PFG
#Yes, good morning, <UNK>.
This is <UNK>.
I'll have <UNK> handle that from a boutique perspective.
Then I'd like to also have <UNK> take a shot at answering as relates to our UK holding company.
<UNK>.
First thing I'd say on Brexit is we have a very substantial operation in London so that could be a factor longer term depending on how over the next two to three years the Brexit negotiations go.
Our main international fund product is domiciled in Dublin, which will remain part of the Europe Union.
We have our investment advisor and mutual finds domiciled in Dublin.
That will allow us access throughout Europe almost regardless of how the negotiations go.
We also in the European Union, just for completeness, have offices in Munich, Amsterdam and Malta, all of which give us some flexibility about how we will domicile and manage different businesses depending on how the negotiations go.
So we feel pretty well protected here.
Our first concern is we have many nationalities in London.
It looks as if the ability of our various people in London to continue to be based there will be unimpaired, but that's something we're watching very carefully.
That's probably our number one near-term concern.
As regards the clients, <UNK>, we have actually seen if anything a boost to our business from the tensions within the European Union, if anything.
Because largely what we're selling is global and dollar-based products, which are extremely attractive in the very low interest rate environment you have in Europe.
Europe has been a pretty good market for us.
Even if economies are somewhat negatively impacted by Brexit, both in Eurozone and in Britain, even if that happens, we would expect to continue to be in a pretty strong position as a fundamentally global and cross-border player.
<UNK>, this is <UNK>.
I'd just like to add a couple comments onto <UNK>'s comments.
We are obviously monitoring what's happening there.
We do think it's going to take a while for it to actually unfold.
We're looking at it, watching it, the opportunities that we have obviously there, they could be positive, they could be negative.
But at the same time, we think this is a very efficient model for the UK holding company to help us to move capital efficiently and effectively around our operation, our international operation, both for international investment boutiques as well as our Principal International businesses.
That said, we still will continue to monitor and look for additional options that we can do to take advantage if it does actually turn negative.
At this point in time we're not anticipating any changes.
<UNK>, this is going to obviously play out over a long period of time.
They've not even given their formal withdrawal notification at this point, which could be sometime this fall, then they've got two years after that.
We expect there to be a lot of negotiating and a lot of haggling between now and that point in time.
Is that helpful.
Yes, I'll make kind of a broad comment and throw it over to <UNK>.
Brazil gets in the headlines a lot.
Obviously when your President's impeached, it's going to do that.
Just as a reminder, when you think about Brazil, we know that there's relatively high inflation, there's high unemployment.
We also know that in Brazil right now that we've got a rebound in the currency.
The currency's up on a year-to-date basis about 22% and we know the stock market's up about 31%.
So in spite of the Zika and the Olympics challenges, Brazil, and in particular our partner, Banco do Brasil, has been very strong through this, for this first six months.
<UNK>, you want to talk more about our business there.
Yes, <UNK>.
Certainly the new administration, the Temer administration, is having a profound impact about the moods in Brazil and certainly we are very much more confident that the recession is not going to be that tough as it was predicted for 2016.
Even analysts are saying that probably in 2017 you're going to have probably a flat economy, if not a little bit positive.
That is impacting a lot of moods for our clients and particularly we have been able to see a very important rebound in our activity in Banco do Brasil, particularly Brazilians continue saving money for their long-term saving needs and retirement needs.
It's very clear as well that for a long time the Brazilian government is going to be unable to put together some kind of strong pillar one for pensions.
So voluntary pensions and open pension companies are going to continue playing a very important role in that country.
We remain very optimistic about our business in Brazil.
<UNK>, thanks for your questions.
Good morning to you, <UNK>.
You're certainly touching on some of the key drivers there.
This business is a real flagship for the organization, has been for a long time, strong margins, strong growth.
It's certainly a feeder to what <UNK> does within asset management.
It supports the bank, [annuity] line, the mutual fund line for rollovers.
We had a very difficult comparison to a year-ago quarter but with that said, I'm going to ask <UNK> <UNK> to weigh in and talk specifically about some of the challenges on the revenue line.
My last comment of before throwing it over, a lot of credit to <UNK> and Greg Burrows and the team for really doing a nice job managing expenses to ensure that we're aligning our expenses with our revenues.
<UNK>.
<UNK>, was that helpful.
Good question.
The first thing I'd say is there's not an across-the-board mandate to reduce expenses.
