Movement 12.6 9.8 2.3 0.5
Net asset (losses)/gains (0.5) (4.3) 4.2 (0.4)
31st December 2003 98.3 71.2 22.1 5.0
--------------- -------- -------- -------- --------
Funds under management (FUM), adjusted to exclude £2.1 billion on the completion
of the sales of Schroder Hermes and Schroder Pensions in January and February
2003 respectively, increased by £12.1 billion from £86.2 billion at 31st
December 2002 to £98.3 billion at 31st December 2003, of which £12.6 billion
arose principally from higher equity markets. New and existing clients
contributed £21.4 billion, of which £12.2 billion was from retail and private
banking clients.
Commentary
From certain angles, 2003 appears to have been a year of little change. Net new
business was more or less in balance, so that the changes in FUM over the year
predominantly reflected market movements. Underlying asset management profits at
£81.0 million were modestly up on 2002 (£77.0 million). By the end of the year
our clients' asset mix (68 per cent. equities, 24 per cent. fixed income, 8 per
cent. alternatives) was broadly the same as at the end of 2002.
Looked at more closely, the results reflect a year of positive developments for
Schroders.
Revenues
On the revenue side, the most important features were the continuing change in
the balance of net revenues between the different distribution channels and the
increase in gross and net margins. In 2003, net revenues from retail and private
banking amounted to 43 per cent. of the asset management total, up from 36 per
cent. in the previous year. This change was driven primarily by the success of
our retail operations around the world, coupled with net outflows in
institutional as clients continued to restructure their portfolios. While the
balance between the three distribution channels is changing, it is noteworthy
that revenue margins rose in each. In institutional, lower margin balanced
business was replaced by higher margin fixed income and specialist products. In
retail, returns were boosted by the structured products area, offsetting the
negative margin development caused by clients switching from equity to fixed
income products through much of the year. The drive in private banking to
concentrate on higher value added services including banking was rewarded with a
substantial increase in margins. Overall, asset management net revenue margins
increased from 44 basis points to 46 basis points.
Costs
While the performance of underlying asset management profits may look unexciting
(£81.0 million, +5.2 per cent.), this improvement was achieved in a year in
which average equity market levels were down on 2002, so that, despite gross
margin improvements, net revenues declined by £22.6 million. This decline was
almost entirely offset by the year-on-year reduction in underlying costs of
£20.5 million (-5.6 per cent.). At the Group level this effect was even more
dramatic: the improvement in Group pre-tax profits from £18.9 million to £65.6
million was primarily driven by the elimination of £63.9 million (13.6 per
cent.) from the Group's 2002 operating cost base. Lower headcount, efficiency
gains and falling project and redundancy costs all contributed to this cost
reduction, which was achieved despite a £10.6 million increase in the cost of
pension contributions in the year.
Earnings Momentum
Schroders went into 2003 with net revenue margins (2002 asset management net
revenue divided by 2002 average FUM) on its fund management business of 44 basis
points and current cost margins (2002 underlying asset management costs divided
by 2003 opening funds under management) of 42 basis points, giving an estimated
net margin of 2 basis points. By the end of the year, as we have already noted,
revenue margins had risen to 46 basis points. More importantly, the 2004 opening
current cost margins, calculated on the same basis, stood at 35 basis points.
This would suggest that we start 2004 with a net margin of 11 basis points.
Whilst these measures of current operating margins are somewhat crude, the size
and direction of the change in the net margins between the beginning of 2003 and
the beginning of 2004 illustrate the very positive impact on profitability of
rising markets and tight cost control.
Market Trends and Related Risks
In Spring 2003, equity markets reached their lowest point since the start of the
bear market in 2000, driven by geopolitical and economic concerns. While the
global political picture has improved less than might have been hoped since the
conclusion of the Iraq war, the economic environment has undoubtedly
strengthened and this has fed through into the fund management sector in the
form of higher profits and changing strategic asset allocation. Equally,
whatever the level of markets in the short term, underlying momentum behind the
sector remains strong, with gaps in existing pensions provision and positive
demographic factors promising a continued focus on stimulating savings over 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. Market related risks have become more manageable in the
light of the reduction in costs and increase in margins over the last two years.
Retaining the cost disciplines acquired during this period as the market moves
into a more expansionary phase presents a further challenge and requires a
strong alignment between 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 three years and 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.
While the economic background has been favourable for fund managers over the
last 12 months, the regulatory and legal environment in which we operate has
become more complex. The impact on Schroders of the market timing scandals in
the US mutual fund industry has been very limited to date, but the potential
consequences for the industry in the longer term are hard to predict. If the
regulatory environment is tightened disproportionately in response, the costs of
doing business are bound to rise. The same, broadly speaking, applies to the
debate about the softing and unbundling of equity trading and research
commissions, where we await further developments. Our overriding concern is that
any new regulation should be appropriate and maintain a level playing field
between market participants.
Capital Allocation and Liquidity
2003 2002
£mn £mn
----------------- ----------- ------------
Asset management 342 358
Surplus:
----------- ------------
Liquid funds 458 457
Private equity 119 124
Other Schroder funds* 73 72
Leasing 32 41
----------- ------------
682 694
Group provisions (9) (35)
----------- ------------
1,015 1,017
Goodwill* 25 35
----------- ------------
1,040 1,052
----------------- ----------- ------------
* Disclosed within the asset management segment.
Shareholders' funds at 31st December 2003 were £1.04 billion.
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 £682 million of surplus capital available to
fund 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.
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 two
significant non-operating items: (i) cash inflows during the year relating to
net interest received (£25.5 million); and (ii) cash outflows relating to
payment of dividends (£53.4 million).
Corporate Actions
The Group's major corporate actions in 2003 were the sale of the following
subsidiaries:
•Schroder Hermes Limited (January 2003)
•Schroder Pensions Limited (February 2003)
Credit Ratings
Short term Long term
------------------ ---------- ----------
Fitch IBCA F1 A+
------------------ ---------- ----------
Standard & Poors A1 A
------------------ ---------- ----------
Currency Exposure
Over 94 per cent. of the Group's capital is invested in four currencies:
sterling, US dollars, euros and Swiss francs. Sterling alone accounts for 72 per
cent..
Dividends
The Directors recommend an unchanged final dividend of 13.0 pence per share,
bringing dividends for the year to 18.5 pence per share or £53.7 million which
will be 92 per cent. covered from the Group's after tax profits.
Performance Measurement
The primary measures of the Group's performance for the asset management
business are the underlying costs: net revenues ratio, 83 per cent. (2002: 84
per cent.); net revenues on average funds under management, 46 basis points
(2002: 44 basis points) and underlying costs on average funds under management,
39 basis points (2002: 37 basis points).
Analyst Presentation
The presentation to analysts and investment managers will take place today at
09.00 GMT, 31 Gresham Street, London, EC2V 7AQ. It can be viewed live on
www.schroders.com.
Jonathan Asquith
Chief Financial Officer
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.
This information is provided by RNS
The company news service from the London Stock Exchange
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