Richard Weil - Chief Executive Officer Roger Thompson - Chief Financial Officer.

Ken Worthington - JP Morgan Alex Blostein - Goldman Sachs Simon Fitzgerald - Evans & Partners Patrick Davitt - Autonomous Research Robert Lee - KBW Chris Harris - Wells Fargo Brian Bedell - Deutsche Bank James Cordukes - Credit Suisse Patrick Davitt - Autonomous Research.

Good day. My name is Karina and I will be your conference facilitator today. Thank you for standing by and welcome to the Janus Henderson Second Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

In the interest of time, questions will be limited to one initial and one follow-up question. In today's conference call, certain matters discussed may constitute forward-looking statements.

Actual results could differ materially from those projected in the forward-looking statements due to a number of factors, including, but not limited to, those described in the forward-looking statements and risk factors sections of the company's most recent Form 10-K and other more recent filings made with the SEC.

Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you. Now, it is my pleasure to introduce Rich Weil, Chief Executive Officer of Janus Henderson. Mr. Weil, you may begin your conference..

an alpha generation, in risk management, in great client experience and in delivering simple reliable cost effective infrastructure. In doing all these things, we must, of course, retain our focus on financial discipline, so that we retain your trust and confidence as owners as we continue on our journey.

These are the ingredients for success in my mind, which will guide our path forward. Janus Henderson is a business with great opportunity. Our investment teams are putting up strong results. We are seeing deeper engagement with our global clients, and growing opportunities to develop new relationships.

Our financial results are strong with growing cash flow generation and our management team is committed and determined to deliver growth. These successful and ambitious will take time, but personally, I'm very excited about the quality of our people and the opportunities ahead of us. With that, let me turn it over to Roger..

Thank you, Dick, and thank you for, everyone who is joining us today at short notice. I think the results for the second quarter and for the first half of 2018 can be characterized by four points. First, integration continued to progress ahead of schedule, underlined by today's leadership announcements; second, investment performance remained strong.

As of June 30, 64% of firm-wide assets were beaten their respective benchmarks over a 3-year time period. While slightly lower than prior quarter this is still a good result. Third, we finished the second quarter with $370 billion in assets under management as market gains were offset by net outflows and FX headwinds experienced during the quarter.

Despite the outflows, we're seeing encouraging results for a number of areas in our business, which I'll discuss further a bit later in the presentation.

Both our financial performance remained strong with adjusted EPS with $0.74 and adjusted operating margins at 40%, reflecting the growing economies of scale in our business and our ongoing deliveries synergies. Finally, today, we announced that the Board has declared a quarterly dividend of $0.36 per share in line with the previous dividends.

And we're also happy to announce that the Board has approved the stock buyback program with an authorization to purchase up to $100 million of stock over the next 12 months, further demonstrating our commitment to returning capital to shareholders. Moving to Slide 3, and our investment performance. Overall, performance remains good.

And despite a dip in the metrics at the beginning -- I'm sorry, at the end of June, compared to the other periods presented, the majority of AUM is outperforming benchmark over the 1-, 3- and 5-year periods.

And looking at the capabilities, performance in the constant equity and capability, which is the INTECH business, experienced the biggest change from the prior period.

INTECH's one year performance of 47% of assets meeting benchmark compared to 91% in the first quarter, and the 3-year performance of 25% of assets meeting benchmark compared to 46% in the first quarter. The drop was driven by notable underperformance in June, and disappointing given the strength performance of INTECH over the last 18 months.

Now turning to total company flows. For the quarter, net outflows were $3.7 billion flat compared to the first quarter. While the quarterly result was negative, we are seeing areas of strength across parts of the business, which included significant quarter-over-quarter improvements in the U.S.

intermediary and UK institutional businesses, and a number of diverse mandate wins in the U.S. institutional team across our equity and multi asset capabilities. Additionally, we saw another strong quarter of organic growth, as Dick just mentioned from Australia.