What we've tried to always do, Larry did it, Barry did it, <UNK>'s certainly been at the forefront of this as we've migrated the Company, is to really look at the revenues that we're generating and what expenses are necessary in order to get a delta between the two.
That's where our focus is on.
Again, not anything across the board but by business unit within <UNK>'s operations, and <UNK>'s, and <UNK>'s, and <UNK>', as well as across corporate, we're looking at how do we line those expenses for the revenues we're able to create.
It doesn't happen overnight.
I would tell you, we've been at this now for ---+ it's an ongoing effort and we're going to continue to focus on that.
At the same time, what I would tell you is we're making the investments where we need to make investments.
We have to make an investment in DOL.
We have to make an investment in technology.
We have to make sure our products are relevant.
Part of the of diminution of the revenue stream that <UNK> mentioned was around investment mix.
If someone chooses a collective investment trust that has a similar investment strategy but the underlying revenue associated with it is less, that's good for the customer, good for the participant, good for the advisor and we need to recognize we have a little bit less revenue coming in.
This won't go away at the end of this quarter or the next quarter.
It's something we're going to continue to keep top of mind.
At the same time, never put the mission and the strategy of the organization at risk.
Is that helpful.
All right.
Thank you.
I'd be happy to do that.
I'm actually going to have a number of us take a shot at this because it's a good opportunity to really speak to some of the underlying details of DOL.
I think about it impacting in three different areas.
One area, which <UNK> will cover, is around Principal Advisor Network, our 1,200 advisors that are out there every day supporting small- to medium-size businesses and their business owners.
<UNK>, on the retirement space, of course we have impact on our ability to attract and retail rollovers at benefit event for job changers and retirees.
Of course, within <UNK>'s organization we have the mutual fund company and certainly could impact DCIO as well.
With that, <UNK>, do you want to make comments on PAN.
Thanks, <UNK>.
<UNK>.
<UNK>, any final comments.
Thanks, <UNK>.
Mike, just maybe three closing comments on this topic and it's probably more than you asked for as relates to DOL specificity.
When you look at the cost, the underlying cost, there's a lot of training and a lot of education and a lot of development within our own staff, within our own call centers, within Principal Advisor Network, within our partners.
That contributes certainly to the cost.
The second is, as you heard from <UNK> and <UNK> and <UNK>, a lot of this has to do with adapting current product to retrofit it to work with the marketplace.
It's not going to require refiling.
A lot of what we have is going to be able to be modified to work.
Lastly, I would tell you we're on our front foot in working with our distribution partners.
They embrace the conversation.
They want to have the conversation.
And we're feeling pretty optimistic about how we can work our way through the DOL reg.
Any additional comments.
That's D, all of the above.
It was our attempt to try to capture as much as we could.
We're not going to go into the nitty-gritty detail of breaking each one of those down.
Each one of our service support areas, each one of our BUs, distribution areas, did the best job they could to quantify what they thought they would have invested and making the modifications around training, around development, around modifying the products themselves.
We think it's our best guess, and as <UNK> always reminds me, it will be wrong.
Just a matter of degree of being wrong.
But we feel pretty good about the number in total.
Thank you for the question.
<UNK>, good question and one that <UNK> is all too familiar with.
<UNK>.
<UNK>, good morning, this is <UNK>.
As you know, let me try to provide some background in China.
The Chinese government has been very focused on deleveraging that economy.
In line with that, CCB Bank, our partner, has been very focused in order to work and increase the quality of their loan portfolio in their bank.
Having said that, in the of last quarter instead of to loan money which is going into bank deposits, they decided to invest that money in short-term fixed income and they moved that money essentially into our JV, our asset management company.
That is the ---+ the source of that money is, that is the source of that money.
Having said that, that is why we got $45 billion in net customary cash flows.
This is China.
But none of that money is ---+ that money that I mentioned to you coming from CCB bank.
Out of that, $2 billion or $3 billion are part of our underlying long-term saving mutual fund retail business.
That is essentially from where that money's coming from.
Okay.
Any follow-ups on that, <UNK>.
That is a good question.
The Chinese government has been very eager and keen to try to, I would say, reduce the activity related with the wealth management products, also trying to manage in some way all the shadow banking and also other type of activities and lending activities that you might have there.
We are not reporting and we never have reported any kind of wealth management productivity and in our JV, we don't have almost nothing in a very small part of our asset management in the JV that we're not reporting that money, is that kind of wealth management product.
But we have a very marginal activity in that part of the business in China in our JV.
