Invesco Ltd (IVZ) — Q1 2019 Earnings Call Transcript

This presentation, and comments made in the associated conference call today, may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, geopolitical events and their potential impact on the company, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products or other aspects of our business or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future 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’s 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.

Thank you very much and thank you everybody for joining us. Today we will cover the first quarter results as we typically do. We will spend some time on investment results during the quarter, and provide an update on the OppenheimerFunds combination, and then we will open up to questions. The presentation is available on the website, if you're so inclined to follow. I'm going to start on Page 5 and just make a couple of comments before turning it over to Loren. Assets under management rose more than $66 billion from the fourth quarter, ending the quarter at $955 billion. We saw net flows increase nearly $22 billion from the fourth quarter resulting in long-term total net inflows of $3.5 billion. Investment performance rebounded very strongly from the fourth quarter, which we expected in the type of market we've seen post-2018. A combination of these factors resulted in adjusted earnings per share increasing by 27%. So in summary, the quarter marks a marked improvement compared to the fourth quarter of last year. Also during the quarter, we made significant progress on the integration at OppenheimerFunds. We anticipate closing now on May 24th. We expect to recognize 85% of the $475 million synergy target by 1,231 of this year, resulting in $0.24 of accretion in 2019. Most importantly, this combination will be extremely beneficial for our clients and shareholders. With that highlight, I am going to turn it over to Loren to cover the financials.

Thanks very much, Marty. So on Slide 6, you'll see a summary of the results for the first quarter, with 51% and 57% of actively managed assets in the top half of peers over the three and five years. Our one-year numbers improved by nine percentage points versus the prior quarter to 50%. Greg is going to go into greater detail on the performance later in the presentation. Our total long-term net outflows were $5.4 billion in Q1, which was an improvement of nearly $15 million compared to the prior quarter. This improvement was largely driven by stronger ETF flows globally and a significantly improved redemption picture across both retail and institutional channels. Our adjusted net operating income was $284 million for the quarter, down from $300 million in the prior quarter. This decline drove our adjusted operating margin down 0.6 points to 0.32% in Q1. We've returned $170 million capital to shareholders during the quarter through $120 million of dividends and $50 million of share buybacks. Additionally, we announced a 3.3% increase in our dividend this quarter to $0.31 per share. An overview of our long-term flows can be found on Slide 7 with additional detail on the flow highlights from the quarter on Slide 8. The net flow picture improved in the first quarter across both active and passive capabilities and across all channels. The redemption rates normalized while sales levels remained generally strong for the firm as a whole. Our institutional pipeline grew about 6% quarter-over-quarter with new funded claims in mandates across real estate, stable values, fixed income and quantitative equity products. In the Americas, we saw institutional net flows improvement as we gathered more than $2 billion in Direct Real Estate. While outflows continued in our U.S. retail equity products, we did see marked improvement in redemption rates resulting from stronger investment performance as well as more stable markets. Global ETFs displayed renewed business momentum in the quarter with more than $4.2 billion in net flows and market share gains in multiple regions. In the U.S., we saw more than $2 billion in ETF flows for the quarter, followed by the S&P low volatility suites and the bullish share ETFs. In Europe, our ETFs also experienced improved net flows across both equity and fixed income products, resulting in net inflows of more than $2 billion. In Asia Pacific, we saw strength in sales across several fixed income capabilities; however, the net flow results in the quarter were impacted by a single client redemption of the bank loan mandate. I’d also note that we benefited from continued flows into our Great Wall JV money market products with more than $3 billion in inflows for the quarter. Let’s turn to Slide 9 next, and you’ll see our assets under management increased by $6.6 billion or 7.5%. This primarily reflects the impact of positive market returns, offset by long-term outflows. Our net revenue yield, excluding performance fees, dropped 1.5 basis points to 37.1 basis points. The dip in the fee rate was primarily due to two fewer days in the quarter, with the remainder of the decline driven by a change in AUM mix. Slide 10 provides the U.S. GAAP operating results for the quarter. My comments today, as historically we've done, will focus on the variances related to non-GAAP adjusted measures, which we found on Slide 11. For the non-GAAP results, net revenues decreased by $32.1 million or 3.5% quarter-over-quarter to $887.1 million. This decrease reflects the reduced day count and lower average long-term AUM for the quarter. Our adjusted operating expenses were $602.8 million, decreased by $16.4 million or 2.6% relative to the fourth quarter and were largely in line with the guidance that I provided last quarter. Despite the positive snap back in the market in Q1, we maintained the expense discipline outlined last quarter, and we will continue to focus on expense management in the current operating environment. The expense decrease quarter-over-quarter was driven by lower marketing and G&A expenses, both of which were particularly high in the fourth quarter. That was offset by the seasonality of taxes and benefits that increased compensation expense in Q1. Our adjusted non-operating income increased by $73 million versus Q4, largely reflecting the positive mark-to-market on our seed investments during the quarter compared to negative market movements in the fourth quarter. The firm's effective tax rate at 23.8% was elevated by approximately 3.5 percentage points reflecting the impact of annual share awards vesting in the first quarter. We expect our tax rate to decline to between 22% to 23% after the Oppenheimer close. This brings us to an adjusted EPS of $0.56 and our adjusted net operating margin of 32% for the quarter. Now I’m going to turn it over to Greg, who will talk about investment performance.