Offsetting these areas of improvements was a decline in flows in Europe and Latin America, which was driven primarily by under performance in several of our largest European equities strategies. Moving to Slide 5, which shows the breakdown of flows in the quarter by capability.

Equity net outflows for the second quarter improved slightly to $1.1 billion from $1.8 billion of net flow in the first quarter. The improvement was a function better flows from our institutional clients in the U.S., Australia and Europe, partially offset by the weakness amongst retail clients in our European equity strategies.

Flows into fixed income were negative in the quarter at $600 million. This is healthy from outflows in our U.S., UK and European channels, partially offset by continued growth out of Australia. Positive equity and net outflows for the quarter were $800 million.

Mult-asset inflows were $500 million in the quarter and improvements over the prior quarter, driven by good growth in the balanced fund, which continued to put up excellent performance, and is ranked first, third, and six percentiles over the 1-, 3- and 5-year periods respectively.

Finally, alternative net flows were negative $700 million, which is improvement over the $1 billion in outflows in the prior quarter. Slide 6 is our standard presentation of the U.S. GAAP statements of income. But I'll turn straight to Slide 7, for a look at few of the financial highlights.

The quarterly results are strong were strong without a lot of movement compared to the first quarter results. Average AUM in the second quarter decreased 2% over the first quarter, driven by the outflows I just talked about our negative currency movements were partially offset by positive markets.

Total adjusted revenue for the second quarter increased 2% compared to the prior quarter as higher performance fees more than offset lower management fees. Adjusted operating income in the second quarter of $191 million was up slightly over the first quarter, primarily as a result of the higher performance fees.

Second quarter adjusted operating margin of 40.1% was flat compared to the first quarter and 41.4% a year ago. Finally adjusted diluted EPS was $0.74 for the quarter compared to $0.71 for the first quarter and $0.68 a year ago. On Slide 8, we’ve outlined the revenue drivers for the quarter.

Performance fees was a biggest driver of the quarterly change in adjusted total revenue. Second quarter fees were $14 million compared to a negative $4 million in the first quarter and $52 million in the same period last year.

The prior year performance fees were near record levels and we did not anticipate and so repeat given the current mix of performance. I’ll talk about the year-on-year change in performance fees in further detail in a few moments.

Management fees decreased 2% in the first quarter, roughly in line with the decrease we saw in average AUM, which is partially offset by one additional day in the quarter.

Net management fee margin for the second quarter was 44.7 basis points, relatively flat compared to the prior quarter and the same period a year ago, which is encouraging given the fee pressure that's being seen in the industry in general. Now, turning to Slide 9, we provided some further detail on performance fees.

On the left side of the page, we’ve laid out the detail behind the year-over-year change in performance fees, so you can better understand the ranges we are going to feed in.

Well, there was increase in performance fees over the first quarter, the $14 million in performance fees realized in the second quarter of 2018, was significantly lower than the $52 million recognized in the same period a year ago.

As you can see highlighted in the graph, we had a triple AUM that had an opportunity to earn performance fees, was fairly similar between the two periods, so the change was a function of weaker investment performance in a couple of areas.

Breaking down the pieces with significant changes, performance fees for the SICAVs in the second quarter were $4 million compared to $30 million a year ago. This decline was a result of two primary factors. First, weaker performance in the European funds, which pay annual performance fees in June.

And second, weaker but still positive performance in the UK absolute return funds, which pays quarterly performance fees. Next performance fees on the OEICs and Unit Trusts, in the second quarter were $4 million compared to $14 million a year ago. The decrease here again was a result of weaker but still positive performance in UK absolute return.

On the right side of the page, we’ve updated a graph that we provided last year, which has a quarterly timing of the non-U.S. Mutual Fund AUM subject to performance fees also really the opportunity we have to earn performance fees during each quarter.

You can see in the graph that in the second and fourth quarters we've anticipated the highest quality performance fees given the significant AUM, which crystallizes performance fees - performance periods during those respective quarters. But we can’t predict future performance fees as their performance dependent.

