Federated Hermes - Earnings Call - Q2 2018

Transcript

Speaker 0

Greetings and welcome to Federated Investors Second Quarter twenty eighteen Analyst Call and Webcast. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Ray Him, President of Federated Investors Management.

Thank you. Please go ahead.

Speaker 1

Good morning and welcome. Leading today's call will be Chris Donahue, Federated's CEO and President Tom Donahue, Chief Financial Officer. And joining us for the Q and A are Saker Nisebe, CEO of Hermes and Debbie Cunningham, our Chief Investment Officer for The Money Market Group. During today's call, we may make forward looking statements, and we want to note that Federated's actual results may be materially different than the results implied by such statements. We invite you to review the risk disclosures in our SEC filings.

No assurance can be given as to future results and Federated assumes no duty to update any of these forward looking statements. Chris? Thank you and good morning. I will briefly review Federated's business performance, and Tom will comment on our financial results. For our remarks today, all data excludes Hermes results unless otherwise indicated.

Looking first at equities. We closed the quarter with $63,000,000,000 in assets, down about $1,000,000,000 from Q1 due to net outflows partially offset by market gains. However, we had 14 equity funds with positive net sales in the second quarter. Our small cap funds continued to show strong performance and solid flows. The Kaufman Small Cap Growth Fund had top decile performance in its Morningstar category for the trailing one, three, five and ten years at the end of Q2.

The Fund had positive net sales of two seventy million dollars in the second quarter to reach nearly $1,500,000,000 at quarter end. MDT Small Cap Core with its top 1% Morningstar category ranking for the trailing three and five years at the end of the second quarter had positive net sales of 177,000,000 to reach almost $750,000,000 in assets at quarter end. MDT small cap growth had top decile performance for the trailing three and five years at the end of the second quarter and posted positive net sales of €81,000,000 to reach over €500,000,000 in assets at the end of the quarter. Other funds with positive net sales in the second quarter included international leaders, MDT's MidCap Growth, Balanced and All Cap Core and Uni Stock Advantage. Using Morningstar data for the trailing three years at the end of the second quarter, seven federated equity funds, 30% of the total were in the top decile and 52% were in the top quartile.

Trailing one year ranking shows 28% of the funds in the top decile, 11 funds, 44% in the top quartile, and 16 funds about two thirds above median. Looking at the strategic value dividend strategy, its objective is to provide high and growing dividend income stream from high quality companies. The domestic funds twelve month distribution yield of 3.55% ranked it in the second percentile of its Morningstar category at the end of the quarter. The fund had a return of 2.4% in the second quarter. It ranked in the top quartile of its Morningstar assigned large cap value category for the second quarter and 98 percentile for the trailing one year and fifty fourth percentile for the trailing three years.

The domestic strategic value dividend strategy had combined mutual fund and SMA outflows of about $2,300,000,000 in the second quarter compared to an outflow of $1,500,000,000 in the first quarter. Looking at early third quarter results, combined fund and SMA net redemptions were about a $192,000,000 for the July. For all Federated Equity Funds in the July, net redemptions were approximately $108,000,000 and equity SMA redemptions were about $69,000,000 Turning now to fixed income. Assets decreased by $769,000,000 in the second quarter to $61,500,000,000 due to net outflows from funds of just under 600,000,000 of net redemptions and net exchanges and market decreases of $383,000,000, partially offset by net sales of a little over 200,000,000 in separate accounts. Consistent with industry trends, our high yield funds had net redemptions of about $400,000,000 up from a little over $200,000,000 in the first quarter.

We saw inflows in the total return bond fund of just, excuse me, over 100,000,000 and in various short duration strategies. Our fixed income business has a variety of strategies that are performing well. At quarter end using Morningstar data, our total return bond, institutional high yield bond and federated bond funds were all in the top quartile for the trailing three years. In total, we had six fixed income strategies with top quartile three year records at quarter end and 21 funds, two thirds of the total in the top half for the trailing three years. Fixed income fund net sales are negative early in the third quarter, a little over 100,000,000 due mainly to a redemption of approximately 150,000,000 from the government ultra short fund.

