Invesco Ltd. (IVZ) Q2 2011 Earnings Report, Transcript and Summary

This presentation and comment made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results for operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as believe, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs, such as will, may, could, should, and would, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our most recent form 10-K and subsequent Forms 10-Q filed with the SEC. You may obtain these reports from the SEC website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Good morning, and welcome to Invesco's Second Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to the speakers for today, to Mr. Martin L. Flanagan, president and CEO of Invesco; and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much. Thank you all for joining us today, and Loren and I will be speaking to the presentation that's available on the website if you're so inclined to follow through with that. This morning, we'll do what we traditionally do and review the results for the quarter. But also as we have traditionally done each quarter, we'll focus on a different part of the business and today, we want to give you our perspective on our European business and how Invesco's positioned against what we do as a very tremendous opportunity for us in that region. Loren will go into the financials in greater detail, and as always, we'll open it up for Q&A. So I'm on Slide 3 for those that are inclined to follow the presentation. If you take a look at the overview for the quarter, long-term investment performance remained very strong across Invesco for the second quarter with areas of exceptional performance. Our strong investment performance contributed to a continued trend of positive, long-term net inflows for the firm. And during the second quarter, we saw strong long-term net inflows across all distribution channels of industrial. And against the backdrop of what we all know are very volatile markets, we achieved margin expansion and earnings growth during the quarter. Also during the quarter, we continue to repurchase -- our share repurchase program, purchasing 11.3 million shares for $280 million. And if you take a look at the summary results, assets under management ended the quarter at $653 billion as compared to $641 billion at the end of the first quarter of this year, reflecting strong momentum across our global business. Adjusted operating income for the quarter was $285 million. That's up from $272 million in the first quarter, which represents a 4.7% increase quarter-over-quarter. Net inflows for the quarter were $7.3 billion. This includes net long-term flows of $3.8 billion. This continues the positive trend we've demonstrated over the past several quarters of increased -- of positive inflows. And again, Loren will go into greater detail during the financial section of the presentation. Moving on to investment performance. I think everybody realizes that the key strategic priority for us to deliver consistent, good long-term investment performance for our clients. Our commitment to investment excellence has helped us maintain strong long-term investment performance across the enterprise. If you take the firm -- take a look at the firm as a whole on a 3-year basis and a 5-year basis, the numbers are extraordinarily strong, with now 82% of our assets ahead of peers on both periods. And again, we have detailed charts in the appendix. But let me hit a few of the highlights of those performance numbers for the quarter. US Value Equity remained very strong with 88% or more of assets under management, the top half of the peer groups over 1, 3 and 5 years. 96% of our U.K. equity assets are beating benchmarks for, of over years 3 and 5. 99% of our Global ex US and Emerging Market capabilities are above benchmarks and peers over a 3-year period. And now, our Morningstar ratings in the United States U.S. Retail business are at all-time high, with 65% of our assets under management are rated 4 or 5 star. Moving on to quarterly flows. If you take a look at total flows on Page 7, you can see strong investment performance across the enterprise contributed to positive flows during the quarter, and improving redemption picture contributed to the continued positive momentum of long-term flows. And as I mentioned earlier, total net flows for the quarter were $7.3 billion, of which $3.8 billion in long-term flows. If you take a look at flows by channel, again, strong gross sales and improving redemptions across the Retail and Institutional channels contributed to positive net flows for Invesco as a whole during the quarter. Now let's focus on the U.S. Retail flows for a moment. And despite a very volatile market environment during the second quarter, which we all realized by kick off in May, which started with the Greek debt crisis, exacerbated by the debt ceiling and financial discussions, prices we're having here in the United States. What you saw in the month of June was the industry mutual fund, U.S. mutual fund industry being in net outflows for the first time since December, and only the second time over the last 12 months, so clearly, having an impact during that last month of the quarter. But the depth and breadth of our investment capabilities are strong investment performance and a very focused client engagement effort resulted in solid momentum for our business during the quarter. At Invesco's core U.S. Retail flows, and that's excluding UITs and ETFs or really just the core of Retail business, improved 72% net flows since Q3 2010. So really, we're seeing quite dramatic increase over that period of time. Our client engagement efforts are clearly paying off as we had 130 new platform placements since we closed the transaction. And driven by strong investment performance, we continue to see increased RFP activity and are winning mandates across a number of investment capabilities and asset classes, including large-cap growth and US Value international equities and stable values. We also completed the fund merger process successfully during the quarter with minimal transition issues. And combined, these efforts helps lower the redemption rate below industry levels despite these very volatile markets that we are now in. So why don't we move on to some highlights of our European business, and I'm on Page 11. And as you can see here, if you just take a look at the world and referring back to some of our previous comments in previous calls, we believe one of our key competitive advantages is our global presence. And we've said many times that to be a successful global asset management company, you need to have a strong business in the United States because of it's just absolute size and significance. And at the same time, for a long-term success, it's equally important to be successful in developed markets and developing markets around the world. The U.K., Continental Europe and the Middle East now comprise the world's second-largest asset management region, coming after the United States with 36% of the world's assets under management. If you take a look on Page 12, we have a very strong competitive position in the United Kingdom, Continental Europe and the Middle East. We have 150 investment professionals strategically located across the region, supported by more than 1,200 individuals in 14 countries. Roughly 1/5 of our assets under management are domiciled in this region. As we all know, we have a market-leading presence in the U.K. and a strong competitive presence on the continent. Our cross-border fund range of 71 open-ended products covers 16 of the top 20 asset categories on the continent. Obviously, we think we are very well-placed. And if you look on Page 12 -- Page 13 and focus now on the cross-border market, the global cross-border market right now is approximately $3 trillion and growing. And it represents a substantial opportunity for Invesco. The cross-border market funds is growing rapidly. It's increased 2x since the year 2004 and currently represents 30% of European fund market. But really, what's very, very important right now, about 2/3 of the net flows are going to this cross-border market. We, obviously, view this as the future in this marketplace. Invesco's investment capabilities are very well-placed within the region. We have a high percentage of 4 and 5-star rated funds on the cross-border range. 24 of our funds right now are 4 and 5-star rated by Morningstar. And as we have done elsewhere, we're bringing the best of Invesco to the European region. We're focused on delivering strong investment performance and a comprehensive range of investment capabilities from all across Invesco to the European investors. The U.K., Continental Europe and the Middle East markets represent a tremendous opportunity for us. We've undertaken a broad transformational initiative to build on our strong presence to accelerate growth in the European cross-border market, Institutional market and the ETF market. And right now, we're clearly maintaining our leading position in the United Kingdom. We continue to look to just continue to strengthen that in the years to come, and we're working to further strengthen our position on the continent by leveraging our global strengths and our world-class capabilities. And to achieve this, we're investing resources to build momentum in key parts of this business and to strengthen our infrastructure ahead of some critical regulatory changes. This will position Invesco very well as the regulatory landscape shifts over the next several years. So combined, we believe these efforts will strengthen our ability to deliver to our clients and enhance our share of the cross-border Retail, Institutional and ETF markets. Leading both revenue growth and efficiency gains will ultimately drive margin expansion. So obviously, we think it's a great opportunity for us. We think we're well-placed in the region, but we feel that we can just do -- be more successful in the years to come with this concentrated effort. So with that, I'm going to pass it over to Loren for his part of the presentation

