Janus Henderson Group plc (JHG) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Derek, and I will be your conference facilitator today. Thank you for standing by. Welcome to the Janus Henderson Third Quarter 2017 Earnings Conference Call. [Operator Instructions] In today's conference call, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors, including, but not limited to, those described in the forward-looking statements and risk factors sections of the company's most recent Form 10-K and other recent filings made with the SEC. Janus Henderson assumes no obligation to update any forward-looking statements during the call. Thank you. Now, it is my pleasure to introduce Dick Weil, Co-Chief Executive Officer of Janus Henderson. Mr. Weil, you may begin your conference.

Welcome, everyone, to the third quarter earnings presentation for Janus Henderson Group. With me today are Andrew Formica and Roger Thompson. For today's call, I will give my thoughts on the quarter; our CFO, Roger Thompson, will walk through the quarterly financial results; and Andrew will then provide his view and an update on integration efforts, as well as an overview of the very exciting deal announced with BNP today. Then, as always, we will take your questions. Turning to the third quarter from my point of view. First, our investment teams are delivering exceptional investment results, which provides a nice foundation, a solid foundation, for future growth. Second, successful client engagement is leading to stable relationships and is translating to net inflows. Third, our integration efforts are proceeding well ahead of expectations. That's particularly underlined today by the expansion of the long-term strategic partnership with BNP Paribas. We were very pleased to announce today that BNP will assume the responsibility for the majority of Janus Henderson's back- and middle-office functions in the U.S., something they already provide for us in Europe and in Asia. Andrew will get into more of those details later in this presentation. Lastly, today, the board has declared a quarterly dividend of $0.32 per share, consistent with the level of last quarter. Let me turn in a bit more detail to these pieces. Turning to investment performance. I'm extremely encouraged with the performance of our investment teams, very pleased with how the group has integrated and have begun to share information, share research and work together. Janus Henderson is only 5 months old, and the collaboration across teams has been growing and will continue to become more ingrained in the investment process as time goes on. There's a lot to look forward to. There is a natural concern in any merger such as ours about disruption leading to distractions for the investment team and resulting in some detraction in performance, but we're very pleased to see from the results, the teams have responded extremely well since the merger. They have not been distracted; in fact, they've just done a superb job, and congratulations to them. At the end of September, 77% of our firm-wide AUM was beating its respective benchmarks over a 3-year time period, which is up from 71% at the end of June. This is an exceptional result, and I want to thank all of our investment professionals for their hard work and dedication to delivering on behalf of our clients. Looking at performance by capability, it is particularly pleasing to see the significant improvement in INTECH's results. After a very tough second half of 2016, which we've talked about on prior calls, the team at INTECH delivered very good results in 2017. At the end of September, 85%, 61% and 87% of INTECH's assets respectively were beating their benchmark on a 1-, 3- and 5-year basis. This compares with only 7%, 5% and 40% at December 31, 2016. Performance among our Equity strategies, which is, of course, the largest pool of assets in our firm, has been very strong, with 73% and 82% of assets beating their respective benchmarks over 3- and 5-year periods. Fixed Income investment performance is exceptional, with over 90% of assets beating benchmarks on a 1-, 3- and 5-year basis. Additionally, we're really excited to communicate that during the quarter, we were able to hire Jim Cielinski as Global Head of Fixed Income. He's a terrific person and a terrific professional, and he's a great addition to an already strong Fixed Income team. Looking at the results from our Multi-asset and Alternative teams, we can see a consistent theme of strong results from both these areas as well. So I congratulate all involved on the exceptional investment results from teams across the globe. Moving on to flows on Slide 4. The result we have seen from our clients since the merger has been extremely supportive. Going through a merger is never easy, especially for clients, and we couldn't be more grateful for how they have responded. As a demonstration of this support, and the strength of our global distribution teams, in the third quarter, we had net inflows for the first time as a combined firm, representing roughly 1% annualized organic growth rate. Third quarter net inflows improved by $1.7 billion from the prior quarter and $3.9 billion from the same quarter a year ago. Looking at those flows by client type, in the third quarter, we saw inflows from our intermediary clients, in our Fixed Income and Alternatives strategies, as well as inflows from institutional clients, which were driven by one large mandate win of approximately $1.8 billion in our Equity business. Turning to flows by capability instead, on slide 5. Equity, our largest capability by AUM, experienced its second consecutive positive quarter with inflows of $600 million, which included the institutional mandate I just mentioned above of $1.8 billion. Fixed Income had inflows of $400 million, compared to outflows in the second quarter of $900 million. The second quarter included a $1.5-billion-mandate loss. The absence of this loss drove the quarter-over-quarter change. INTECH saw further improvement in flows during the third quarter, with outflows of $500 million. Relative to the second quarter, the improvement was driven by a 52% decline quarter-over-quarter in gross redemptions. We remain optimistic about INTECH's business and believe in the investment process, but as it is predominantly an institutional business with many large accounts, future flows are tough to predict and will be lumpy. Multi-asset continues its flow improvement for us with $300 million of outflows in the third quarter. Lastly, third quarter inflows in the Alternatives capability were $500 million, compared to inflows of $800 million in the prior quarter, with our U.K. absolute return strategy driving the majority of flows. In summary, we are encouraged with the quarterly results. We are pleased with our investment performance that the investment teams have delivered and optimistic about the future opportunities we see in the pipeline and the developing strength of our distribution. The third quarter represented a decent quarter for flows, with inflows from intermediary and institutional clients and ongoing improvement at INTECH. With that, let me turn it over to our CFO, Roger Thompson, to review our financial results.