We have continued to see net sales in the total return bond fund, the institutional high yield fund and for the July. Looking now at money markets. Total money market assets decreased by about 11,000,000,000 with funds down about 10,000,000,000 and separate accounts down about 1,000,000,000. Much of the fund decrease, 9,000,000,000, was due to withdrawals related to client m and a activity. This is usual business.

We also had one client redeem a significant amount, about 8,000,000,000 in April due to a change in their cash management process, and we saw asset decreases around tax payment periods in both April and in June. These decreases were partially offset by three clients each adding more than a billion, adding to about 5,000,000,000, dollars as well as net increases from other clients. Interestingly, prime money fund assets increased about 4% in the second quarter to 31,300,000,000 Taking a look at our most recent asset totals, excluding Hermes, as of July 25, managed assets were approximately $384,000,000,000 including $258,000,000,000 in money markets, 64,000,000,000 in equities, 62,000,000,000 in fixed income. Money market mutual fund assets were $174,000,000,000 In the institutional channel, RFP and related activity levels continue to be solid and diversified with interest in MDT and dividend income for equities and high yield core broad and low duration for fixed income. We begin the third quarter with about $700,000,000 in fixed income institutional wins yet to fund, mostly in separate accounts.

On the international side, as you know, we recently closed the acquisition of a 60% controlling interest in Hermes Investment Management from BT Pension Scheme. As we develop our global strategy that can leverage the strengths of each company, we are excited by the breadth of opportunities presented by the combination of Hermes leading ESG integrated investment strategies and methods and federated strong investment capabilities, broad product line, all backed by our respective distribution strengths. Hermes has demonstrated the value of ESG insights through its integration into the investment process, strengthening the risk management of investment portfolios and providing an additional source of insight into enhanced returns. Federate will expand its ESG capabilities learning from Hermes' global leadership in this area. In keeping with our fiduciary duty, our goal is to identify ESG factors that are material to investment risk in order to more deeply understand the forward outlook for the companies we invest in and in order to accomplish outcomes beyond performance.

We are working towards a full launch of a number of Hermes strategies for The US institutional market and are planning to register mutual funds to offer some of Hermes' best investment ideas to our customers in 02/2019. We are looking at how we can help to grow the successful Hermes EOS business that features leading ESG stewardship services to institutional asset owners. We are owes also working with Hermes to evaluate opportunities for them to offer federated strategies to their clients. Hermes managed assets at June 30 were in pounds 35,300,000,000.0, up £1,600,000,000 from £33,600,000,000 from the first quarter. Hermes net sales for the second quarter were £816,000,000 We are making solid progress on business development in the Asia Pac region with a focus on opportunities in Greater China, Korea and Japan.

We are actively working to establish strategic relationships with selected financial institutions and add regional distribution to federated investment strategies. This effort complements our European, UK and Canadian operations. Managed assets in these markets totaled about $15,000,000,000 at quarter end, up from $14,500,000,000 at the end of the first quarter. We continue to seek additional alliances and acquisitions to advance our business. Tom?

Thank you, Chris. Total revenue decreased by about $8,000,000 from the prior quarter due mainly to lower average assets and higher money market fund waivers, partially offset by an additional day in Q2. Reported revenue was down about €17,000,000 compared to Q2 of last year, of which €8,200,000 was due to the impact of the adoption of the revenue recognition standard. Higher waivers primarily from money market fund and changes in asset mix of average money market assets also impacted revenues. Operating expenses decreased $8,900,000 compared to the prior quarter and $13,300,000 from 2017.

The decreases from the prior quarter was due to lower compensation and related expense from payroll tax seasonality and to lower incentive compensation. Distribution expense decreased mainly due to lower money market fund assets. The decrease from 2017 was primarily due to lower distribution expense due mainly to changes in the mix of average money market fund assets. The adoption of the revenue recognition standard also reduced distribution expense by EUR 7,400,000.0 and other expense by EUR 1,000,000 compared to Q2 twenty seventeen. When we announced the Hermes deal, we estimated that we would incur about EUR 22,000,000 in transaction related expenses in 2018, including hedging costs.