Thanks very much, Marty. So turning to the next slide, you'll see that during the quarter, our long-term net flows added $3.8 billion. This was despite $2 billion of outflows that occurred between the PowerShares QQQs and the DB PowerShares products in the quarter. You'll remember in last quarter, the QQQs and the DB PowerShares products accounted for $3 billion of long-term inflows. This quarter, we continue to see positive net inflows into our Institutional Money Market product, adding $3.5 billion, and market gains added $3.2 billion and FX added $1.3 billion. So the resulting increase in AUM quarter-over-quarter was $11.8 billion or up 1.8%, giving us $653.7 billion of AUM at the end of Q2. Average AUM for the quarter increased 3.6% to $652.8 billion, and our net revenue yield in Q2 was 46 basis points, in line with that of the first quarter. So let's go on next to operating results. You'll see that net revenues increased $26.9 million or 3.7% quarter-over-quarter, while favorable FX rates added $5.4 million to net revenues. Drilling down on this, you'll see that investment management fees grew $28.2 million or 3.5% to $824.3 million. This increase was driven by average assets under management growth relative to the first quarter, but also favorable FX contributed $7.3 million. Service and distribution revenues were up $7.5 million or 3.8%, also moving in line with average AUM. Performance fees came in at $7.6 million, that was up from Q1 as a result of strong investment returns from both the U.K. and our Private Equity Funds-of-Funds area. Other revenues in this second quarter were $32.2 million, largely flat with Q1 given a consistent level of Real Estate transaction fees and UIT issuance, third party distribution, service and advisory expense, which we net against gross revenues, increased by $12.1 million or 3.7%, which was in line with the increase in investment management fees, as well as the quarter-over-quarter growth in our average AUM. FX added $2.6 million to these expenses. Continue to move on down the slide, you'll see that our adjusted operating expenses at $466.4 million grew by $14.2 million or 3.1% relative to Q1. FX accounted for $4.6 million of this increase. Employee comp at $310.9 million was up $11.2 million or 3.7% versus Q1. As we flagged in our last call, the second quarter compensation numbers include a full 3 months worth of annual base salary and share-based compensation expense increases, as well as a full quarter of the Hyderabad staff cost that had previously been reported in the property, office and technology line item. These factors were partly offset by reduction in payroll taxes, and in combination, it amounted to approximately half of the increase. FX increased comp expense by $3.3 million. Invariable compensation linked to performance and growth in our operating income amounted for the remaining increase. Marketing expense came in roughly flat to the prior quarter. It's up $0.4 million really due to sale of overture [ph] costs. Property, office and tax decreased by $2.1 million or 3.3%. Again, this was due to the outsourced administration as we brought in our Hyderabad operation in-house. FX added about $500,000 to this line item. G&A expenses came in at $66.3 million in the quarter, up $4.7 million versus Q1. About half of this increase was a result of greater staff recruitment costs as we continued to selectively upgrade certain of our distribution and investment capabilities. The other half was due to greater levels of travel, generally reflecting heightened levels of RFP and other business activity. FX added about $500,000 to G&A in the quarter. Continuing down the page, you'll see the non-Op income increased $2.5 million quarter-over-quarter. This was due to an increase in mark-to-market of certain of our private equity and real estate partnership investments. Now the firm's tax rate on pretax adjusted net income came in at 26%. Going forward, we expect the effective tax rate to be around 26.5%, plus or minus 0.5 percentage point. So our adjusted EPS came in at $0.44, an increase of 7.3% versus Q1. And furthermore, as Marty mentioned, we continue to see our margins expand as our adjusted net operating margin came in at 37.9%, up from 37.6% in Q1. So before our turning things back to Marty, I'd just like to provide a little more detail on the European infrastructure charges, which is one part of our broader European initiative. As mentioned in the press release that we're outsourcing our European TA [ph] and making certain structural changes to our both our product and distribution platforms, all of which is expected to be completed by December of 2012. And we believe that taking these steps today will allow the firm to better respond in the future, so depending, but still uncertain regulatory environment. So right now, it's obviously difficult to fully know the impact of the proposed, and sometimes, actually competing regulations such as the revised Markets in Financial Instruments Directive, otherwise known as MiFID 2 in Europe, and the Retail Distribution Review or RDR in the U.K. But it's clear to us that either of these have the potential to significantly change the relationships between the distributors, clients and investor managers in the region. So regardless of whatever regulatory outcome ultimately prevails, we believe that outsourcing our European TA will reduce both the cost and the risk of operations to us, and allow us to react more swiftly to the changes in the marketplace and therefore, further solidify and actually strengthen our competitive position. So given this opportunity, we anticipate incurring up to $40 million in total European infrastructure implementation costs, which amounts to an incremental $34 million over the next 18 months. The ongoing benefits of this project are well in excess of the projected implementation costs. We anticipate the project will achieve a cash payback within 2 to 3 years, and yield an estimated IRR of about 30% to 35% and add an estimated $0.02 EPS accretion to fiscal year 2013 and beyond. And given the fluid nature of regulations and the potential future impact on our infrastructure transformation project, we will provide you updated estimates on the implementation cost and benefits to this initiative only to the expense, of course, that it changes -- change in any material way. So finally, in terms of reporting and consistent with our past approach to dealing with material one-off types of expenses, the $40 million in infrastructure charges will be adjusted out of our non-GAAP presentation, but they will be detailed and tracked each quarter in our U.S. GAAP reconciliation table within the earnings release. So with that, I'm going to turn it back over to Marty.