The takeaway fees from this slide is that there will be fluctuations in fees on a quarter-on-quarter basis, but the same quarters on year-on-year basis had a similar performance fee opportunity. Moving to operating expenses on Slide 10, the second quarter has adjustments associated with non-deal costs as well as integration.

There was approximately $8 million of integration costs incurred in the quarter. So far, we've recognized approximately $216 million of the total $250 million deal and integration costs that we expect to incur.

Non-deal costs, adjusted out of operating expenses in the quarter were roughly $8 million, and mostly consisted of intangible amortization of investment management contracts and contingent consideration.

Adjusted operating expenses in the second quarter were $296 million compared to $282 million in the first quarter, a 2% increase quarter-over-quarter. Adjusted employee compensation, which includes fixed and variable staff costs, increased 1% compared to the prior quarter.

Adjusted long-term incentive compensation was up 37%, primarily due to the timing and value of new grants in '18 compared to the role of -- impact of grants rolling off.

Similar to the first quarter, in the appendix we provided further detail on the expected amortization of existing grants and the total for the year has not changed and that we provided in the first quarter. The second quarter adjusted compensations revenue ratio was 41.8%, in-line with the low 40s that we've communicated previously.

Turning to adjusted non-comp operating expenses, collectively, there was a decrease of 11% quarter-over-quarter. The main drivers of the decrease were lower G&A, partially offset by higher marketing costs. G&A was down $12.4 million, due to the onetime $12 million legal outcome that occurred in the first quarter.

The increase in marketing was primarily due to spend levels returning to a more normal run rates after lower levels in the first quarter. Turning to Slide 11, I wanted to take a few minutes providing some additional color on the guidance we've provided around non-comp operating expenses.

As of today, we're revising our prior guidance on [indiscernible] expenses to the lower end of the range we provided previously. And then we now expect the year-over-year increase to come in as around 12%. This increase is higher than what was in the first half run rates or what the first half run rate would suggest.

However, we continue to post spending to pick up during the second half of the year, primarily due to seasonality and the timing of project spend.

Importantly, from a modeling standpoint, this increase is in addition to the costs associated with research, as we've previously highlighted as well as the one-time legal outcome we had in the first quarter. I think you illustrate a number of questions on this point, I wanted to spend a few moments further discussing the drivers behind this increase.

The expected 12% year-over-year increase has driven by three primary factors each of which accounts roughly a third of the change. Firstly, 2017 expenses were abnormally low as a result of the merger, which led to a lower spending in areas like marketing, travel and entertainment and other G&A items.

Therefore around a third of the increase is the business gets back to a more normalized rate of spending. And that's why I've included on this page, the 2016 data in the graph for comparison and context.

Second, there are annual initiatives and projects that we choose to invest in, and in 2018 that's dominated by a number of mandatory initiatives required to be compliant with the changing regulatory regimes along with geopolitical elements like Brexit. And third, the impact of FX rates, primarily sterling dollar.

I understand the level of inflation that impacts our revenues and expenses each year. It's important to note that this level of expense growth reflects exceptional certain circumstances that I've just highlights and is not the annual run-rate growth you should expect to see in our business going forward. Moving to Slide 12.

Now that we more than a year past the merger close, it's a good time to take a step back and see how the realized cost synergies have impacted the expense base, the majority of which residing in compensation expense.

As of June, we've achieved $107 million of the annualized run-rate cost synergies and on track to realize targeted annual cost synergies of $125 million by the end of year three post the merger close. Of that $107 million, approximately 90% has come through the stock compensation line.

This is illustrated in the graph on the slide, with the adjusted compensation ratio of 47.5% in the first half of 2016 being reduced to 40.4% in the first half of 2018. That's a reduction of 710 basis points in two years.

Given that the majority of synergies coming through as part of the merger and people related, this is the clearest way we can show you that the savings promised as part of the transaction are being realized. As discussed previously for full year '18, we continue to expect the total compensation ratio to be in the low-40s.