We incurred about $2,800,000 in operating expenses year to date 2018, including $1,300,000 in Q2. An additional €1,200,000 of non operating expense related to the derivative transaction was incurred in Q2 and is included in the €27,200,000 net expense in the press release. For Q3, we estimate that we will incur about $11,000,000 in transaction related costs and additional approximately $5,000,000 in expenses to be incurred in Q4. For 2018, a total of approximately $19,000,000 in transaction related operating expense. We will continue to where we will consolidate Hermes for the reporting purposes beginning in Q3.

At quarter end, cash and investments were $418,000,000 of which about $396,000,000 was available to us. On July 2, we used approximately $327,000,000 of cash and $18,000,000 from our existing revolving credit agreement to fund the purchase price and related obligations of approximately $345,000,000 for the Hermes acquisition. We've already repaid the amount borrowed for the Hermes acquisition and currently have $215,000,000 in unused capacity on our revolving credit line, which does not include the additional $200,000,000 available to us from the accordion feature. Brenda, that concludes our prepared remarks. We would now like to open the call up for questions.

Speaker 2

Maybe first one, just on the equity part of the business. It seems like on the small cap side, you're seeing some decent momentum. Just wanted to get your take. It seems like you have enough products there, but just from a capacity standpoint in the industry, we're seeing a lot that are closing just given where assets are trending. So just some outlook, you know, on the small mid cap where you're seeing, you know, some of the strength and flows.

Speaker 1

Yes. The first point is we are not threatening capacity in any of those mandates at this point. It is a important thing that gets reviewed. It gets reviewed in terms of portfolio manager input, trading impact, size, position of securities and percentage ownership. And so at this point, we are not threatening any capacity in any of those mandates.

Speaker 2

Okay, thanks. Then Tom, just a quick one. Just on the expenses, more on the core items. Just anything that we should be thinking for the rest of the year? I understand the transaction costs.

But on the core lines, I think maybe like other, it seemed a bit light. I think you mentioned comp came in a little bit better. Just anything that's unusual that we should be thinking about from a modeling standpoint in the second half?

Speaker 1

Yes. The other is light because part of the hedging, there was a gain in there, so that kind of made that look light. And so I go back and, you know, look at last quarter and the quarter a year before and, you know, average them or something like that. You know, the 11,000,000 is gonna be spread out in in a bunch of different areas. So, you know, that's where it's gonna be spread out basically in professional service fees, comp, and then, you know, again, spread out.

The you know, there's new numbers coming in from Hermes, we're not really going to go through where those expenses are going to show up. We'll all see them at the end of Q3.

Speaker 3

Our next question comes from the line

Speaker 0

of Bill Katz with Citi.

Speaker 4

Okay. Thank you very much. So first question, you mentioned in the prepared remarks and also in the press release about fee waivers on the money market business. So I'm wondering now where we are with sort of short term rates, why that's happening? And how should we think about maybe the fee rate mix on money markets as you go forward if you are still employing fee waivers?

Speaker 1

Good morning, Bill. On on the these are different fee waivers than those that were done in order to maintain a positive yield back in the day. So let's set that aside, and I know you know that. The the the what occasions these particular waivers are simply competitive forces in the marketplace in order to maintain these products, at a competitive level. Yeah.

Bill, it's Ray. You you look through our disclosure. I mean, we've we've prior to even the low point of the rate cycle, you know, we we would report in there hundreds of millions of dollars worth of of fee waivers. So as Chris said, this is really a continuation of a long term trend of waiving portions of our fee for competitive purposes.

Speaker 4

Okay. Just a couple of more follow ups. The second question I have is, as you think about the comp relative to the gross sales dynamic, sort of gathering that the comp came in below the prior range because of the sort of more sluggish gross in net sales. I guess I want to confirm if that is the case. And if it is the case, how do we think about the key to operating margin improvement from here?