Loren, thanks very much. There are three things I wanted to cover on my top-level review of investment performance in the next four slides. First, I’ll provide an update regarding Invesco’s performance improvement that builds on our expression from last quarter’s earnings call. Second, I wanted to highlight performance improvement at OppenheimerFunds. And third, I’ll review performance on several key investment strategies for both Invesco and Oppenheimer. If you turn to Slide 13, you’ll see both Invesco and OppenheimerFunds' one, three and five-year performance on a pure relative basis based on total assets under management for each firm. As you can see from the top of the chart, Invesco's long-term performance remained strong with 57% of our actively managed assets in the top half of their respective peer groups on a five-year basis, with 38% in the top quartile. At the bottom of this chart, 60% of OppenheimerFunds' total assets were in the top half of peer groups on a five-year basis, with about a quarter in the top quartile. These results on both an individual and combined basis highlight our long-term focus and the high-quality nature of our investment teams. Now let's look at performance improvement for both firms on a quarter-over-quarter basis. As we become evident on Slide 14, both firms reported significant quarter-over-quarter improvements in performance in total U.S. mutual fund assets. These charts show three-month performance on a peer relative basis at the end of the first quarter of this year compared to three-month performance at the end of the fourth quarter of 2018. 76% of Invesco's mutual fund assets were in the top half of peers at the end of the first quarter compared to 40% at the end of the year, an increase of 36 percentage points. In a similar vein, 72% of OppenheimerFunds' mutual fund assets were in the top half of peers at the end of the first quarter compared to 8% at the end of 2018, an increase of 64 percentage points over this period. It's worth noting that Invesco maintained a solid proportion of its funds in the top quartile, while Oppenheimer improved its assets in the top quartile from 5% to 35% between these two time periods. While this performance is short-term in nature, the chart shows the significant improvement in peer-relative performance over this period for both firms, and is indicative of an ongoing trend of improving performance as well as the strong desire of both firms to drive strong investment results. Now let's examine performance over a longer period as well as performance improvement from notable funds for both firms. If you could please turn to Slide 15, I wanted to provide a couple of touch points that highlight performance improvement from November 2018 to the end of March 2019 for Invesco. The upper left-hand portion of this slide shows Invesco's performance improvement in the top half of peer groups increased from 11% to 44% on a one-year rolling basis. We used November as a time period for consistency, so that was used in last quarter's earnings call and we thought it would be helpful for ease of comparison. We have also seen significant improvement in the performance of several of our largest mutual funds. Over this time period, we improved the number of our 16 largest funds in the top half of peers from one at the end of November to seven at the end of March 2019, as shown at the bottom left-hand portion of the slide. To illustrate this point, we've shown material improvements in the one-year peer-relative rankings for several notable strategies as highlighted on the right-hand portion of this slide. Many of these strategies experienced significant flow challenges over the past year. Let me highlight a couple of these improvements: Diversified Dividend moved from the 84th percentile to the 43rd percentile, high-yield units from 64th to 33rd, international growth from 66th to 32nd percentile, and balanced risk allocation from 70th to 45th percentile. We continue to size the mutual fund assets in each strategy on the right-hand side, which combined, represent 26% of Invesco's total U.S. mutual fund asset base. I’d now like to share the results for OppenheimerFunds' mutual fund assets using the same methodology and time period as we move to Slide 16. The peer relative performance for Oppenheimer’s mutual fund assets remained strong and stable in total, as well as for several of their key strategies on a one-year rolling basis. The upper left-hand portion of this slide shows performance in the top half of peer groups on a one-year trailing basis remained solid at 53% at the end of March 2019, up slightly from 51% at the end of November last year. As expected from these numbers, the total number of their 16 largest mutual funds in the top half of peer groups remained about the same over this period. The following observation can be made when drilling into some of OppenheimerFunds' notable strategies on the right-hand portion of Slide 16. On a one-year rolling basis at the end of November 2018 and March 2019, developing markets continued to deliver superior results for clients by maintaining performance at the 13th percentile for each time period. Main Street large cap core improved from the 79th percentile to the 32nd percentile, and International small and mid cap maintained outstanding performance at the 4th percentile for each time period, and Rochester High Yield Muni also maintained outstanding results for clients by delivering 2nd percentile performance for each period as well. You can also see the size of mutual fund assets here for each strategy, which combined represent more than a third of Oppenheimer’s U.S. mutual fund asset base. Let me wrap up this section with a couple of high-level summary points. Performance in aggregate is strong and improving at both firms. Performance in the largest mutual funds is improving or remaining solid at both organizations. We’re extremely excited about this performance improvement and are working hard to ensure this performance will continue. We believe that the combination of investment capabilities from OppenheimerFunds with Invesco will create a truly unique all-weather portfolio across passive, active and alternative capabilities to better serve the various needs of our clients. These firms will have a broad set of complementary capabilities in the industry, which we believe will drive stable long-term investment results and provide greater sources of outflows to better align with clients across the globe and in different channels. This is exciting for us and for our clients as we continue to focus on delivering strong performance that helps them meet their long-term investment objectives.