Great. Thank you, Loren. And we'll open up the questions people might have.

[Operator Instructions] Our first question does come from Roger Freeman of Barclays.

I guess, maybe first on Europe. Can you maybe talk to how this restructuring/growth initiative is actually sort of split between for fixing issues you've had, because I think there've been some performance inflow issues in the U.K., versus growing the opportunity set? And I'm still trying to understand sort of the growth component.

Let me try to answer. First of all, in the U.K., we're just -- no more play in the U.K., very, very strong. It was very, very successful, quite dominant, so we're looking to just go from strength of strength there. In Continental Europe, we start from frankly, a position of strength too. And there's less robust industry data, in a consistent way, than what you see in the United States. But from the work that we do, when we look at a peer group of what we defined as sort of the top 40 players on the continent, we've been, if you look at assets under management, sort of the top 20 players or mid-teens. And where we want to be is a top 5 player. And if you just look year-to-date, right now, we're already in the top 10. If you look at the investment performance across the product range, it's very, very strong right now, broad range of capabilities, as I said. Where if you look at the largest categories, the 20 largest asset categories on the continent, we have product in 16 of them and it's all quite good. So we're really starting from a position of strength on the Retail side. Institutionally, again, we've been there any number of years. We think we can just be much stronger in the United -- excuse me, on the continent by bringing greater range of capabilities, and we've been there with the European Equity product. On account of real estates, we've been recently very successful bringing in the Invesco Perpetual products onto the continent. So it's really going from a strong position to something that we think we could be much stronger at. So again, that's what we wanted to get -- to make the point today of where we're starting.

Yes. And, Roger, I would just make the point that there's really a couple of elements. I mean, one is the top line growth and the opportunity to generate greater market share, capture and revenues. Then there's an infrastructure piece as well, which we feel is critical to support that success. The $40 million that we talked about, and which is primarily related to the outsourcing and the transfer agency but there's some other structural things within our product and distribution platforms that we need to work on, really will support that success going forward. So that's kind of how you should think about it, that the $40 million has its own cost-base benefit kind of stream. But that's not really what Marty was discussing. I think it's really kind of us bringing to bear resources above and beyond what we've seen in the past.

Got it. Okay. And then I guess just with respect to the fund mergers having been completed, I guess, you've kind of have a month or actually about 2 months of absorbing the combined platform. Can you -- any comment at all in terms of whether you've seen any sort of immediate benefits in terms of coming off model hold or any kind of inhibitions to selling the product before or even redemptions in some of the products that were merged into better-performing ones?

Yes, Roger. We definitely are seeing the benefit of the transaction. One thing is just despite the fact that we have, obviously, a predominant number of our assets sort of located in categories within the industry that has been in outflow, we have seen our redemption rate improve better than industry by several percentage points. And quarter over quarter over quarter, just going back over the last several quarters, our outflow situation has been improving significantly, almost an accelerating way in terms of doing better each quarter as we come into the next quarter. So I think we're seeing it in the numbers for sure. And then in terms of, I think, the opportunity in the second half of the year, we've been actually very focused on all the fund mergers, and it's been a discussion with the distributors about what's going on with the fund mergers. And it's been hard to really get into the next leg of the transaction, which is really talking about we're done with that and now we can start focusing on the opportunity and being even more proactive with sales. So I really think going forward is where you're going to see the real sort of benefit of the transaction. And in the last half of this year or the first -- first half of this year, I mean to say, it's really been a little noisy because we've had to deal with all the fund mergers.

Okay. And just last question on share repurchases. A fairly sizable pick up this quarter. I don't have a bunch of prior quarters in front of me, but I'm just not sure how the size [ph] this is. But how do you think about cash requirements, and you guys have $600 million I think on hand now, and the opportunity around buying stock going forward?