Thanks, Dick. The financial results will begin on Page 7. Before I get started, I just wanted to give you a quick reminder as to how we'll discuss the financial results. The third quarter results contain 2 views: U.S. GAAP and adjusted non-GAAP disclosure. We believe adjusted non-GAAP is the best way to think about the ongoing operations of Janus Henderson, so that's what we're speaking about today in our prepared remarks. Turning to Slide 8, we'll look at a few of the financial highlights. Our third quarter adjusted financial results are strong. Average AUM in the third quarter increased 4% quarter-over-quarter, aided by an annualized 1% organic growth rate, positive markets and beneficial currency movements. Higher average assets drove a strong increase in management fee revenue, which was offset by the expected seasonal decline in performance fees, resulting in a 6% decline in total adjusted revenues from the prior quarter. That said, on a year-on-year basis, adjusted revenue increased 8%, driven by higher average assets. Adjusted operating income in the third quarter of $168 million was down 16% over the second quarter, again primarily as a result of the seasonality of performance fees. Compared to the third quarter of last year, adjusted operating income was up nearly 16%. Third quarter adjusted operating margin of 37%, compared to 41.4% in the prior quarter, and up from 34.8% a year ago. Finishing up the slide, adjusted diluted EPS for the third quarter was $0.56, compared to $0.68 in the second quarter and $0.52 in the third quarter of last year. On Slide 9, we've outlined the revenue and the operating expense drivers for the quarter. As I mentioned, total adjusted revenues decreased 6% over the prior quarter, driven by lower performance fees, which is partly offset by higher management fees. Performance fees in the third quarter were negative $2 million, compared to positive $52 million in the second quarter and negative $2.5 million a year ago. In the second quarter, we realized exceptional performance fees. However, as we discussed on the last call, the third quarter has significantly less AUM subject to performance fees during the quarter, so the opportunity is less. Therefore, in the third quarter, you saw a material decline, but nearly the same results as the third quarter of 2016. To help you better understand how performance fees can change quarter to quarter, based on the AUM subject to fee payouts, we've added some additional disclosure in the appendix, which we hope you'll find useful. Looking at management fees. Management fees increased 5% from the prior quarter, in line with the increase we saw in average AUM. We saw some benefit from a higher net management fee margin for the quarter of 45.2 basis points, compared to 44.5 basis points on a pro forma basis in the second quarter. The change in net management fee margin was driven largely by mix shift, as a result of higher equity markets and lower distribution expenses. Shareowner servicing fees and other revenue were up 2% and 5% respectively quarter-over-quarter. Moving on to the operating expenses. The third quarter had adjustments associated primarily with the integration, as well as some non-deal costs. There was approximately $22 million of total deal and integration costs incurred during the quarter, a significant portion of which was associated with severance pay to employees. So far, we've recognized approximately $183 million of the total $250 million of integration costs and deal costs that we expect to incur, which is consistent with our previous guidance. Non-deal costs adjusted out of operating expenses in the quarter were roughly $9 million and mostly consisted of intangible amortization of investment management contracts and contingent consideration. Adjusted operating expenses in the third quarter were $286 million, compared to the second quarter amount of $283 million, resulting in a 1% increase quarter-over-quarter. Third quarter employee compensation, which includes fixed and variable staff costs, was up 1%, and LTI in the third quarter was flat compared to the second quarter. Looking forward, we're maintaining the previous guidance of a total adjusted comp-to-revenue ratio in the mid-40s for the fourth quarter, compared to the third quarter's ratio of 46.1%. Non-comp operating expense saw a slight increase quarter-over-quarter, consistent to what we've previously communicated. In looking at the parts, investment administration expenses increased primarily due to an increase in transaction volumes and also AUM that drives this cost line. Lower marketing expense was mostly driven by the seasonal slowdown that we typically see in the summer months. G&A was up slightly as the firm was returning to a more business-as-usual spend post the merger, which is consistent with what we expected and guided to in the second quarter. Lastly, I wanted to highlight that embedded in these quarterly results are approximately $17 million of cost synergies that are coming through the P&L, primarily coming out of the compensation line. With that, I'll turn it over to Andrew to provide an update on the integration efforts, as well as an overview of the deal we've announced today with BNP.