Thanks very much, Greg. As Marty mentioned, during the quarter, we made significant progress towards the integration of OppenheimerFunds. We've highlighted a few of the key activities completed to date on Slide 18. I'm not going to spend too much time here, but I just wanted to say that we’ve completed a process of defining the leadership teams and the organization for the go-forward business, and we're making significant progress obtaining fund shareholder approval for each of the funds that we’re bringing over. Finally, I should mention that a key area of focus between now and May 24th is to ensure that the combined sales teams are ready at close to execute a single transition and provide enhanced experience for clients on both sides. Next, let me provide a quick update on our deal economics based on the information effective by the end of March, which reflects a May 24th close date, full clarity on the timing of synergies and current levels of AUM. And for those of you following along, I'm now on Slide 19. We now expect to recognize, as Marty mentioned, up to 85% of the cost synergies by the end of 2019, which is earlier than originally anticipated. The estimated ETFs accretion numbers for both 2019 and 2020 are now estimated to be $0.24 in 2019 and $0.58 in 2020, similar to the way we showed this in Q4. These accretion numbers are calculated looking at the combined firms relative to Invesco on a standalone basis, assuming no Oppenheimer combination were to take place. The updated IRR for the deal is now expected to be 17%. By the end of 2020, when we realize the full impact of the $475 million of synergies, Oppenheimer will add more than $900 million in EBITDA. The combined firm will have an operating margin in excess of 41% and the annual EBITDA of the combined firm will be more than $2.6 billion. Other than the update to reflect current AUM, the May 24th closing date and the timing of synergies, our expectations have not changed regarding the total amounts of the synergies, the integration costs or slower revenue assumptions for Oppenheimer post-close. Let me next turn to review what the financials of the combined firm will look like. On Slides 20 through 22, we provide a pro forma look at the financial position of the combined organization. Slide 20 shows the combined organization’s run rate, net revenues and net revenue yield after the combination. Again, this is based on March 31st information. The combined firm will have a net revenue yield, excluding performance fees of 41.5 basis points after the close, and estimated annual adjusted run rate net revenues of nearly $4.9 billion on a pro forma basis assuming assets are flat to the end of March levels. Next, turning to Slide 21, you'll see the pro forma view of the combined expense base before and after the full cost synergies are captured. After the impacts of the full $475 million in cost synergies, the combined organization would have approximately $2.9 billion in annual adjusted run rate operating expenses. Once again, I'd like to point out that this run rate assumes that AUM is flat to the levels of March 31, 2019. The $475 million in cost synergies represents approximately 14% of the expense base of the combined firm. As we discussed last quarter, this expense reduction is directly related to the inherent benefits of scale of this deal as we will leverage a single operating platform for the combined businesses, manifested in the areas of the middle and back office, enterprise support, technology and distribution in particular. Slide 22 provides further detail on the synergies, including a breakdown by line item and quarter of realization into the run rate. As you will note from the chart, we expect to recognize roughly 50% to 55% of the cost synergies by the end of the third quarter. Additionally, by the end of 2019, we will anticipate capturing approximately 85% of the synergies, or more than $400 million in run rate savings. You will remember that we had previously guided capturing approximately 75% to 85% of the synergies by the end of the first quarter of 2020. The progress we've made to get the go-forward team in place and the integration work that we have completed to date has positioned us to deliver on the higher end of our original target range in one quarter earlier. Remaining synergy capture, which largely represents property and office-related costs, and the remaining compensation synergies will come in over the following year so that 100% of the synergies should be captured by the first quarter of 2020. In subsequent quarters, we will continue to provide you with updates on our progress against these targets. And now with that, I will turn it back to Marty.