Yes, Roger, I think we're going to maintain sort of an opportunistic approach to our stock buyback given where our stock is, and then value our stock, and you saw that. I mean some of the buying, I think, we've discussed is in line with us eliminating dilution associated with the share grants, the deferred stock grants that take place at the beginning of the year. We definitely did above and beyond that this first half. We are going to be balancing our approach though, and so we are going to continue to focus on paying down debt. So we don't want to lose sight of those capital priorities. But we are not, again, in anyway, sort of tying our hands in terms of what we'll do with the stock buyback. Hopefully, that gives you a sense of our approach.

Our next question does come from Michael Kim of Sandler O'Neill. Michael Kim - Sandler O'Neill + Partners, L.P.: Just first, can you maybe give us some color on the Quant business? It sounds like interest in these sorts of products is on the rise as maybe performance has started to come back, so just curious if you're seeing the same things. And any color in terms of flows during the second quarter would be helpful as well.

Let me make a couple of comments. You're right. If you look at Quant performance, ours in particular has been very, very strong all year. And it was probably, maybe the neither of what was going with Quant third and fourth quarter into the first quarter of this year, where it was the favorite child in 2005 and '06. And it just really, as an industry, most under severe pressure. And what we are now seeing is because of the model's coming back and better performance, that it feels like that pressure's off and you're actually starting to see inquiries, RFP inquiries around Quant. We're seeing it, in particular, with some of the Global Equity Quant portfolios in particular. And so, we think we're going to see brighter days ahead probably for the Quant sector, but in particular, for our group base, which is the investment performance has been very strong. Michael Kim - Sandler O'Neill + Partners, L.P.: Any color on the kind of flows in the second quarter?

Yes, I think if we look at the Quant's, it was probably somewhere a little bit north of $1 billion outflow, just over the last of what we saw in terms of sort of determination. So we feel that we're largely past that at this point. So we're drying the corner.

I think you're going to have the right point. It's an inflection plan. I mean those are -- people are opportunistically going back to Quant. I think there are still people that haven't confirmed their commitment to Quant yet, but it does feel like you're now moving at that uptick area. Michael Kim - Sandler O'Neill + Partners, L.P.: Okay. And then maybe just kind of turning to the Money Market fund business. You've been able to generate some pretty good growth the last couple of quarters at a time when maybe the industry has been suffering some outflows. So just wondering what the drivers might be in terms of the market share gains. And then also, any thoughts on the regulatory environment and maybe the likelihood of potentially transitioning to floating NAVs for some of those products?

Excuse me. Just for us in particular, as you saw the flows coming in, and it's really just on the back of it. As you know very well, it's a very, very good team. They do superb credit work. It's highly recognized by the clients in the industry. And I think whenever you get pressure points, you tend to see separation. And again, I think that was the main driver of it. At a more macro level, if you consider where rates are in the money fund industry, it just proves thoroughly that there's an absolute need for the money fund vehicle in the industry. It's done very, very well even during a low rate environment and then frankly, another "crisis period" in the marketplace. And the regulators have been clear that even though there've been very, very good changes put in place by the SEC that make the industry just that much stronger than where it was previously, and again, with already a very good track record of success, that they want more done. And if you look at some of the suggestions out there, the floating NAV is still out there, I would venture to say that's not the likely outcome. If you just look at all the reaction to the idea of a floating NAV, all the users of money funds concluded that it just really -- it does not make sense. And so there'll be something different other rather than a floating NAV would be what I would say. Michael Kim - Sandler O'Neill + Partners, L.P.: Okay. That's helpful. And then just do you have an end of quarter share count for us?

Yes, I do, Mike. Just bear with me one second. It is 6 -- sorry, 461.4 million.

Our next question does come from Michael Carrier of Deutsche Bank.

Just focusing on the U.S. Retail business, and I don't want to get in into too much month-to-month, but you guys have that chart on Slide 9 where you provide like a redemption rate and you had that decline into the second quarter. Any clarity? And granted like the industry flows and redemptions are probably a lot worse in June, but just any color from like an April, May to a June level, just given post the fund mergers?

Let me try to answer as best I can. We don't have -- we don't publish monthly information, but so let me speak to industry-type topics and less in the context of that and I think the answer will be pretty quite clear. If you looked at the first quarter, you could see where the trends were for us, on the Retail side, up and up. And once the uncertainty in the marketplace started as I've said in May, really from the European debt crisis and then some of our challenges, fiscal challenges here in the United States, you just saw something very dramatic a change happen in the month of June. And if you look at Equity flows, in particular, in the month of June for the industry, what were the 3 categories that were in the biggest outflows? You saw U.S. equities go from what was $4 billion out in the prior month to $15 billion out in the month of June alone. You saw net inflows in international equities of $3.2 billion to out of $0.9 billion. And you saw some outflows in sectors. So if you again, where did the money go and what's in the mid-year fixed income, and again, it's -- we've seen this movie before and that's really what you saw happening. So as investors got scared of the outlook for the markets, they went back into fixed income. And if you look at our assets under management, our relative strengths, you can understand why you saw that quarterly hit, although we still were in net flows. And as Loren pointed out, if you just look at the quarter-over-quarter relative net inflow improvement in light of this market environment, it's really quite amazing.