Thank you, Roger. As I reflect on the quarter, and considering it has been just a year since we announced the merger, three key themes resonate with me. First, fantastic investment performance; next, exceptional client support since we announced the merger; and finally, the progress to date we have made on integration, which is well ahead of our expectations. All of these strengthen my conviction of the merit to the merger. In regard to the first 2, Dick has already spoken about investment performance and net flows, so now I wanted to turn and address for a few minutes and give you an update on the integration. More specifically, the BNP strategic partnership that we announced today, as well as cost synergies and revenue synergies updates. We turn now to Slide 11. I want to give you an update on integration and cost synergies. As Dick mentioned, this morning, we announced that we have expanded our strategic long-term partnership with BNP Paribas, whereby BNP will take over responsibility for the majority of our U.S. back- and middle-office fund administration, fund accounting and custody functions. We have a long-standing relationship with BNP Paribas outside of the U.S., and we believe this outsource model will provide a consistent global platform to support the global growth of our business. Clients will benefit from BNP's expertise in back- and middle-office services, as well as from lower administration fees and expenses. Janus Henderson shareholders will also benefit from lower ongoing operating costs and from a net consideration of $36 million, which BNP will pay at closing in the third quarter of 2018. Following the closing of the transaction, which we expect in the first quarter of 2018, Janus Henderson employees who are currently providing these functions in the U.S. will become employees of BNP, and this group will establish BNP's U.S. securities servicing center in Denver. This continuity will ensure a seamless transition and consistent, high-quality service for our clients, and we are pleased that this transition supports a continuity for our U.S. colleagues. I just wanted to say thank you to all of the Janus Henderson employees for their work on this transaction. It took an exceptional amount of effort. You all did a great job. Now, looking at an update on cost synergies. It is truly amazing how far we've come in such a short space of time. It is hard to believe that we announced the merger only 13 months ago. We still have a long way to go, but many of the operational decisions have been made, and now it is about executing on those decisions, including, of course, our plans for middle- and back-office support. Enhanced partnership with BNP, coupled with the ongoing work across the firm, has enabled us to increase our target for cost synergies that we expect to realize over the next 3 years, and thus, today, we are taking the per annum estimate up from $110 million to at least $125 million. Again, this result wouldn't be possible without the hard work of all our employees, and I want to emphasize that we are very pleased with the pace in integration. Regarding where we stand on realized cost synergies, as of the end of September, so far we've executed efforts to realize approximately $72 million of annualized savings, the majority of which are tied to compensation. We remain well on track and believe we will achieve $90 million by the end of Year 1, and at least $125 million by the end of Year 3. As we now move to revenue synergies on Slide 12, the revenue synergies continue to develop, and, as we've said previously, these efforts will materialize over multiple years. That said, we are very pleased with the exceptional client response since we closed the merger, and we are very encouraged with the progress we have seen to date. In the third quarter, Dai-ichi Life funded an investment into the European secured loan strategy, completing the investment of $500 million they committed to at the time we announced the transaction. Dai-ichi continues to be a great partner for Janus Henderson, and we're excited about the future prospects with them. Turning to the U.S. Since we closed the deal and completed the merge of our U.S. mutual funds, there have been marked improvements in client flows into legacy Henderson funds as a result of the strength of the intermediary distribution footprint we now have in the U.S. As evidence of this improvement, the top-selling Janus Henderson U.S. mutual fund in the third quarter was our Global Equity Income Fund, which is a legacy Henderson fund, and this fund brought in roughly $280 million of net inflows in the quarter, which is significantly higher than the recent flows for the fund. The third area of revenue synergy I wanted to highlight was the growing momentum and increased conversations we are having with clients outside the U.S. As an example of this, during the third quarter, an Australian client who, prior to the merger, was invested in both Janus and [ Capstone ] strategies, put money into our Tactical Income Fund, a legacy Henderson strategy. These types of opportunities are in the works with clients all over the globe, and their success really underlines the strength of our global distribution team, which was a key pillar of the strategic rationale for this transaction. So in closing, let me sum up on the quarter. First, our results are underpinned by very strong long-term investment performance across capabilities, a testament to the strength of our investment teams at Janus Henderson and the fact that the merger has not been a distraction to them. This strong long-term investment performance will provide a solid foundation for future growth of our firm. Second, we saw positive net flows across a breadth of strategies during the quarter, including early signs of revenue synergies, which is very encouraging. These flows can be attributed to the strong investment performance and our exceptional global distribution team. Client response to the merger has been better than we could have anticipated, and we're excited about the opportunities that lie ahead. Finally, our integration efforts are proceeding ahead of expectations. We are pleased to be increasing our cost-synergy target to at least $125 million, underlined by the enhancement to our strategic partnership with BNP and the ongoing tireless efforts of our teams across the globe. With that, we'll open it up to questions, and I'll hand you back to the operator.