Thank you, Loren. As we've discussed on previous calls, what truly makes Invesco unique is the combination of the leadership we have in core markets and our ability to continue investing in high-growth areas. Our strategy remains unchanged. The combination with Oppenheimer meaningfully accelerates our strategy of expanding leadership in core markets, particularly in U.S. wealth management, while strengthening our ability to execute in high-growth areas we focused on in the past, including China, ETFs, and multi-sector solutions. This approach is helping us deliver on a lean set of capabilities, which will drive sustainable and broad-based growth aligned with where our clients are and where the industry is heading, while further benefiting shareholders. The addition of OppenheimerFunds will create a $1.2 trillion global investment manager that provides significant benefits to both clients and shareholders. The combined firm will be the 13th largest globally and the 6th largest investment manager in the U.S. wealth management channel, and importantly, provide greater scale and client relevance to further expand our comprehensive range of capabilities in a number of highly differentiated investment capabilities. We’ll provide compelling financial returns to shareholders, as Loren pointed out, and opportunities for growth from day one post-closing. We’re very confident in our plans to bring the two organizations together. We could be more excited about the tremendous potential of the two firms and the benefit for both clients and shareholders. With that, let us stop and open it for questions.

Operator, will you open up the line for questions?

I guess, I think you guys have gotten some comments about this as we have around leverage post the transaction. I wanted to talk about how you’re thinking about capital post-close? How we should think about maybe net debt considering, obviously, the long-term bonds you could pay, but they aren’t necessarily as really callable or as financially attractive to do that. So just wanted to understand your thoughts on leverage and excess liquidity over the next 12 to 24 months?

I’ll pick that one up. So, good question. Given the continued improvements in markets and our AUM levels, we actually feel comfortable maintaining our plan right now, our current capital plan, which as you know, sort of suggests that we’re going to buy back $1.2 billion of our stock by the end of Q1 2021. However, I will say, Dan, we will continue to evaluate both the timing and the pace of the buyback in light of, obviously, any subsequent market actions as well as any significant shareholder inputs. Again, we feel that both firms are continuing to strengthen in this current market, and the combined firms are going to be stronger and more effective together than they are currently right now.

Got it. And then just in terms of kind of the flow picture, I recognize some of the performance improvements you guys are talking about. But, obviously, flows for the first quarter are typically better for the industry, and we saw that improvement with you guys. If we think about kind of the combined benefit and the distribution efforts, how quickly do you think you’re able to start to manifest an improvement in the net organic growth rate as you kind of go through this integration?