Yes. I mean, just within the month, I think the flow pattern was sort of degrading through the course of the quarter. I mean if you have to think about, I mean, April was good. May was not as good, and June was the worst month. And so it was sort of a downward trend which, again, we're hopefully seeing some stabilization, but it definitely was in line with the industry in those -- in that trend line.

Okay. And then the alternatives. You guys have mentioned in the past that the real estate business continues to do well. The flows this quarter just seem very strong. So I guess, any granularity around what's driving that and maybe even the outlook just in terms of the pipeline on the institutional side?

Maybe I'll make a couple of comments, and Loren can too. So it's interesting if you look at where investor appetite is right now institutionally and what's driving it, for us in particular it's probably broad. Real estate is a very, very attractive asset class around the world, and we are benefiting from that with a very, very strong team. The other thing that is -- where we're seeing traction is in what we -- the premier plus S allocation capabilities has really been gaining traction. And in particular, a sleeve of that has gained traction, which is the commodity sleeve, which is probably not surprising, again, recognizing where many people think where the world is right now. Those are probably 2 of the bigger alternative asset categories for us that we can speak of, and it seems to be something that is continuing.

I mean I think the other point is probably just we're having a huge success with our REIT products in particular and especially in Japan. This has been a very positive trend for us. That's not slowing down, in fact, so that's an element. And again, the U.K., positive, Europe, positive flows, so it's broad based. It's not just fixed income, and it's not equities. I mean, I would have been really pleased to see the crossover variety of those products on the retail platform outside of the U.S.

Okay. And then last one, Perpetual, if we look maybe a year ago, performance was under some pressure. In the past 6 months, performance has done really well. When we think about the seasonality of, like, performance fees when we start thinking about near the end of the year, are the odds increasing that performance fees will be more in line with this quarter and ramp up? Or is it still too early to tell?

Yes. I think, Mike, it's unfortunately too early to say. They've only been halfway there, and it's -- it is definitely a point-in-time kind of calculation that takes place. And we've seen there is a fair -- can be a fair amount of volatility in the short-term numbers and the discipline that's been run out of the U.K. So obviously, right now, year-to-date, doing very, very well. So I say if you just extrapolate, yes, there's hope, but I wouldn't want to be able -- I don't want to just extrapolate, because we still have 6 months left of a fairly unclear time ahead of us. So I'm sorry. It's not very helpful for your model. But again, when we think about our plans, we tend not to assume any performance fees and then just because it's so hard to actually forecast performance.

Our next question does come from Glenn Schorr of Nomura.

So question. I mean, I think it's an obvious statement about how you feel about your stock as you keep buying it back, but debt-to-EBITDA, loose calculation, 1.4x up from 1.2x. Just curious on how you think about the comfort zone there and buying back along the way.

Glenn, I think we have a definite plan in place in the state of our capital priorities. I think pretty clearly, we certainly needed and wanted to buy back some shares related to the share grant that were issued as part of our year end awards. In terms of the incremental stock that we kind of brought in through the quarter, as they call it around 200 million-ish was the amount, that is in no way sort of going to change the nature of our financial strength. And so we're very focused on -- continued to bring down debt. We have a lot of flexibility with the new credit facility to do that. And again, there was a little bit of just timing, because we had -- and leverage, because we had our -- we bring back dividends from the U.K. on a periodic basis, and we need to get all the financials in order to do that. And so again, I think you'll see through the course of the year all that kind of smooth out very nicely.

Okay. Cool. And the last one is when you look through the ETF, UIT, Passive businesses, it's predominantly U.S. business still, and it's growing nicely. Just thoughts on expanding. You have a great distribution network, especially in Europe. How hard or easy is that to take that product and manufacture things more geared towards some of the other markets that you're already in? It feels like you already have the distribution.

Yes, in -- that's a great question. And it is, we think, one of the great assets of the company, the ETF capability that we have. And it is a fact we're just getting stronger and stronger in the United States. The area to look right now is -- and then if you just start to look at different parts of the world, we launched ETFs in Canada about a year ago. It's probably approaching $2 billion in ETFs. We just got some of the U.S. list of ETFs listed on the Canadian Stock Exchange, and we think that's going to be a very, very helpful thing in that marketplace. Europe, we launched probably 3 years ago if I'm getting the timing right. You can think of the launch in the marketplace environment that we've been in. So it's been a difficult market. Part of this European initiative, we're looking at the ETF market in a very real way. And I will say, market-by-market, they're different. The European market right now we classify much more as a institutional market and has been tied more to larger banks. In particular, yes, some of our traditional competitors are there. But if you look at the impact that some of the banks have had with exchange-rated notes and some of the investment banking capabilities tied to it, it is a different market. That said, it's a market that we intend to pursue, and we think, in time, we will be successful on the continent also. And again, we just think there's opportunities around the world. We've listed in Mexico. We used it as another way to get into other markets, and again, we are continuing to look market-by-market to see where it makes sense for us.

I appreciate that. And if you go the ETN route, do you need someone to play the role of guarantor?

Yes, it's just not an area that we're focused on.

Our next question does come from Bill Katz of Citi.

Just a couple of questions, Loren, perhaps for you in terms of the expense guidance. And then sort of curious, if you will, what's the underlying revenue and expense saves and/or growth to get you to that 30%, 35% IRR as well as the accretion on earnings?

Yes. So the -- there's no revenue growth assumed in that IRR. It is essentially an ongoing cost save that will occur at the end of the completion of the project, which is somewhere between $13 million to $15 million per year. And I think there's a small growth across -- maybe 5% of growth associated with that as the business assume to grow. So that's where the 30% to 35% IRR gets calculated.