In summary, we're realizing the benefits of the cost synergies coming from the merger, and we continue to maintain a very strong cost discipline. However, we're not managing the business to meet a particular margin target.

And we continue to invest in our business in the areas where we see long-term growth opportunities and we're it's acquired due to changing regulation. Moving to Slide 13, and then look at our profitability trends. We continue to generate strong operating profits and EPS.

The second quarter adjusted operating income of $191 million is slightly higher quarter-over-quarter, driven primarily by performance fees. Turning to EPS, the second quarter adjusted EPS of $0.74 is improved over the first quarter and 9% better than the same period a year ago, and our strongest to date. Slide 14, is look at the balance sheet.

Cash in investment securities totaled $1.4 billion as of June 30. Cash and cash equivalents increased during the quarter by 6% as the cash flow from operations was $119 million in the second quarter was partially offset by the dividend payment.

In July, the remaining convertible notes matured and were retired with cash on-hand, so the only outstanding debt now is the 2025 senior notes. Lastly, I wanted to refresh everyone on our capital management philosophy, which is one that looks of cash in a hierarchy of needs.

First, we set us our cash for regulatory and liquidity needs, contractual obligations, near-term debt maturities and a sustainable regular quarterly dividend. Second, we evaluate opportunities to strategically grow the business both organically and inorganically. And finally, if expense cash exists, we review ways to return that cash to shareholders.

At Janus Handerson, this capital return program will be comprised of regular quarterly progressive dividends one that grows with the profits of our business, which will be supported by regular share repurchases.

And as such, I'm very pleased to announce that the Board has approved a $0.36 per share quarterly dividend and a share repurchase program of up to $100 million to be executed over the next 12 months. With that, I’d now like to turn it back over to the operator for questions, which Dick and I will be happy to answer..

Thank you very much. Ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator Instructions] And we’ll take our first question from Ken Worthington with JP Morgan. Please go ahead..

So when Janus Henderson merged, it picks merger of equals, and I think Dick, you highlighted that both Janus Henderson had an equal number of appointments for the senior positions. But then Jennifer left and David left from the genocide.

And it seemed at least from the outsiders' perspective to be increasingly lopsided with the Henderson side kind of taking some of the senior roles.

So how do you see and in particular, how do you manage the risk of your more senior managers leaving, particularly given again my outsiders' perspective that there was some heavier weight on the Henderson side filling those top roles following Andrew and now still wag stuff out the door? Thanks..

I guess I don’t -- I don’t want to start by confirming your premise. I don’t think the history -- I don’t see it quite in the same way. We had a pretty even mix to start. But from that point, we’ve really been focused on building one company.

And we’re nowhere near as focused as your comments might suggest on the legacy starting points of various officers. And furthermore, we’ve been really successful in attracting wonderful new talent, which doesn’t come from other legacy firm. And that’s been tremendously important as we filled out our executive ranks.

And so, I don’t track this as Henderson up, Janus down and then Janus up, Henderson down or anything like it. And I don’t think you should or certainly any of our employees should. The more the time passes, the less relevant the whole idea of legacy firms is. There aren’t any legacy firms anymore.

There’s one firm and we need to focus on delivering for our clients and beating the competition and the various backgrounds of having worked at prior firms that all of us bring to the table our strengths in terms of experience, but are not particularly relevant in terms of any balancing of the boat..

In the multi-asset business seem to have a really good sales quarter both on a gross and net basis, the best you’ve seen in some time.

Love to get more color on which products really drove the nice step-up in the gross sales?.

Ken, this is Roger. I mean the largest piece of that is the U.S. mutual fund balance fund as I talked about, it’s a very sizable fund, it’s growing well, it has exceptional performance numbers. So as I said, it’s in the top -- with top percentile over one year, top percentile over 3 and 5.

So comparatively strong set of numbers and unsurprisingly, we’re seeing increased flows in that area..