So if you were to get an improvement in sales, would that get absorbed by a pickup in variable compensation?

Speaker 5

You are

Speaker 1

exactly right. And if you remember last quarter, we had an uptick in comp because we had an uptick in sales. So this quarter, we're having a downtick in sales and a downtick in comp. If we have another uptick in sales, which we hope to do, we will get what I used to call a success item, higher expense in the incentive comp line. But, Bill, that's not to say the margin can't expand.

I mean, you know, you have noise in any period, obviously, with, you know, the timing of pay of incentive comp accruals and and payments. So you need to we would take a longer look at it, a longer view of it than that quarterly tweaking.

Speaker 4

Right. And just last question again. So Chris, just going back to your opening commentary about sort of how you're positioning the strategic value fund. But then when you look at the attrition, it doesn't really box up against how you're sort of thinking about it. So what is the disconnect in the retail marketplace, particularly in the SMA side?

And what are you doing to try and reeducate people relative to sort of stumping some of the redemption pressure?

Speaker 1

Well, I don't I don't think there's a a disconnect at all. It is the first point. And and that is because we have been very thorough and explained exactly what the mandate was on that fund that is different than that category. The reason why the redemptions continue is because of the confluence of factors that occurred early in the year, which was which now isn't exactly the case. But anyway, a three percent ten year T bill and then the securities that were owned in those funds were not the favored securities by the marketplace.

And so you see and the reason I pointed out those jump around numbers on performance was so that you could get a sense of what we've said all along. But because that fund is focused on high and growing dividend income stream, the performance on a Morningstar basis jumps around. And, I mean, if you even go into another factor that for the month of June, that fund was in the top 3%. And through so far in July, it's in the 96%. And so the if people are now focused on that kind of, performance number as opposed to the three and a half percent yield, then we're gonna continue to have the redemptions.

So if you look at the redemptions, yes, they are continuing, and I can't make a very good case that that they are lessening. However, I will note that in April, the total redemptions were 509,000,000. In May, the redemptions were 481,000,000. In June, they were 440,000,000. And so far in July, they were 202,000,000.

Now, you know, you can double July or do whatever you want. It's three weeks. But it it it's not enough for me to make, oh, well, the trend is really good. Those numbers are very, very small. And overall, if you look at the year, we've lost $2,000,000,000 out of that fund.

And the only good thing about a redemption in the circumstance like this is it can't happen twice. And at the base, I think, as I've said on this call before, that at some point, we're getting to the base where the shareholders that are in there are shareholders for dividends and not shareholders who came in in the early part of, you know, through '16 because of the number one performance that was going on at that time. Where that exactly is, is very difficult to say. And as regards the SMA, it's basically the the the same dynamic. And we saw that there were some instances where some of our our clients, because of the performance of that mandate, we're putting large chunks to include even big big chunks of their customers' SMA entirely in that portfolio.

And we're seeing them over time reducing that or eliminating the the position. But but that wasn't exactly the a use of that fund for a for a customer. What we are doing in answer to your question, we are spending a lot of time, PMs, a lot of helpers, talking to clients about exactly what this mandate does. Daniel Paris's new book, his third book has just come out, which is basically an articulation of the dividend method of investing. And, this is just another effort of us to repeat the sounding joy of what this mandate is and communicate it to clients.

Bill, I'll just add one other thing. We have seen, some institutional interest viewing that as we keep saying that the dividend cash stream from this strategy has been effectively put on sale by the sector rotation and the rate spike that we saw earlier in the year. So the numbers are small relative to the mutual fund and the SMA, but we had positive institutional separate account flows in the strategy in the second quarter and we are seeing institutional interest in the income strategy.

Speaker 4

Our

Speaker 0

next question comes from the line of Patrick Davitt with Autonomous Research.

Speaker 1

The July flow picture you gave, did that include or exclude Hermes? And if if not, could you give the Hermes flows for July? It it excluded Hermes, and we we don't have Hermes month to date flow information. What we gave you for Hermes was the full second quarter. Right.