Yes, Dan, this is Martin. Let me start with this, and Loren has mentioned this. So what now is in place on the distribution side is all the leadership is in place and everybody in the go-forward organization is placed and notified and already been trained, and is focused on the day after close to make an impact in the field with clients. We've done this in the past, and I think it will be better than we have done historically; the talent is representative of the best talent from both of the firms. So we'll have better talent and more resources against distribution than we ever had before. So that's where I would start. I think you are right, historically, the first quarter is one of the strongest flow quarters. And we saw quite a bit of change ourselves. But let's remember, coming out of 2018, in the fourth quarter, in particular, people were not very confident about where the markets were going, which really slowed relative to the uptake. We're continuing to see increased demand globally. Loren pointed out, in particular, we're seeing improved flows from our ETF business, which we would anticipate. Again, Greg pointed out we're seeing a marked improvement in our equity investment performance, which we expect because we intended to have a value bias, and that really hurt us last year. So we’re seeing strong performance. All the leading indicators suggest we're heading in a very good direction and quickly.

I just got to know, MassMutual better. How are the conversations going in terms of cross-marketing? It seems like you're going to be hitting the ground running in terms of the cost synergies from the deal. To what extent can this team be set in terms of revenue synergies and cross-marketing?

Ken, great question. We were very specific to focus on what are the financial outcomes that we're delivering right now. The vast majority of people following the company, that's really all they wanted to hear. Now, the reality is we have great conversations with MassMutual. We are making good progress. We will update people at the next call on the go-forward revenue opportunities across the organization, just not limited to MassMutual. Again, our definite scale benefits here have to provide for us a very strong firm with greater capabilities and greater upside in revenue opportunities that meet client demand. So we're not ignoring it; we're just responding to what has been the very specific focus of you and other analysts following the company right now.

And then can you talk about the sales environment in the UK? Given Brexit has been pushed back, but it’s still an issue and given current performance, what is your outlook for the rest of the year or the go forward here in the UK? I think you called out the big GTR redemption in the quarter, given the performance track record there. What is the outlook for this strategy and the assets?

Yes. Ken, very good point. When we look at the fundamental strength of the organization, the UK and EMEA, in particular, last year became a headwind as Brexit became very real. If you just look at retail flows across the continent and the UK, the industry level dropped like a rock. Investors went absolutely risk-off, which hurt us quite a bit. It continues to be a risk-off environment. Brexit is a headwind. I don't think anyone can answer when that’s going to happen. So I don't have a specific timeframe. Obviously, we anticipate marked improvement in inflows post any decision. As for GTR, the performance has been improving, which is very good. As you know, it’s been a very successful capability for us, but as the relative performance waned last year, it did slowdown. We look forward to improved performance going forward.

Just a quick follow-up to Dan’s first question. All of that commentary would suggest an increased willingness to delever post-deal. Are you kind of the same willingness or lower willingness to delever versus repurchase?

I mean, I think we’re open to it. We feel very comfortable with the financial leverage that is effectively part of the preferred in light of the strong operating EBITDA that we’re going to be generating through the synergies and with the combined business, with close to a billion dollars of EBITDA coming on board post-synergies relative to the coupon. It does not really present in our mind a significant financial risk, but it is one that we continue to listen to shareholders. We certainly believe there is a little bit of work to be done just to make it clear kind of our perspective on the financial risk associated with the preferred, which is again, non-cumulative. It doesn’t have a call until the 21 years, and there is no principal repayment.

And then on the flow picture, what about the GTR redemption mix? Do you feel like it’s one-time? How much more exposure do you have to bank loan clients in Japan? On a more broader note, could you speak to more detail on how the April flow picture is tracking?