[Operator Instructions] And your first question comes from Andrei Stadnik with Morgan Stanley.

Look, first question, if I could ask: Look, on the flows, could you give a [indiscernible] sense of what additional flows you saw in the quarter, from the cross sale into the respective new markets that the merger has opened up for you?

This is Dick. I don't have that number isolated from all our other flows. We tried to highlight an example in Andrew's comments in Australia and the Global Equity Income Fund that's -- was the leading U.S. mutual fund sold in our U.S. mutual fund complex as examples and highlights, but I don't have the fully broken-out flows according to those categories. We also mentioned, of course, the $500-million investment from Dai-ichi Life.

Roger that. And with my second question: Look, just on the comp ratio, it does feel a little bit high in terms of -- it's gone up from 43% to 46% roughly quarter-on-quarter despite $17 million of synergies coming through largely in comp [indiscernible], and also the benefit of pretty strong market returns, and they've made inflows that have boosted the revenue line. So was there anything unusual in this quarter in the comp ratio, and should it slip down a little bit from here?

Hi, Andrei, it's Roger. The -- yes, we indicated the comp ratio would be in the mid-40s, so we're around there. There is a tiny bit of accounting noise in there, but I think the key bit you've got to think about is that the profit is up 20% year-on-year, and that obviously brings increased comp with it. But yes, broadly, we talked about a comp ration in the mid-40s. That's where we are. And I guess it also, if you compare it year to year, the comp ratio is down year-on-year, showing that some of that -- there's that benefit coming through from the synergy space.

Your next question comes from Nigel Pittaway with Citi.

I was wondering whether you could give a bit more clarity just on what happened on the equity flows. Obviously, if you do strip out that one-off, there was a relatively sizeable outflow. So can you give us a bit more color on what happened there, and whether or not that's now sort of turned around with a sort of better outlook on the flows in Equities?

Yes. Sort of a hard question. I mean, obviously, we have a lot of moving parts in different marketplaces. The $1.8-billion mandate was in our EMEA group. Part of the U.S. business is our direct business and our self-directed channel, and that has tended to be a bit negative over recent periods; that's pretty consistently negative. So the question on a U.S. regional basis is, can we do well enough in intermediary to offset some of those losses in flows in the self-directed channel, and that's been a struggle recently. We have seen, looking at it by client type, we saw inflows in institutional and in retail, which we thought was very significant. In terms of product areas, Global Equity Income is obviously a strong product area for us. Our enterprise, which is the mid-cap growth, has been terrific. Small-cap value is gathering assets. It's a fairly broad cross-section of asset classes and products that have contributed to the result. I hope some of that was helpful; I don't have -- go ahead, Roger.

Nigel, I guess the -- we've had some outflows in European equity, and you look at -- when you look at Equity's investment performance, as Dick talked about earlier, overall performance is very strong. Equity performance is strong. But I guess the softer area is the European equity performance, so we have seen some outflows there. I guess nothing to write home about, but to give the full picture. Dick's given the positive, so I guess I'm the CFO, I'll give the negatives.

Thanks for the question.