Okay. Yes. I did mention wait a second, Patrick, I did mention that Hermes net sales for the second quarter were GBP $816,000,000. Yes. Thank you.

And then following up on I think it was the call when you announced the deal, there was some discussion around some legacy BT assets that would be coming out over the years. Is there any update on the timing and size of those outflows? Saker, you are more than welcome to comment on this.

Speaker 6

Sure. So we still manage a sizable amount of assets for the BT pension scheme. And we had a plan over the long term for a controlled decrease of those assets. They're, in fact, spread across a variety of our funds, not just one or two, and the decline has been exactly on schedule. So nothing is out of what we've expected when we did the deal, and it remains online.

If you're looking at the second quarter, just to give you a flavor, we had small net outflows from the BPS of about GBP 600,000,000 in Q2, and that's pretty much as part of the plan that we've had over the long term.

Speaker 1

Thank you.

Speaker 0

And our next question comes from the line of Araud Ghosh with Credit Suisse. Please go ahead.

Speaker 7

Hey, good morning, everyone. So thanks for the color on the urban sales trends that you just mentioned as well. So of that 800,000,000 that you saw in 2Q, it looks like the retail side of it is still inflowing really nicely. So curious if the institutional flows were a bit weaker in the second quarter. Any color on that would be helpful.

And also, I think in 2017, around 35% of the sales of Hermes was from The U. K. Region. So any update on that in early twenty eighteen? Is it still you know, business usual there, or have you seen anything change?

Speaker 1

Saker, could you hear the question?

Speaker 6

I heard the second half. Can you repeat the first half again? I'm so sorry.

Speaker 7

No. You got it. Can you hear me now?

Speaker 6

Yes.

Speaker 7

Yep. So just looking for a little more color on the sales trends in February. I believe it was around net of 800,000,000 in net sales for Hermes. And, you know, based on some of the information that we look at and the data that we track, it looked like the retail side was inflowing nicely. So just curious if the institutional flows were a bit weaker and what the outlook there is?

Speaker 6

Thank you for that. And the answer The flow between institutional and non institutional remains on track as before. There's no change there. The institutional flow, obviously, there's timing issues.

So sometimes you'll see the retail flow come stronger in one quarter more than another simply because of timing. That's the wholesale customers we tend to play into. And if I look at the commitments that we have got in the second half, which is yet to fund, there's a very strong institutional flow within that. So again, no change from where the plan is. In terms of regional distribution, we are still the majority flows are seen within Europe, including The UK, which is not surprising given this is our home market, if you think about it.

So that's, again, no change from where we were. Does that answer the question?

Speaker 7

Yes. That's perfect. And then just a quick follow on. Back to expenses. Excluding comp and other expenses in 2Q that you added some color on, is are the other core items a good run rate and starting point as we think about the next six months?

And this obviously excludes any impact from Hermes. So just Federated on a stand alone, is 2Q a good sort of run rate? And then on on the cost side, you mentioned a few institutional and mutual fund launches that you have planned. Is all of this baked into sort of, you know, the accretion numbers that you initially provided? Was it part of the original plan?

Or should we think about any incremental costs moving forward in 2018 and 2019?

Speaker 1

Yes. So thank you. The run rate for June and what we expect for Q3 without talking about the Hermes expenses. We don't have I don't have anything to add that I talked about before in terms of the other result because of the hedging, the comp and the distribution lines and professional service fees related to the $11,000,000 that we're expecting in Q3 as an estimate. So I'm not really going to change that.

In terms of expenses related to bringing out new products with Hermes, that's part of when we talk about the 5,000,000 in Q4 and actually some of the money, some of the 11,000,000 in Q3 that we don't know what those numbers are. We keep saying they're estimates, and that should cover what we're talking about doing for Hermes. Will that drag into 'nineteen? We had to come up with estimates. We wanted to try to start at that 'twenty two that we did when we announced the deal.

And as you see, we have that down to 'nineteen, not including the hedging. And it's our best estimate. We don't know. We'll carry into 'nineteen. Will we use all of it in Q3 and Q4?