In terms of GTR, we're getting wins on GTR. There are a couple of potential ad-risk accounts as well. In terms of size, there doesn't seem to be anything quite of the same magnitude that we saw in the first quarter, but it's a big pool of assets, and there could be further determinations. But we’re defending it well, given what Martin mentioned in terms of performance having improved. So again, we’re watching that closely, but nothing that we know of is depending. Concerning Japan and bank loans, there’s still probably some potential outflow that we see nothing significant; it could be an aggregate of about $0.5 billion issue in that time. We're continuing to do solid client engagement with those clients. Ultimately, I think we’re seeing a strong sales pipeline that could offset some of the outflow associated with that particular category. Again, the bank loan category just in general has been an outflow, which is nothing unique to our capability. It's really just been the lack of interest in that segment.

I think it’s interesting enough in Japan outside of one client. There's been some increased demand. We’re seeing quite strong interest in the pipeline even in Japan for bank loans. The performance of that strategy is incredibly strong, and most of that stuff is separately managed accounts. However, there's also big buyers of what we do on the CLO front that also coincide with the interest in bank loans overall. We'll have to see; we think the worst is probably behind us from a flow standpoint.

Thanks. Good morning. Just on the net flows, you saw improvement in the quarter, some seasonality in environment, but even if you look over the past three or four quarters, it's a good level of improvement. It still seems like the redemption levels are a bit elevated, close to breakeven. When you look at what's driving that, whether it's on the RECO side or the institutional, you called out the GTR and then the bank loan, but is there anything else weighing on the redemption that you think can start to improve as we get later into 2019?

Let me just make a comment for some perspective from our point of view and then Loren can get specific. Last year, if you looked at the fundamental strengths of the organization, we would say it's the UK, the continent, Asia-Pacific, and a number of the capabilities that Greg highlighted here in the U.S. All of that led to a nine-year net flow before last year. Brexit became a tremendous headwind for us as an organization last year, and at the same time, the trade war became quite a headwind in our Asia-Pac business in this risk-off environment. Finally, our value bias in some of our equity capabilities in the space where bank concentration really hurt us. So all three of those lining up at the same time was something that we wouldn't have ever imagined could happen. What we're seeing coming out of it is really improved performance because of the market. The pipeline continues to grow. But there is an absolute focus on the redemption side for us as people are assessing their sort of risk-off posture or entering the market. Everything we're seeing in interactions are as strong as they’ve been over the year. So we're very happy to leave 2018 behind, and it looks like heading in the right way.

Yes. I wouldn’t add much more to that. I think on the institutional side, obviously, there have been one-off redemptions. There have been large ones, and we’ve seen them in the fourth quarter. The idea that we're going to avoid any large one-offs in the future is probably unrealistic. But we do see the pipeline strengthening significantly, as I mentioned. They were up about 6% quarter-over-quarter with probably about 15% year-over-year improvement on AUM as well. Revenue mix in terms of what is coming in relative to what's going out is superior, so all those dynamics are very positive from a flow perspective. You can certainly focus on the absolute numbers of the flow amounts. But when you actually look at the revenues, that is what I am most focused on, and I think we’re seeing continued interest in products that we really have great capabilities in that are higher fee. Certainly, with Oppenheimer coming on board, that is another feature. There’s always been continued thought about the fee rate on Oppenheimer being at risk. And when you look at Oppenheimer’s fee rate, all the way back to 2011, I mean it’s only increased, and it’s been steady for the last six years. It has not been a topic where the fee rates have been challenged. So our opportunity to slow at a reasonable rate with good economics is something that we’re focused on post-transaction.

One thing I’d add may be just to focus on outflows for a second. This is a real positive story. I think our gross flow picture is remaining very, very strong, particularly in a couple of key markets. But the redemption picture to the question is spot on. We’re also seeing that redemption begin to decline. If we can focus; what I mentioned is really important, and we're actively working on minimizing redemptions while driving investment performance. We don’t have these one-off events. That’s kind of the flow trajectory, but I think we could see a net basis improve going forward.

All that color is helpful. And then just a quick one on the Great Wall JV, given the strength you’re seeing in the money market. Is there an update on how you can broaden that relationship? Or what would get more of the long-term product flows in over time?