I think, if I’m looking at the right number, it’s $485 million in the second quarter of 2018 net flows for the balance..

And moving on, we’ll take our next question from Alex Blostein with Goldman Sachs. Please go ahead..

So just sticking, I guess, with the management chair announcement. Could you give us maybe a little more color in the key factors the Board considered with respect to making this decision, and against now that you will be dissolve to see Janus Henderson.

Aare there any changes or strategic pivots you’re planning to make sort of relative to the path you and Andrew laid out over the last 2 years?.

The Board was faced with a difficult proposition with Co-CEOs, each have been successful in his own right, and they undertook a full evaluation that used outside advice, they talked to a huge range of internal and external people to get feedback.

And they can’t believe they did a very, very difficult job and a very thorough and careful and as objective away as they could. And they came out with the best decision they could in a difficult circumstance. I couldn’t possibly give you the way things are various factors underneath that process.

But I can tell you, it was very careful and thorough and thoughtful. And both Andrew and I respected the process of it completely. In terms of changes from here, we’ve worked together to set strategy to this point, and we haven’t had a lot of disagreements; I think our partnerships been strong.

And so I don’t think there’s a big pivot to announce on the table. I do think we have opportunities to move a bit more efficiently. I think we can clear some of the stuff that may have been less effectively resolved. We have an opportunity to proceed that way.

I think we will take a look at this strategy and we’ll have an opportunity, I think to sharpen that voice. As we would have candidly together anyway through time, I think we’re learning more about this strategic direction that we’ve laid out previously. And we’re going to be able to work through that and sharpen that message in the months ahead.

The number one priority of the firm is to get to breakeven and positive flows and grow profitability for our shareholders.

And frankly, my number one personal priority is to reach out to all of the employees and make sure that they understand that there are many who I know well, and then there are many who I know far less well, I want to get to know those people. I want them to know that I value them and care about their contribution to the company.

And I’ve got to focus on that as my personal highest priority..

And the second question, also a little bit bigger picture, but I guess a meaningful motivation behind the merger, when you guys announced and that was kept to capitalize in the global distribution of a combined franchise. You obviously mentioned one of your key priorities also to kind of get breakeven flows and the management positive.

So I think going back to some of the initial parties you laid out, there was 200 to 300-basis point improvement in organic growth as kind of aspirational target.

Where does that spend today now that the firms been together for some time and also with filled departure? What risk does that create and you achieving these targets over the kind of the near-term?.

I think the progress we’ve seen in some of the products that have been sort of legacy one side and sold through the distribution of the other, has been impressive. But candidly, I think the underperformance of some of the European equity strategies has taken the amount that we can do down fairly significantly.

We have a really excellent team that fills both over many years on the distribution side. We have a deep bench with a lot of really superb professionals.

And I think, they’re well positioned to carry on, fill success and deliver on the promise -- and the promises we made around revenue synergies and deliver on the promise of much stronger global distribution team. So we're not -- we value Phil tremendously and he's been a wonderful leader. And we will miss him when he steps off at the end of the year.

But certainly one of the great things that he has brought to the table is building a great team. And for that, we have to be very happy and confident in our future..

And moving on, we'll take our next question from Simon Fitzgerald with Evans & Partners. Please go ahead..

Dick, I just want to take a little bit of a sense from you in terms of how you're sort of seeing costs going forward more over the medium to longer-term. I mean, we're seeing a lot of industry pressures at the moment, particularly same margins and things like that.

What sort of views you're going to have enough think about how you play at costs and just wondering your thoughts on that early on?.

Well, thank you for that question. Yes, I think the industry data is unequivocal that we're all under increasing amounts of financial pressure.

I think the revenue lines are under pressure with the key pressure, and I don't think the cost base is looking at the industry-wide data responding in quite the same aggressive manner that maybe it has some prior periods. So, certainly we acknowledge that pressure.

Although, I think the financial results that we showed today demonstrate that with careful management and a lot of good work by people, we can still deliver really an excellent operating margin nonetheless.