We'll see.

Speaker 7

Got it. Very helpful. Thank you.

Speaker 0

Our next questions come from the line of Ken Worthington with JPMorgan.

Speaker 4

Hi, good morning and thank you for taking my questions. First, on the competitive waivers, obviously this has been a part of the business for a long time. It's the first time I can remember you guys calling out the competitive waivers in the release. So to what extent were they more severe this quarter than you've seen in the past? And were the waivers more meaningful in a particular product, say, like Prime versus Govvie or in a particular distribution channel?

Speaker 8

Ken, it's Ray. I don't know that

Speaker 1

they were more severe. I think that when we were doing attribution to those line items, they stood out as significant enough to mention. It may have just been that there weren't very many other changes to to to surround them. So I I don't know that I would call them more severe. And in terms of area of of product, no.

They they kinda go across the different types within money markets. So they would correlate more to asset levels if you you know, than than to the in terms of the financial impact and and not necessarily to the type of asset.

Speaker 4

Great. Thank you. And I can't remember if Debbie is on the call, if she is. Maybe what are you seeing in terms of investor transition from banks to money market funds? Is there any evidence of that happening yet?

And in particular, we're looking at sort of the bank trust channel. What's sort of happening there in this migration from bank to money fund or money fund to bank? Thanks.

Speaker 8

Sure, Ken. This is Debbie. Yes, we are seeing that. We started seeing that in the 2017 and it is certainly continuing into 2018. As you well know, I'm sure the deposit beta with banks is very low in an upward trending interest rate environment, which we've been in now for several years.

And I think certainly the institutional side of the marketplace has recognized that and has started to transition into money funds, some of their deposit product, cash, liquidity. A little slower on the retail side. So from a bank trust perspective, I'd say it's less and maybe lagging a little bit there, but it certainly had started. And it's interesting the flows have gone both into the government funds as well as the prime funds. The government funds more from a sweep product perspective because those products do not have dates and fees associated with them.

For the Prime and muni products, it seems to be more on a ticket trade basis, but substantial size from those businesses.

Speaker 3

Our next questions are from the

Speaker 0

line of Kenneth Lee with RBC. Please go ahead.

Speaker 9

Hi. Thanks for taking my question. Just a follow-up on that question about the money market funds. Are you seeing any clients shift from money market fund towards direct ownership of paper? Just want to see about that dynamic.

Thanks.

Speaker 1

Go ahead, Debbie. You're on a roll.

Speaker 8

Sure. That is not a trend that we've been seeing. It seems as though with repo, the biggest direct switch from funds into a product in the market was to switch into repo. And repo is just not that accessible any longer. There's, fewer participants in the marketplace.

Although the rate in the second quarter, offered was a little bit better than it has been, over the previous quarters, you know, compared to where other short term interest rates like commercial paper and CD rates are. It still is something that is contractual. It's, got a lot of legal associates with it. And as such, we've not seen too much, of a switch into the direct marketplace. Some of our very large clients that have, you know, some of the M and A activity, potentially some of the repatriation activity, they have taken some cash and put it into the direct commercial paper and CD marketplace.

But it's not a big trend. It's more sort of the supersized players in the market that have gone that route.

Speaker 9

Okay, great. And just one follow-up if I can. Just on in terms of the Hermes, I know that in the past you've talked about in terms of new product registration things of an nature like a private market strategy. Wondering if there's any other additional product that you'd like to highlight that could be coming online in 2019?

Speaker 1

Well, I will let Saker comment, too. But at this point, we're not prepared to articulate any given product. We have an array of ideas on many of Hermes' various mandates, and we have a longer term view towards the the beauty of bringing property, infrastructure, private equity as well, but in a in a in a in a later phase. I'll let Saker take an attempt if he wants to highlight any of the products.

Speaker 6

Thank you. In fact, I'll not highlight any of the products. We're doing a joint study of the market to see which is the most appropriate. The only thing I'd say about the products that Hermes bring to the table is and you can see them because they're all on public domain. They have very strong performance, very high active share, which means high active products across the board in public markets.