Look, we are incredibly uniquely placed in China. As you know, we are the only foreign manager that has a financial network, and it is broadening into other capabilities. We started with a very specific need around money markets that’s going to slow down here for a quarter or two as we’re going to be introducing more money funds to that and broadening the channel. We’ll get into further detail in the quarters ahead. The rate has just come out in China, and we are right as the number two successful firm in China as a foreign money manager. We're very well placed, and that platform is just one of many. We're seeing almost half of our retail flows through this joint venture coming through their e-commerce channel. So that is the future for us. We're continuing to be very well placed, and this will continue to provide proportional growth for our organization.

Maybe just to start off with the cost save side of things. Thanks for all the granular detail. But as I asked this before a couple of quarters ago, just wanted to get a refreshed view. Marty and or Loren, obviously, these cost saves are back office in nature. What are your thoughts about potential product rationalization? Last time you said as you get into the deal, you may revisit that. So some updated thoughts there? And then what portion of the combined sales force was cut?

Yes. To reiterate with regard to product rationalization, that's something we do on an ongoing basis. We have to be very clear that we have not been able to focus on a lot of client rationalization while the proxies are in the market. We have no insight to pass on to you. What I will say is, the vast majority of the capabilities are supplementary. We don't see an awful lot of rationalization there. It'll be on the margins and it is not disruptive to clients, which is really important to us. We wouldn't have done the transaction if we thought it was. But again, that will turn our attention to that after closing, and we will grow as rapidly as we can with that.

We've provided, obviously, the percentage of the synergies that are coming from sales and distribution in the last call. That level of detail in terms of what we're doing is really the most we want to provide at this point, Brian. Hopefully, you can pick up on that. But we feel that a combined sales organization is going to be stronger clearly than what each of us individually had. We're going to be able to invest in areas that each of us has not been fully able to invest in with great results, brand innovation, thought leadership, and practices around education and client engagement that are going to be superior to our individual capabilities.

Okay. Okay. That's a good take to the revenue synergy side. So I don't know if this has been asked before. Maybe just more specifics on the plan for branding. Are you getting with the Oppenheimer name or keeping it for a while? And then on product creation, given that there is opportunity, if you create new products for existing mutual funds on the Oppenheimer side, especially, what are your initial thoughts there? And also whether you would license the upper city in active ETF; may just hear thoughts on the approval of that active non-transparent ETF?

Yes, a lot of questions, Brian. With regard to product capabilities focusing on Oppenheimer, we said they are very complementary; the vast majority of capabilities are in the U.S. wealth management channel. There are opportunities institutionally for several capabilities and retail outside of the United States. There will likely be product extensions into Asia, really off the Emerging Markets team, and the performance is really quite spectacular. Global equity is something that’s interesting to institutional clients outside the United States. So we’re on that same path we discussed in October, and we have greater confidence in that. Regarding the proceeding in ETFs, I think the SEC approval is a good development. I think the other reality is that there is going to be a long tail before that becomes successful in the marketplace. Looking at the totality of the ecosystem, firms that are most likely well-placed will be those who have a strong active capability along with an ETF franchise.

Okay. And then just on branding?

Yes. At close, the combined firm is Invesco. The funds will be labeled as Invesco Oppenheimer for a period of time. Clients will tell us what they ultimately want that to be, but not that will be some time in the future.

Thank you for the helpful realization timeline you shared on Slide 22. I just want to clarify whether the synergies you expect are included in the current quarter or the exit run rate. For Q3, are the costs from now until around July 1 reflecting an annualized synergy of 250 million, which means about 50 million in the quarter itself, or are you exiting at the 930 million run rate?

Yes. It would be the exit run rate that’s the way to think about that.

And Loren, maybe I misunderstood you, but I think when you’re talking about the synergy timeline you earlier here noted that it assumed AUM as flat to 3.31. If AUMs move up or down from here, should we expect the cost saves to change at all or are you just referring to the accretion math overall and the impact on the top line?

It's really related to the accretion amounts and the top line. We’ve been consistent with the $4.75 through different AUM levels as well. So we're not going to change the $4.75 whether markets go down or go up. It’s the number that we’re going to be focusing on and will continue to report on.

Quickly on the net revenue yield and passive sales being like 7% year-on-year and more than that quarter-on-quarter. Is most of that just mix in end markets? Were there any material price changes in the quarter?