But we will have to continue to keep increasing the efficiency of our infrastructure and our teams in order to continue to achieve that sort of results. So we acknowledge the pressure is growing. We have, on previous call, talked about whether we see it growing in some sort of leaps and bounce. I see it more as a constant pressure that that is growing.

I haven't seen it in huge set functions. But watching my crystal ball isn't perfect, and you can still face that in the future. But we think of it as a pretty constant grinding pressure and it forces us to get more and more efficient in our delivery in order to maintain the level of profitability that we're currently delivering.

And obviously, it's all related to the pressure that as an active manager, we have to deliver on our client promises every day and demonstrate that our approach delivers value over some of the incredibly cheap passive options. And that's a challenge we accept the numbers..

Okay. And second question just on PayPal. Recently, one was talking to management the sort of idea of having lock-in the staff wasn't one of the sort of things that have been looked at very closely that given now with -- see over partying so forth.

Are you thinking about anything in terms of sort of maintaining management structures and ensuring laid down terms?.

I apologies, I'm not sure I heard all of that question..

Okay. Let me restate it just in the sense that -- let me if I can just restate it.

You're looking at introducing lock-ins to the spot to ensure that there's not a blade that harm management?.

No, we are trying to look at our employee compensation and make sure that we have the right incentives for extremely talented people to want to continue to work here, and certainly fair compensation is an important part of that. But lock-ins are typically a very bad way to retain people in our minds.

Philosophically or not, we don't believe that people who stay because they get a lock-in or necessarily committed in the way that you need them to be to the organization. So we use that as a special tool in special circumstances, but we don't rely on it on a broad basis.

We need people who want to be on this team and we want to do this work and help our clients in this way. And we have to build around that rather around folks who are sort of locked in by contract..

And we'll take our next question from Patrick Davitt with Autonomous Research..

Thank you. With the follow-up to Alex's question, I'm not sure how long this has been playing out. But just wondering how you've been able to receive any assurances, particularly from your institutional clients outside the U.S.

that Phil's departure doesn't put you in the penalty box or anything?.

Yes. Thank you, Patrick. I don't think I really have a great answer for you. That's not the sort of thing that typically I would go out and clear to clients about. I think we all know particularly institutional clients both inside and outside the United States are not [indiscernible] change.

And when you have change that can be quite deliberative about evaluating the effect on that and it does slow the flow of business down. Typically that's much more dramatic when that change is a portfolio manager as appose to a relationship or sales or marketing executive or even a CEO for that matter. And so these are all things by degree.

That's said Phil is an immensely respected executive on our team and in the marketplace. And certainly clients who want to understand his logic and what's driving him, and whether there are any lessons to be learned that extrapolate to a broader audience.

We'll expect a lot of pointy questions, but I don't think, I have a better answer for you than that..

That's helpful. Thank you.

And any updates on cross-sell traction when particular products that are selling across, I guess like few platforms now, I think, you gave us a couple of examples last time?.

Yes, I think the biggest example that we've given you previously has been the global equity income product is experiencing a little bit of underperformance at the moment, which probably slows down the progress of some of that cross selling.

And once report on this step quarter-by-quarter, I'm afraid you're forced to report a little bit, what I would consider even over-reporting as these things move around a little bit legal by legal. But we have a really strong global set of investment products run by excellent teams.

And we are very confident we can find ways to deliver those across markets with an exceptionally strong global distribution team. So we're not seeing anything that changes our view or what we've previously said we can accomplish. But it will sort of ebb and flow with investment performance in particular pockets. And it adds and that will continue..

And moving on, we'll take our next question from Robert Lee with KBW. Please go ahead..

Thanks. Good afternoon or good evening, everyone. Just my question is on the intermediary channel. And Dick you mentioned that at least in the U.S., that's and while clearly it's a place where you are up, you suggest that you seeing some better trends.