Okay, thanks for that. And then just -- maybe just as a quick followup, just the $36 million from BNP, how will that actually be booked? Will that just appear as revenue, in ordinary revenue, and no real cost attached, or will there be a one-off, or actually [indiscernible]?

We'll book that as a -- yes, we'll book that as a one-off and treat it as a -- treat it, yes, below the line. So we won't include it in our adjusted revenues. But it'll be a one-off that we'll book at the end of the first quarter, or we expect to be in the first quarter.

Your next question comes from the line of Ken Worthington with JP Morgan.

First, on the Paribas relationship: How are those cost savings going to come in? If the relationship closes in March, are you getting some sort of immediate benefit, or does the cost savings come over time? And then, are you turning fixed costs into variable costs with this relationship? Basically, to what extent does Janus Henderson get the benefit as you scale your business and grow your AUM?

Hey, Ken, it's Roger. I think you -- we need to think about this in 3 pieces. So I've just talked about the $36-million one-off amount that we'll receive on closing. The other 2 pieces are: There's probably about mid-single-digits benefits on an annual basis to our Janus Henderson costs, which will flow through from when that business transfers over, so I guess that will -- yes, in theory, that will start at the beginning of the second quarter, as long as that's when we close the deal. So you'll get 3 quarters of that coming through in 2018. And I think the other thing is, most importantly, is the reduction in fees for our clients and fund shareholders, which is -- the reduction there is probably 2 to 3 times that level. And again, that will come through once those businesses transfer. So clients will start to see that benefit, again, from when the transaction closes. In terms of moving from fixed to variable, yes, to some extent. The transaction is structured similarly to how the existing BNP relationship was outside of the U.S. So it has drivers based on transactions accounts, say, U.N., et cetera. So there is a variable element to it on the upside and the downside. But certainly not 100% linked to -- certainly not 100% linked to assets.

Okay, thank you. And then, I believe Henderson changed its view on the cost of research with regard to MiFID and will be absorbing those costs onto its P&L. Can you estimate the incremental costs we should see from MiFID and the sort of change in approach there? And I assume these costs turn on Jan 1?

Ken, hi, it's Andrew here. The -- look, the first thing I'd say is, whether you reverse our decision, I think as the investment market has evolved and we've looked at the, really, the client demand and the landscape in Europe, it's clear that it's the -- it's become the sort of normal operating practice, or will become from the 1st of January. And you're right, it's from the 1st of January. That for European clients or MiFID-related business, they're taking that expense hard. In terms of quantifying the cost of -- it's not really something you would go do at the stage. It's fair to say that the price of research, as several on the phone would probably be able to attest, is changing quite dramatically at the moment, and also, as part of the budgeting process and the price discovery and the -- sort of the usage of research, and being more tailored in that research. So even if we were to look at historical costs, they are significantly higher than what we would anticipate and expect the going-forward rate would be, both equal to the price coming down as well as the utilization coming down. I think it will come in from 2018, and 2018 will be like a year of discovery, I guess, for the whole industry, in terms of how this model operates and where it's going to, and throughout that year we'll probably be in a better position. But as we see here today, we don't see it as that significant an impact, but to be able to quantify it wouldn't be fair, and I don't think there's a number we could put on that. I think there's -- so that's probably the best way to leave it for now, but as we work through 2018, we'll probably be in a better picture. Because it is quite a moving feat, and it does just relate to our European or MiFID-related business.

Your next question comes from the line of Kieren Chidgey with UBS.

Just 2 questions, 1 on cost, 1 on performance fees. And then, just following on from the MiFID II cost discussion. Andrew, I mean, don't you have to have a feeling for what that cost is at the start of the year? Isn't that part of the requirement?

Well, we -- if you've got to -- if you're charging your clients, you have to sit there and have a budget and disclose it to them. If you're taking it on yourself, you don't, because that's sort of the [indiscernible]. We're deep in discussions with the likes of UBS and others around this. But as a -- once you're sitting there absorbing it, the main transparency is, if you are charging your client, what that charge is. Once you take that on, you don't need to sit there and disclose that to them.

Yes, this is Dick. And we're not . . .

I just meant from a client's point of view.

We're not trying to be vague. It's just the volume of research that we're purchasing is under negotiation, the price of that is under negotiation, and there's even some potential for movement around which clients are included in that treatment. As a consequence, we have a range of hypotheses around, depending on how you move those variables, what the outcome could be. But we literally can't give you a high-quality estimate at this point because there's too many moving parts. It's a work in progress.