What we're doing even ---+ you have to consider the China mutual fund industry is a very short-term oriented by nature.
What we're doing, we're moving and shifting our strategy in order to be a long-term saving provider in China.
It looks difficult but we're going to do it and it's going to be a long march in China.
As an example, we just launched a final fund presently in the month of July and that's allowing us to really, really offer different kind of solutions, balanced funds and asset location products to our clients.
The idea is to expand that offering into the bank platform in order to start moving and continue moving and shifting our strategy towards more long-term oriented funds in China.
We do think that we do have a very good opportunity in order to do that and we're going to continue moving our JV in that direction.
<UNK>, we appreciate your question.
Thank you.
<UNK>, go ahead, please.
This is <UNK>.
$800 million to $1 billion is what you mentioned.
We look at this as a balanced approach of capital deployment to our long-term shareholders' strategy and value.
Most of our businesses like we talked about in the past are fee-based businesses, which generates a lot more of that capital earnings that are available.
As you look at that $800 million to $1 billion, we've already made a pretty good dent in it already in terms of capital that we've deployed in the first half of the year as well as we've committed to.
We announced our increase in the third quarter dividend up to $0.41.
We're pleased with that.
We're progressing towards that 40% payout ratio.
We're continuing to move towards that.
Acquisitions, we put more into the boutique strategy, which is part of our long-term strategy, buying part of additional shares of Finisterre origin, CCI as well as Claritas.
That's a good, consistent process that we've been having in place for a long time.
The share buyback program, you're aware that we had a $400 million authorization in February.
We're executing on that, as I stated in the comments that we've executed.
We still have $250 million of authorization going forward.
So far what we've deployed and committed is over $600 million so far.
Now, we have options for the rest of the year.
Hopefully we'll pay out a dividend in the fourth quarter which we assume will happen and M&A activity, we're always looking for options and opportunities there.
Share buybacks, as I mentioned just a few moments ago, $250 million of that authorization.
With the low interest rate environment right now, <UNK>, there's some opportunities.
There's some opportunities to actually execute on some of our debt maturities that we have coming up.
We have, in 2017, we have $300 million and that's at a 1.8% coupon.
2019 we have a $350 million which is at a high 8 7/8% coupon.
We have an opportunity to actually execute on that, enhance the overall return to the organization, and reduce our leverage ratio.
Right now we're under 24%.
We're marching towards 20%, so we have options.
Now, are we going to exceed that $1 billion.
I can't say at this point in time, because as I mentioned, share buybacks and some of those upper opportunities will continue to unfold as the year goes on.
But if you look back to last year, if you look back to 2015, we said that $800 million to $1 billion and we were a little bit over that, [$1.07 billion] which was about 90% of our net income.
We're continuing to deploy capital in what we believe is a balanced approach to enhance the long-term shareholder value.
So stay tuned.
Does that help, <UNK>.
Sure.
No, I actually think it's a plus.
I mean, at the end of the day we're here to serve the needs of the customers.
These participants have long-term needs, in large part how to convert these lump sums into lifetime income.
It's frankly one of the reasons why I like this diversified model that we have.
Whether it's purchasing an income annuity, whether it's having some sort of drawdown strategy, whether it's investing in an asset allocation strategy that allows for income and retirement or whether or not they want to purchase CDs from the bank, there's so many different ---+ so much optionality for a retiree and benefit event.
Will there be a longer disclosure process at benefit event.
Yes.
Will we be able to operate very much like we have in the past.
I think so, with the appropriate amount of disclosure and we have really competitive products.
Whether the money stays in the plan or goes into one of the rollover products, I feel very optimistic about our ability to maintain and perhaps enhance margins in the post DOL regulatory environment.
Appreciate your question.
Thank you.
Again, thanks for joining us this morning.
We feel good about the quarter.
It was a very strong quarter.
We think that the diversified and integrated business model is the right model for Principal against fee and spread and the risk businesses.
We are going to continue to enforce a disciplined approach to expense management.
It served us well in the past.
It will continue to do in the future.
As <UNK> was talking there, we're going to take this very long-term, balanced approach to capital deployment.
Whether it's through acquisition, investing in our organic growth, paying down debt, dividends, et cetera, but again, those are heavily vetted.
They're thought through.
We discuss them with the Board at length.
Again, we're doing the best job we can to support the interest of the long-term shareholder.
With that, have a great day.
Hopefully we'll see you in Tokyo, New York, or somewhere else on the road.
Have a great day.
Bye.