That's very conservative.

Very conservative.

So those saves then are just beginning at the end of the restructuring?

Yes, because we're going to have parallel activities going on. And so it's really when the project is complete that you're going to see the full phase come to fruition.

Okay. And second question is within the alternative business, there seem to be a pretty sizable allocations going to that platform. Could you give us a little sense of sort of what's happening with Wilbur Ross from 2 levels? One, in terms of harvesting of previous gains, and I think that's now been almost about a 5-year investment for you guys. So I'm wondering on that score. And then secondly, just in terms of the fundraising backdrop.

Yes. I mean on the harvesting, again, I think as we mentioned in the last call, it became substantially invested in Fund IV. And so it's at the point where you can actually begin to start sort of harvesting, and so that is the page we're in there. And so you'll continue to see activity, and we've done some of it that I think is notable in public note in terms of some of its holdings. So moving ahead, well, the -- on the fundraising, I really cannot comment, unfortunately, Bill, as we've said in the past just because we're in a position where the fund is still in a position of fundraising. I would say one thing though that, I mean, generally, with private equity fundraising, we're seeing, industry-wide, sort of a lengthening of time to raise funds at sort of an 18-month cycle now is what our sales force is telling us for most private equity managers. And so I think we're in that same space in case you're wondering what's going on.

Okay. That's helpful. And just one last one. In terms of your U.S. retail, you mentioned earlier -- I apologize if I missed the number -- a number of sort of new installments on platforms, if you will. What's the historical lead lag between sort of getting on those platforms and then sort of seeing a more powerful step-up of organic growth?

Yes, that's a good question. I really don't think that I can quantify it. But let me -- and again, that's not very helpful to the question that you're asking. So the way that we look at it is once you're on, if you maintain your performance, you're on for a good long time. And what this is doing, this is broadening very, very much our depth and breadth within these different platforms. And I think somebody might be more helpful though, quite frankly if you -- again, if you look at our investment capabilities, they are heavily-oriented towards equity products right now. And so what we've been saying and what we really need is a movement back to equities. Yes, U.S. equities but also international equities, and we should play really quite well. But the big, big driver is going to be when people start to put money back into the U.S. equities. I think it's going to be a very, very different outcome for us in this organization, and these are the important elements to have in place.

Our next question does come from Ken Worthington of JPMC. Kenneth Worthington - JP Morgan Chase & Co: To follow up on Bill's question, it's been about a year since the Van Kampen merger. You've gotten on a 30 -- 130 additional -- well, there's been 130 platform placements, but placements doesn't equal sales. So where are you at driving sales through the distribution channels that are new to either Invesco or new to Van Kampen? And maybe a way to address that is to talk about what percentage of retail sales are coming from the new or enhanced relationship to this point. And then to maybe help us size or better think about the opportunity, what inning are we in? Are we in the first or second inning? Third inning? Or is it later in the game there?

Yes, good questions. So let me try my best to answer those. From -- let's take the baseball analogy. From the inning that we're in, I think that we're very, very early innings in the results category. But that, if you recall, the foundation building, the quality of the team, the capabilities of the team, the capacity of the team is very broad and very, very deep. And that's what you're seeing with the RFP activity, the placement activity, the investment performance that right now, at each percent on a 3-year basis, is just strong. That's the foundation element of it. The -- what I would say on where are we not like us to be, and it's nothing new, I would say it's the public awareness of the Invesco brand and through all the FAs throughout all the system. Has it been a focus? Has it been increasing? Yes, it is. But again, I think we've said, that's going to be a multi-year effort, simply because it's a new name in the channel. And I don't have the gross numbers in front of me, but I still think what a very, very good indication of what are the relative changes during this period recognizing the lineup's just gotten completed, which is hard to believe, but that's how long it takes to get through that. And from our point of view, we did it as fast as can be done. But again, going back since Q3 of 2010, net flows in that core channel, not ETFs, not UITs has improved 72%. And if you put that in the market environment that we're in and where the flows have been going within this market environment against where our investment capabilities are matched, I think that's quite a darn good thing. So hopefully, that's helpful, Ken. And Loren, would you add?

Yes. I mean, again, I think I mentioned it in one of the other questions. But clearly, now our conversations are being centered on product solutions and not the fund mergers and the capital gains from mergers and all this noise around the products. So I think we have that in place going forward. So we have not seen that historically. And also, when you think about we're inning we're in, I mean, we're actually being rained on. It's hard to actually say when you're seeing kind of Armageddon, and you have that feeling and other things happening. So it is a little hard for us to sort of anecdotally give you some sense of how it's going, because we're in sort of an unusual time other than I'm looking at the numbers, and we're ahead of plan on sales across the U.S. and in the channels that we're looking at. And so I do believe we are executing exactly the way we would and even better than we thought we would. And really, when I think about the opportunity and then according to our plan, it's really the second half of the year is what we've been seeing consistently after the fund mergers that we're going to see the real benefit of the transaction.

I think, Ken, in a funny reverse sort of way, the continual sort of 2 years in a row as far as I'm concerned, May a year ago, that sort of lack of confidence in the market. May this year, the lack of confidence in the market, which were perpetuating. It slowed down, really, what I have thought and probably all of us thought would be sort of movement out of cash and fixed income into equities. And each time, there's been a blow back when investors have lost confidence. That's actually probably helped us longer term, right? It has allowed us to have the wholesalers get in other territories, because they were -- more than half of them were new in different territories and for us to get more capabilities on the platforms and the like. So longer term is probably a better thing, but again, you've not seen that turn. And again, I think as Loren talked about, a very concerning thing I think probably for all of us in the United States and probably other parts of the world. What's going on in Washington is just not very helpful right now, and it has definitely negatively impacted investor sentiment. You can see it in the marketplace. And the good news is what a great buying opportunity, but that said, I do think once it turns, we just continue to get better and better positioned against the capabilities that we have.