And I'm just curious, I mean a lot of your peers have talked about they've made investments and they've talked about need to make investments in broadening their product investment vehicle capabilities whether it's building CITs or SMAs.

Can you maybe just update us a bit on kind of where you stand with -- do you feel like you have the right investment vehicles, not just the strategies, but the vehicles, as you drive into the intermediary channels? And maybe as a follow up to that, could you maybe breakdown even intermediary channel a little bit because there is -- when you feel your particular strength is in national warehouses? Is it kind of bank channel? Just wondering to get sense of -- a more granular sense of which pieces of intermediary you think of the opportunities?.

Clearly, a big part of the intermediary flows, the positive numbers were given in the multi-asset line, and the multi-asset line was heavily influenced by the balanced fund as we previously mentioned on this call. So if you look at the results, that's a big piece of the puzzle.

Also our enterprise fund, Triton venture, our small mid areas contributed, I think, to the success we're seeing there, in terms of breaking it down by channel, in terms of banks or other kinds of intermediaries. I don't have that data right at my fingertips.

We can take a look after this call and see what's public and see what we're able to share with you, I apologize. But I just don't have that data right at my fingertips..

Thank you. That was my only question..

And moving on, we'll take our next question from Chris Harris with Wells Fargo. Please go ahead..

So we've clearly seen a lot of disruption in the U.S. from passes, and somewhat argue that Europe will ultimately follow a similar path. And so Dick, I'm wondering, having managed the U.S. business through that, is there a different way you might want to manage the non-U.S.

business?.

I think when people talk about passive versus active, the first problem is they talk about industries. And with respect -- I care much more about our part of the industry. And so the way for us to succeed against passive, I think, is pretty straightforward.

We have to deliver risk adjusted investment returns, which frankly means we can't blow up every 3, 4, 5 years. We have to have excellence in alpha, we have to have excellence in risk management in order to deliver that. And you got to wrap that in client relationships where it's a positive relationship with trust both with the clients.

And I don't think that recipe is particularly different in the U.S. and in Europe. Some of the market structures, some of the regulations, some of the competitive pressures, certainly vary whether you're talking about the UK or you're talking about Germany.

If Europe is in one place either, it varies a lot market-by-market, but the basic underlying principles, I think are constant. Our UK market has had regulatory change that I think is fairly significant and different than what we've seen in the U.S. And that acts as a burden to our business.

On the other hand it acts as a sort of barrier to entry for new folks trying to come into that space. So there are pluses and minuses to it. But overall, I would say the basic principles that allow you to compete against passive are pretty similar. And I think, we have learned valuable lessons in the U.S., but we've got to keep stepping it up.

When I look at the industry broadly speaking, I think, we failed the communication effort with clients. I think passive has done a better marketing job. And I think our industry has been out-marketed in terms of the actively managed industry.

And we've got to figure out in our little piece of that story what we can do to rebalance that vote in our favor. I think, there is plenty that we can do. And I think the knowledge shared platform that came through our association with Henderson that we've rolled out in the U.S.

is a really positive contribution to strengthening our message, but there is more to be done clearly. And principle is pretty similar between the U.S. and UK in Europe..

And moving on, we’ll take our next question from Brian Bedell with Deutsche Bank. Please go ahead..

Maybe just to -- and I apologize that my line got cut off for a little bit. So I don’t know if this is asked or answered. But just for the institutional consultants maybe not, I know, you answered the question on the client side in terms of your relationships with them.

But as you think about the institutional consultants and maybe you can just sort of comment on, I think, you’ve been coming off the watch list.

Do you expect or do you think there is a risk that you might be put on back on watch list with the management changes?.

Thank you for that question. I think the answer is pretty similar to what we said before. So I think the institutions -- any institutional consultants, so I could bucket in, I think, I was probably bucket it in my mind, in my prior answer.

We certainly have been a little bit on old with institutional consultants, as a result with the merger and some of the changes in the business.