Okay. But bottom line, it's not expected to be material?

Well, it -- no, I don't want to make it out -- it's not a -- it's a sizable number, but from an earnings perspective, I guess you're right, it's not material, no.

And just very quickly, on cost, the additional cost synergies -- you've talked about $125 million. Is there an additional one-off implementation cost? Previously you talked about $185 million. Does that number go up?

No. We're still hoping to operate within that umbrella.

Right. And second question, just on performance fees, the new disclosure on Slide 28 is quite helpful. Obviously there's a different level of performance-fee-recognition AUM by quarter, but also a different mix. And I see in fourth quarter quite a lot of the annual stuff is segregated mandates and private accounts, which, I guess, can be quite varied. But is there any sort of commentary you can give as to how that proportion of the performance-fee AUM has been tracking?

I think only in line with -- yes, with overall performance, Kieren, is -- and our performance is good. But obviously, performance fees are on a wide variety of accounts with different targets, et cetera. So I'm pleased you find the slide on 28 useful. As I said on the remarks earlier, the opportunity set in the third quarter is lower, and on quarterly reporting, we will have volatility in performance fees. Q3, as you can see, has a significantly lower opportunity set. Q4, only -- yes, you -- I guess the only way you can really do it is look back at history, and you'll see that Q4 has been a good quarter in the past performances, and performance is good on an aggregate level. So I guess directionally, more than the third quarter, but the magnitude of that will obviously depend on individual accounts. It really is -- I guess if nothing else, I'm consistent on this: It really is very difficult to forecast. So I think history is the best guide, plus an overall view of performance. And then, obviously, on the public accounts, you can look at how we're performing on the large funds with performance fees on them. I guess the last thing I'd say is, on the fulcrum fees, you'll see Q3 is pretty much the same as Q2. Q4, we drop off a relatively good quarter. So we have to add another good quarter in Q4 to replace the quarter that's dropping off. Otherwise, the fulcrum fees will get slightly worse before they get better.

Your next question comes from Michael Carrier with Bank of America.

Just on the expenses and on the outlook, Roger, if we think about the $125 million in synergies over the next couple of years, just wanted to try to get a sense, what your view is, is on the sort of the core expense growth. And we can exclude MiFID. But just kind of the core operations, just so we kind of get an understanding of what, like, the net growth we should be expecting and where maybe the margin can settle over the next couple years.

Well I guess with -- I'll take it in pieces. So we have non-comp. We indicated that the second half would probably be about 5% higher than the first half, and you'd expect to see some growth in that with inflation and just the size of the business growing in '18, ex-synergies. But definitely very moderate. I guess the investments in the business, again, relatively moderate in 2018, and variable comp, as we talked about, at a high level, comp is effectively driven by profits. So variable comp will move up or down in line with profit growth. But I guess if you -- on the fixed-cost elements, certainly in the single-figure category.

Okay. And then on capital management, just any update there, given you guys have a strong balance sheet, you had the dividend. It looked like the share count ticked down; I don't know if that was something that was more unusual. But just any update on priorities as you go over the next, say, 12 months, on buy-backs versus dividends versus investing in the business?

Yes. I think the first thing is, $0.32 is $65 million of dividend that we're paying out on a quarterly basis. As we said before, the short-term cash needs of the business are relatively high in terms of the integration spend. Obviously, a significant chunk of that has been spent, but there is -- there's probably about $60 million of that $185 million we talked about earlier, $60 million to $70 million of that which is still outstanding. And then we've got the convertibles. You'll notice that that's -- that $33 million of the convertibles on a nominal value, we have redeemed in cash in the third quarter. The remainder of that will come in -- those mature in the second quarter of -- three, in July of next year. So I guess from a cash needs perspective, think about the convertibles, the next chunk of integration spend, and then the first half of the year is always more expensive from a cash point of view than the second half of the year because of bonus payments. And then after that, then yes, we're responsible guardians of capital. As we've always said, if we have true excess cash and excess capital, and not a better use of it, then that's when the board will consider how -- returning it. Then there's the question of how, for the -- we're certainly not talking about that today.

Your next question comes from Patrick Davitt with Autonomous Research.

Still a lot of chatter about the FCA getting more aggressive in their capital reviews and requiring companies to hold more capital, and we had the kind of surprise with Hargreaves this summer when they were told they would -- needed to hold more capital. Could you kind of walk us through your view of the risk that that could happen with you, and why or why not?