It's going to be mix. There’s a substantial amount of non-fee earning AUM in the passive category, like the leverage associated with our mortgage REITs when we do an equity offering that shows up. So that will definitely push those fee rates down relative to what you might see on a quarter-on-quarter basis.

And then one other question on the retail distribution side. There are a lot of changes around how they approach their business and moves towards more portfolio construction. But that has a long tail. So the question I have for you is: what are you doing to capitalize on that change? You’ve got a lot of the tools between your ETF franchise and your diverse product set. Are you seeing big changes? Are you changing in a big way in how you approach that channel?

Yes. I mean, I completely agree with you. Under the banner of solutions, that’s exactly what we’re doing. We are creating models for platforms and working with wealth management platforms where your question was. Also with the big teams, working directly with the big teams, helping with analytics to work within their approved list and what they’re trying to accomplish has been a massive undertaking for us. This is the future. If you don’t have the resources to compete there, you’re at a severe disadvantage. We have a very talented team, and maybe Greg can speak to that.

Yes. We’ve put a significant investment in our solutions team over the last four years. Components include client engagement to really understand the needs from the platforms, as well as the institutional side of what those needs might be. We have an analytical team to create outcomes for them, whether that be in retail where we have model portfolios or elsewhere to modify what they’re doing. We think the retail market is ultimately going in this direction, and we believe that with the solutions capability and what we're doing with distribution, we’ll be extremely well-positioned there.

Just kind of a follow-up. Is that Invesco branded or do you private label that when you deliver the model?

Yes. It's all different, right? It really depends on what client, so it's a full spectrum, which is just fine for us. We’re on an important topic, and we feel very well-placed against where that setting is going. This is a critical area of focus that we have, and it will yield results.

Okay. Thank you very much for taking the question and also appreciate the very specific line on details. It's especially helpful. Loren, may be a question for you just on the, I think, I understand the dynamics driving the higher year one accretion for 2019. What I am trying to understand is where the excess success is coming in the second year, just given some of the statements around some of your underlying assumptions?

Yes. So when we disclosed in the end of Q4 results, we had about $0.53, and that reflects Oppenheimer assets at $214 billion. Currently, Oppenheimer's assets are at $230 billion at the end of March, which provides that operating leverage and earnings opportunity across both years.

And then I don’t know if for yourself or Greg or Marty, just on the gross sales dynamic, it sounds like there are some ins and outs. As you think about geography, asset class, distribution channel, what are the key characteristics of gross sales moving up from here? Is this pro forma or from the full impact of Oppenheimer and leveraging that to the U.S. retail distribution channel? Or is there something else you can do beyond that with the legacy book of business to get the instant franchise accelerating?

A couple of comments. First, coming off what Dan mentioned, the industry and likely investor sentiment in Q4 became distinctly unique with all the sentiment I talked about across different parts of the world. Going forward, it’s really no different. Within the institutional business, we’re seeing more mandates for institutions than we ever had before. China will be another area we’re looking at moving forward. So it’s about blocking and tackling as we’d expect for us. Greg pointed out that over the years our gross flows continue to increase at a strong rate. That’s very important for our health as an organization. We have turned our attention to how to minimize the redemptions and understand that many of those decisions happen overnight. But we’re seeing good interactions and moving toward a positive trajectory.

The blocking and tackling includes marrying demand with capabilities and understanding our go-to-market strategy. We are stronger teams that we’ve built in distribution in most markets. Regarding Oppenheimer coming on board, we’ve done work looking at where capabilities overlap in existing markets and where we can take those capabilities into new ones to reach clients successfully. The solutions capability is another piece. We talked about this previously; there’s been a push toward outcomes rather than just products. We also have a strong chance to engage clients and better solutions through our resources.

Okay. Just as a point of clarification, I think one of the questions was about April flows, and I apologize if you shared that number. But if you can just repeat what that was or?

We didn’t actually share the numbers. So moving forward, we won’t ramp up discussions about flows into the next quarter or so. We’re going to keep our commentary to March ending quarter, so my role will be having our April AUM released. We’ll see those numbers as we move forward.