And the record of our sales records in The UK and Europe historically has been incredibly strong and the performance is incredibly strong. And we think that in the right format, these would be equally attractive in The U. S. Market. The second thing that is worth pointing out is that, again, this is massive public record, and you can look it up on our website that where we've launched new products, we quite often manage to see them from clients coming in very early as Cornerstone cedars.

And these have done really well, including in areas which are new in the market, like SDG fund, Life and Impact fund as well as in certain aspects of unconstrained credit funds. So we've got a strong portfolio. Now we and our colleagues in Federated are working hard to understand which are the best opportunities to bring to the marketplace in The United States. And in time, we'll come back and be able to share that with you. But I want to also emphasize that a big part of this is knowledge sharing.

We have, over the last thirty years, pioneered the way that you can integrate ESG to increase the ability to mitigate risk and understand underlying stock positions better, not least with the launch of something we call the Carbon tool that lets you go down to a specific company level and understand the risk associated with Carbon with that specific company that you're looking at. That's the sort of knowledge base that we'll be sharing with our colleagues across the board, across Federica. And we think that is quite powerful in its own right within the firm as well as having new offerings to offer to third parties. And with that, I think I will hand back to you guys.

Speaker 1

And I would only underscore our enthusiasm for the EOS equity ownership services as something that we are looking at, have talked about before as to how to structure it and how to build it up for presentation more robustly in The United States, which I don't have the answers to those questions, but it is something that we have articulated that we are quite interested in doing.

Speaker 4

Great. Thank you.

Speaker 0

And our next question comes from the

Speaker 8

line of Robert Lee with KBW.

Speaker 5

Thanks. Good morning,

Speaker 4

guys. Good morning. I was

Speaker 5

just wondering going to the Hermesat deal. I mean, now that you've closed on it, I mean, I don't know, is there any update to how you're thinking about the financial impact? I think originally, you thought it may be a couple of pennies GAAP dilutive but cash accretive. So any change to that? And then maybe as a follow-up to that, what your thoughts are about altering your reporting going forward to include an adjusted number that may reflect any kind of non cash expenses, intangible amortization, tax benefits, etcetera?

Speaker 1

Yes. Thanks, Rob. What we came out with at the announcement of the deal and including the expectation of the $22,000,000 and $0.19 of $02 dilutive in EPS and so on. We're updating that. We're not changing that.

We tried to give that to everybody as something to to have a view of our expectation of what we thought was gonna happen at the time. And we so we don't wanna go in and update the numbers, change them, look at what, you know, we think that Hermes is gonna do for the July, August, September, and redo those numbers. So so we're just we're just not gonna do that. I did take you through the $22,000,000 and the reduction there, and we will update you on that next quarter, much we can attribute to the deal and so on. The what was the second part of the question?

Speaker 5

Well, since you have the acquisition, assume you'll now have some noncash items. Maybe there's some tax benefits.

Speaker 1

Yes. Internally, we are not planning on doing that as of right now. We think it so we don't have the valuations, of course, because we have to hire the valuation company and have them go through that. So we'll have that by the end of Q3. But we're not we think it's going to be readily available to see the amortization.

And so we're not planning on doing a cash item, and we're trying to just stick to GAAP. That's our that's our plan right now. Thank you very much.

Speaker 5

Okay. Just follow-up. Is it possible just so we can kinda, you know, touch up our models what Hermes assets were at closing?

Speaker 1

Yes. Yep. Yeah. Those are Chris's remarks, and we're just giving them back to you here in twenty seconds.

Speaker 5

Yes. I got on a

Speaker 1

little late, so I see if it's Assets at June 30 were £35,300,000,000 in pounds, PS, up £1,600,000,000 from £33,600,000,000 at Q1.

Speaker 5

Great. Thanks so much.

Speaker 0

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for closing comments.

Speaker 1

Well, that will conclude our comments for today, we thank you for joining us.

Speaker 0

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.