Yes. Hi, Patrick. Roger again. The answer is, it's already happened. Our capital requirement in our U.K. group, which is the dominant part of the capital that we have to hold in the combined group, increased following the FCA's review, which for us was completed last year. So we've already seen that. Our capital requirement went up quite significantly. So that's already baked into these figures. The -- so I don't think we're at risk of more, at least at the moment. And the other thing is, one of the advantages of the merger is, yes, the U.K. has a very different capital environment than other regulators, so there are things that we will look at in terms of, from a capital perspective, what do we do within our U.K. regulatory group? The whole of Henderson was within that group. There are opportunities from a restructuring perspective to do things from a capital perspective a little bit more efficiently, but that will take time.

All right, that's helpful. Thanks. And on the flow outlook, do you have any visibility on large institutional wins or losses, or even more qualitatively, how the pipeline has kind of ebbed and flowed into October and November?

Yes. Patrick, as you're -- I'm sure you're aware, your institutional flows can be lumpy. We're focused on the third quarter numbers here; I don't think looking at any outlook of that's helpful. So there's nothing worth saying at this stage.

Next up, we have Chris Harris with Wells Fargo.

On the flows, the net number was good, but the gross sales were down quarter-on-quarter, and actually at the lowest level in about a year. So it sounds like there's some good things happening with the merger, so any thoughts on why the gross sales weren't a little bit better than they were?

I think the -- for both gross sales and gross redemptions, there's a -- you've got a seasonality effect in there, with the largest part of our business being in the northern hemisphere and the summer period. So that's to be expected based on the sales and selling on the gross sales line or the redemption line, you're seeing a combination of movement through the phase of the merger and through the completion of the merger and looking forward, as well as, obviously, some seasonality effect as well.

Your next question comes from Alex Blostein with Goldman Sachs.

Hi, this is actually Ryan Bailey filling in for Alex this morning. I had a 2-part question on the tax rate. So as we think about the mix of the business going forward and growth in different parts, and then you have some of the synergies, how do you think about the tax rate going into 2018? And that's with tax reform. And I guess the second part of the question, if we do think tax reform goes through at kind of the 20% corporate tax rate, do you have an early sense of where that might shake out for the overall company? I know it's early days on the latter question.

Yes, hi, Ryan. I guess the tax rate -- and we guided to high 20s. The tax rate in the third quarter is higher than the second quarter, and that's because of the mix of earnings. So a lot of those performance fees that we booked in Q2 and didn't repeat in Q3 are European in nature, predominantly booked in the U.K., which, as you know, is a 19.25% tax rate, or average for the year will be. So that's why Q3 is higher than Q2. I would continue to guide towards high 20s as our tax rate going forward, without change. Should tax rates lower, then does that have a benefit? U.S. tax rates come lower, does that have a benefit? Yes, obviously, it does. U.S. tax rate is 37% and a bit. U.K. tax rate's now 19%. The merger of those is what gets you to 28%. So if the 37% comes down, our high-20s number comes down.

Your next question comes from Robert Lee with KBW.

Could we maybe talk a little bit forward-looking in the sense of where you see some strategic investment initiatives? I mean, when you look across the industry, I mean, obviously, some competitors have been trying to build up an ETF business. Others have invested in even some technology businesses and tried to roll those out. And obviously, Janus did have the ETT business they acquired a couple years ago. So if you'd maybe update us on kind of new business initiatives that you're -- that you may be thinking about over the next couple of years, and kind of where you kind of see the firm headed in many different and new directions?

Yes, thanks. It's a good question, but maybe not the best time for that good question, in the sense that just as we sit right now, the obligations of business as usual, plus integration, plus dealing with regulatory change, frankly, have a whole lot of our resources pretty fully allocated, and the amount of spare resource to pursue the sorts of initiatives that you're describing is pretty limited right at this moment. We're impatient people; we want to get to that point where we're moving forward again on some of the ideas along the lines of the technology or products that you've described. We obviously, in legacy Henderson and legacy Janus, we've both been reasonably aggressive about expanding our capabilities in the past, and we want to get back to the place where we can make those moves effectively. But for the next year or 18 months, to be realistic, we have -- we've got a pretty full agenda in dealing with regulatory change and business as usual and integration, and you shouldn't look to us to be at our most aggressive peak during that period of time.

And just to add on some of the -- just to give you some statistics in some of those areas, our ETF business year-to-date has seen about $160 million of net inflows, so that business is actually doing quite well, and the ETP business is actually up to about $3.4 billion in assets. So it's -- while it's a small part of our business, it is an important part, and doing -- and actually seeing some good progress at the moment.