Just a little bit more color. I mean, the one thing that we have working for us very strongly even with most of our mutual fund product being centered on equities, UITs and PowerShares, products are more balance between fixed income and equity capabilities, and those have been consistent. We have seen flows, positive flows, in each of those areas for every single quarter for I don't know how many quarters in a row. So that continues to be a very strong theme. And again, we know both of those products are -- and I'm talking about traditional PowerShares products, very profitable for us. And then in terms of the mutual fund and some advice and SMAs, as I mentioned earlier, every quarter that we've seen since Q3, our redemption or our net outflow number on that product has been improving significantly, where it's almost gone in half from going from Q1 to Q2 of this year. So we do see the trend. It's very obvious to us in terms of the net outflow, improvement of the trajectory on some of those core things despite all this volatility that we're seeing on equity products.

And Ken, again -- and I'm just understanding your question, but -- and I can't remember how you phrased that one point. But if you look at the building blocks of the organization, if you look at the breadth of the investment capabilities; you look at the performance of the capabilities; the placement of the U.S. core retail business, what the ETFs, UITs are doing; what's happening to the institutional business in the United States; the success of alternatives, quite frankly, moving around the world; the progress we're making in Europe; the strength in the U.K.; what's happening in Japan; what's happening in the greater China for us; Canada, really quite frankly, the investment performance really starting to turn in a very real way, which has kind of positioned us differently there; and the ETFs in Canada and frankly, some emerging early day success in Canada too, very strong building blocks. We do need a market environment to help us, but that said, I think the company has positioned itself very, very well for some real good success.

Our next question does come from Craig Siegenthaler from Credit Suisse. Craig Siegenthaler - Crédit Suisse AG: Representative Berkley is introducing a bill to allow Invesco and other multinational companies to repatriate foreign earnings at a lower tax rate. I'm just wondering how much excess cash do you actually have outside of the U.S. And is this something that you could use?

I guess, Craig, good question. I think it won't really directly affect us because of our Bermuda domicile. So we have no constraints, in terms of tax considerations, about bringing dividends back in terms of worrying about what that means for the dividend being taxed. So it's helpful probably for U.S. global asset managers but not relevant to us. We continue to bring back dividends from the U.K., from Europe, from Asia. And again, we get taxed on our earnings based on where those earnings are generated, so not really a topic for us. Craig Siegenthaler - Crédit Suisse AG: Okay. Then just real quick on capital management. Given the increase in debt this quarter, should we really view this as kind of peak debt for Invesco and looking kind of future cash flow, probably some of it being diverted to reduce these levels? How should we think about the -- kind of the mix versus debt and excess cash?

Yes. I don't want to commit entirely, but I'd say yes. I mean, generally, that's the right approach. We have temporary spiking up the leverage due to, as I mentioned, sort of this timing of when we bring back the cash from the U.K., and so that will bring down the ratio. And again, I think we are still quite focused in wanting to have the balanced sort of approach to paying down the credit facility. So I would say in principal, absolutely.

Our next question does come from Jeff Hopson of Stifel. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.: Okay. So first question, stable value, can you give us the flows for this quarter? And then Europe, you did see improvement in flows in the quarter. Can you give us any background on that? I believe I saw that in May, Invesco, on the equity side, was particularly strong. Can you confirm that? And just talk in general about flows this quarter.

Okay, let's see. I'm looking around for stable value here. Hold on. I think that probably, we've got some but maybe not as quite as strong as what we saw in the first quarter.

Maybe a couple comments just generally in a more macro level. Stable value, we find ourselves in sort of a pole position, and the gaining factor has been more the insurance wrappers than anything else. The demand is high, but the flows in the quarter were probably less than what they were in the prior quarter simply because of the wrapper element. And again, in these -- the more macro comments, the -- we did see ourselves, as I said, as a net flows on the continent, in the top 10 in the last quarter and where we are seeing a lot of the flows where the European equity product on the continent, which has been a good performer in addition to what has been the European bond product. So I don't have specific numbers, but you're right. Those are the themes, and that's what's been driving them.

Yes. And so in terms of stable value, again, I think you're going to have to take sort of a range right now, somewhere between $500 million to $1 billion. We're still looking to confirm, because some of it comes through the DC side, some of them institutional. So we have that together some numbers that I just don't have in front of me.

Our next question does come from Dan Fannon with Jefferies. Daniel Fannon - Jefferies & Company, Inc.: Marty, you talked about a lot of different growth opportunities. And I was just wondering, as you look at all your different businesses or products, are there any that are subscale or potential brands that you might look at that have limited growth opportunities that you might look to exit at this point?

Yes. I wouldn't say that's the case anymore. I mean, there's always areas that you're -- but it's more on a product-by-product basis. And if you look at what we've been sort of focused on and accomplished over the last 5 years, it's -- we feel very, very good about what's out there. But again, there's always areas in the product range that we will -- if we can conclude they're not competitive, we will merge them, and we're pretty well done with that in the United States. There's probably a handful more that we might look at. And in a year or 2, in the Continental Europe, there's some -- that's part of some of the activity that's going on right now with the different domiciles that we have there, one in Luxembourg, one in Dublin. And probably, that range, we'll do some more work on, but again, that's probably too much detail. But we think we're in positioned very well that way. Daniel Fannon - Jefferies & Company, Inc.: Okay. And then looking ahead, Loren, as we look at expenses on the non-GAAP side, is there anything that you see in the second half of the year that might be a one-time or something we should be looking at in terms of for a modeling perspective?