The changes that we’re seeing today will not be received immediately as positive, because it’s just further change by a number of consultants and institutions that has the risk and potential to slowdown the flow of business and clearly hope it doesn’t.

We think that the most impactful changes are the ones to the named portfolio managers managing the client’s money, and the names on the track records. So the good news is that’s not what we’re talking about today. But still any change as the -- has the potential to raise the risk you say.

And we are, what can we do? We can only go out and tell our story as well as we can and get out there as much as possible to try and shorten the time that anybody maybe feeling uncertain about us. The last element I would highlight on this is, I think these changes were pretty well telegraphed.

I’m not sure, certainly with respect to the CEO transition, I think everybody should have been expecting it for a while or perhaps not right win, but they knew it was coming. And so hopefully that that mitigates the uncertainty experienced by institutional clients and institutional consultants..

And then just maybe to dissect or maybe can we dissect the equity flows in the quarter between the U.S.

and maybe the Europe portion that you were talking about that was underperforming? And what level of AUM do you see, I think within European equity franchise that sort of given in that underperformance/out from those?.

Yes, I’m going to give you a product answer more than a geography answer to that question with the numbers I’m looking at, but if you look across international pan European products, we saw really significant outflows in the order of $2 billion-ish.

And if you look at Ghana, Denver, historic equities to the small to mid -- the midsize that I mentioned earlier, Global Natural Resources multi-strat global equity income as a positive contributor. Some of things like that goes well on the positive side for our equity strategy.

So clearly the outflows were heavily focused in the areas that we outlined where we are facing somewhat we believe to be temporary performance challenges, but there is significant performance challenge..

And moving on, we'll take your next question from James Cordukes of Credit Suisse. Please go ahead..

Just on the buyback, I'm interested in a bit more detail on how you and Board coming up with that number? Do you think we've reached a normal level of earning potential based on the current buyback in dividend you can so.

Are you still building up new capital distribution putting aside any of the new products and initiatives?.

Hi, James, this is Roger. I mean that's, obviously a discussion that we've been having with the Board. Now we've -- the capital distribution is in three pieces, as you know would be the regular dividend. Again it's not a half percentage, but if you look at it, it's about 50% of the payout.

And if you add-in -- so the Board approved that $100 million over a year. So if you put $50 million in for the second half of this year, that will get you to sort of payout of about 55%. In addition to that we would have repaid back to convertible this year. So that's an ongoing discussion.

But yes, you should expect to see the Board is obviously comfortable with the level of cash and capital at the moment. And that's why it's approved the buyback, and as we continue to grow and generate excess cash and capital. As we've said, we look at it in a hierarchy of needs.

And if the business is not have a better use for that capital then you'd expect us to continue to repurchase program over time..

Thank you. And just another one for you Roger as well just on the operating margin. You mentioned that you don’t target a particular margin, but you have talked in the past about me to reinvest.

Do you think this scope for the operating margin sill expand and to get full benefits of those synergies over the medium term or willing reinvestment in pressure on pay margins hold that back a little?.

I think you've hit the nail on the head there. A business with the 40% operating margin is a good business. There are certainly areas where we're going to want to invest as we've talked about in the past. There are efficiencies that we will continue to look to drive as Dick talked about.

Those will wax and wane over different periods and then the margin maybe slightly higher or slightly lower. As I said, it's not -- that's not the one hard thing that we manage the business by. We're looking to grow the business profitably. The markets will be dependent on that as well.

But I think we've given guidance and say that -- operating margin in the low 40s is what you should expect given market levels where they are..

And we have time for one additional question from Patrick Davitt with Autonomous Research. Please go ahead..

Thanks for taking the follow-up. I know you haven't historically typically given more guidance on how the quarter is going.

I'm just curious if you could frame any kind of broad flow trends through the second quarter and into July that you can see because we've heard some pretty bad guidance at least from those that have been willing to give it for the trend in July?.

Patrick, quarterly I didn't see it's plenty. I don't mind those if you already know. We don't comment on that -- on short of things and courses..

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