Great. And just maybe as a followup, this really -- probably a little bit more of a modeling question for Roger, but with BNP, kind of optically, I would assume that we're going to see comp, once this comes in, maybe come down, but G&A go up as you kind of move from -- the people off your books, and you start paying BNP?

Yes, exactly. So yes, there's about 100, just over 100 people that will move from being -- well, they won't move at all. They'll be in the same desks, doing the same jobs, with the same systems, which is very important for our clients. But about -- yes, just over 100 people will move off our payroll and onto BNP's payroll, and we'll pay for that through, as you say, through non-comp expenses, but at a slightly -- yes, but with a, as I talked about earlier, with a slight benefit to us in the mid-single-digits.

And our final question comes from the line of Brian Bedell with Deutsche Bank.

Maybe just staying on the BNP topic, I guess maybe just your selection process of BNP versus the other U.S. custodians, which have been pretty prominent in this space. Is it -- was it mostly about the price and BNP's trying to establish a better U.S. foothold, or I guess, what other types of criteria? And then, how much are -- is the basis-point reduction in the funds? Can you quantify that?

Brian, I haven't -- yes, in terms of the criteria, there is no single criteria. The BNP proposal and offer really addresses so many of the core constituent requirements. So firstly, as we go looking to integrate and create a global platform, given they were the significant provider of back and middle office for the outside-of-the-U.S. business, to integrate that and create a global platform around that is obviously very important for us as a business as we look forward. In addition, the fact that they were taking on our staff, as Roger said, retaining the people, the processes, the systems underlying that, and that means from our clients' perspective, we see no change in the processes and the way it works. There are significant client, as Roger mentioned, savings for the underlying fund shareholders. In terms of basis points, I don't know, because the savings we get actually are across the globe. They're not just for the U.S. mutual funds. But obviously it is a savings, which we think is very important, as well as we get additional savings. And as importantly, BNP didn't have particular back-office operations in the U.S. prior to this, and so their desire to move in and do this and continue to invest was one of the critical aspects of what we're seeing. So retaining our people, retaining our processes and systems, and a partner who we know very well, who will make sure we knit our back office together globally, as well as significant investment plans in this space, was really the key drivers, supported by the fact that there was significant savings on behalf of our clients and some modest savings on behalf of our shareholders. All of that came together to what was a very compelling proposition from them.

Okay, that's great color. And then just lastly, maybe, Dick, if you could talk about the -- I guess the view from the institutional consultants and gatekeepers. Obviously, typically in a merger, there's a waiting period or a wait-and-see period. Your performance has been improving across the franchise, so are you seeing any sort of lightening up of that, that might indicate gross sales would improve from the institutional, and I guess, plan-sponsor angle?

Well, thanks for that. I think we see great opportunities in the institutional market, and anecdotally, I see some signs that we've gotten some very positive results on individual products from various institutional consultants recently. But I can't give you a broad, cross-sectional answer to your question. I think quite properly, the institutional consultant community, they take a pause when you go through a transaction like this, and they become watchful waiters. And we haven't jumped the line on that. We're still in that period with those folks. But there are positive signs developing. The most important thing is obviously performance, performance, performance. The most important thing is that our investors are delivering, and then that our client-relationship folks are maintaining and growing those relationships. And we're seeing good results on both those fronts, so we're optimistic, even though we can't predict the specific timeline of acceleration of sales in the institutional space.

And we have no further questions in the queue. I'd like to turn the conference back over to Mr. Dick Weil for any additional or closing remarks.

Thank you, operator. Thank you, everybody, for joining us today. I hope we've been clear. It's easy to get overly focused, I think, on the quarter-to-quarter changes and comparisons, and I guess that's a risk of quarterly results, but from our perspective in management, thematically, the most important things in this story are exceptional investment performance providing a foundation for future growth. It's really -- we're very grateful to clients for their support of our transaction, for the continuing trust in relationships. Well done to the client-facing teams on maintaining and growing those. And finally, the very important integration efforts are proceeding well and ahead of plan, and thanks, especially, to BNP for their partnership in this new effort in the United States. So with that, only 5 months in, we think we're off to a great start as our new company. We're very pleased with what we've been able to accomplish, as a direct result of all the hard work of our many employees, and thank you to them. We'll talk to you next quarter.

And this concludes today's conference call. Thank you for attending.