Nothing off hand. I think, Dan, we're -- the ones that we highlighted are the big ones related to the outsourcing. By far and away, that's the big one. Anything else is probably just noise and nothing that I can really tell you about.

Our next question just came from Robert Lee of KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc.: Let's see. I guess, kind of most of my questions were asked. But real quick, I'm just curious on the outsourcing of the European TA. I mean, it seems a little counter to, I think, my impression of what you guys have been doing the last 5 or 6 years with creating the centers in India and I guess up in Canada.

Yes. Robert Lee - Keefe, Bruyette, & Woods, Inc.: And since TA is usually a big chunk of what gets kind of outsourced, geographically at least, I mean, why outsource in the European TA to, I guess, I assume to the third party? Does that somehow mean that the scale you can realize in the rest of the business isn't going to be at the margin? Is it a crazy thought? I'm just kind of -- it seems like a little -- again, a little different than what you've done with other TA operations.

That's an excellent question, and our view is this. I mean, our general instincts are we want to control -- make sure we do a great job for the clients and in particular, the client interface side. And again, we'll continue to be very high quality in what we provide to the client. So that's not changed. But part of this is our read of what is some of the possible outcomes in the regulatory environment in Europe. And again, there's not absolute conclusions, but if some of the proposed regulation goes through, it will put enormous pressure on the existing business model and the business model of a relationship between -- of money management firm and a individual investor or through their financial intermediary, which could put just tremendous pressure on that traditional per-account charge and who's going to carry the burden and who's going to take the regulatory responsibility for some of the know-your-client type activities and the regulatory environment that's coming with it. So we did do -- we're down the path doing something different, but we thought it was uncertain enough that we wanted to get ahead of the whole thing. But again, we're still committed to making sure that the client relationship is a very, very good one and a positive one. Robert Lee - Keefe, Bruyette, & Woods, Inc.: Okay. Maybe not -- to back to maybe Slide 9, I just -- we talked about retail sales. Just want to make sure I -- looking at this, the Q2 2010 made in gross sales redemption net, that's pro forma for the Van Kampen acquisition. Is that correct? Because the spike in sales and redemptions is pretty dramatic year-over-year, and I'm just curious how -- you kind of talked about this a little bit, but how much of that kind of big jump in sales was driven by -- and redemptions is driven by the ETF business, which seems like it's in there ex-QQQs or the retail business? Because the year-over-year jumps are pretty dramatic.

Yes. I think -- so the 2Q 2010 has only 2 months of -- or one month of the pre-close situation. So think about only one month of the Van Kampen Morgan Stanley products being included, whereas 3Q has obviously 3 full months of it. So sales will grow. Obviously, redemption will grow, because the base of assets have grown at that point. So it's really just more of a mechanical formulaic saying as opposed to sort of looking at it and saying, "We're suddenly selling a whole lot more." It's just the franchise got bigger at that point. Robert Lee - Keefe, Bruyette, & Woods, Inc.: Okay. So it wasn't pro forma for the whole Van Kampen?

No.

Our next question does come from Jonathan Casteleyn of Susquehanna.

Just wondering if you see any impact of a U.S. credit downgrade on any of the money fund businesses, either stemming some of the inflow trends you're seeing or anything at the fund level that could be troublesome?

Let's see. I -- at the fund level, again, I think ourselves and other providers are very much on top of that, and we don't see that as a topic. And with regard to the fund flows, I think what we've seen and others, it still continues to be a very highly thought of product, and I don't see it being negatively impacted during this environment.

Okay, and that's helpful. And then just, obviously, you're cash flowing at a level you feel very comfortable buying back your stock. Could you just remind us of your debt maturities? And then any prepayments scheduled? Does that apply to those if you were to early retire some debt?

Yes. So the next one is April 2012. It's $215 million. The next one after that is February, and that's 2013, and that's for $334 million. And then the final one is December 14 -- sorry, December 2014, and that's $197 million. And there is no provisions for prepayment, so you should assume that they're going to be with outstanding through maturities.

Our next question does come from Marc Irizarry of Goldman Sachs.

Great. Just on the institutional outflows for a second. I know activity might have been a bit slower during the period, but it looks like some of the momentum that built there might have slowed. Marty, anything going on regionally that you're seeing in the institutional business? Or is that just sort of a function of a more subdued environment? Because it looks like some of the gross inflows in the institutional slowed a little bit?

Yes. It's more timing than anything else. I mean we just continue to -- as Loren talked about, RFP activity continues to be very, very active, from RFP activity to success. I mean, it's at the lead time if you win in the finals or not. So it's more of a reflection of the lumpy nature. But again, I would suggest that in the U.S., I'm feeling we've got great leadership and really good, good traction building. We're very early stages in Canada from a standing start, where we think we'll see success there. Continue to do very well in greater China. Japan actually received some very good activity. On the continent, again, we continue to see activity in the U.K. So it's really been pretty broad based, so it's more timing than anything else.

Yes. I think we got some real state wins in Canada after our big push there. So that's encouraging.

That does conclude today's conference call. Thank you for participating.

Thank you very much, everybody.

Thank you.

And we'll talk to you next quarter.