DST Systems' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 2.11 | About: DST Systems (DST)

DST Systems (NYSE:DST)

Q3 2011 Earnings Call

November 02, 2011 8:30 am ET

Executives

Kenneth V. Hager - Chief Financial Officer, Vice President, Treasurer and Member of Proxy Committee

Thomas A. McDonnell - Chief Executive Officer and Director

Stephen C. Hooley - President, Chief Operating Officer and Member of Proxy Committee

Analysts

Peter J. Heckmann - Avondale Partners, LLC, Research Division

David Togut - Evercore Partners Inc., Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Operator

Good morning, and welcome to the DST Systems Third Quarter Financial Results Conference Call. [Operator Instructions] Now I would like to turn the conference over to our host, Mr. Tom McDonnell. Please go ahead, sir.

Thomas A. McDonnell

Thank you, and good morning. We appreciate you joining our earnings call this morning. With me here today are Steve Hooley, our President and COO; and Ken Hager, the company's CFO.

Before beginning, I'd like to remind everyone that in the course of our conference call today, we will make forward-looking statements regarding DST or some of its businesses and such statements are based on our views as of today, and actual results could differ materially from the forecasted results. There could be a number of factors affecting those future results, including risk factors set forth in our latest annual and quarterly reports, which we file with the SEC.

All such factors should be considered in evaluating any forward-looking statements that we may make. Since you have access to our detailed earnings release, we will focus our comments on those items that we think are most significant.

This morning, we made an additional announcement regarding our Board of Directors strategic review process. Before we review our third quarter financial results, I'd like to take a moment to discuss this announcement and our business plan to create additional value for the shareowners.

As you know in August, we announced that our board had retained independent financial and legal advisers to assist in an ongoing review of the company's business plan, its assets and its investment portfolio. With the assistance of our advisers, the board engaged in a comprehensive review process and our Board of Directors unanimously determined that continuing to execute the company's business plan and strategy is in the best interest of DST and all of its shareowners.

Our board is confident that the company's focus on 5 key industry verticals: asset management, brokerage, retirement, insurance and healthcare, as well as the development and delivery of customer communications through both print and electronic media, will enhance that shareowner value.

Our growth strategy is to leverage our technology-differentiated solutions to support our customers' information management, business process and customer relationship needs. We're committed to driving future growth by continuing to increase scale, efficiencies and competitiveness as well as expanding our product and service offerings. We will, of course, continue to explore synergistic acquisitions, strategic partnerships and additional investments in areas that enhance the company's existing technology offerings or to create new solutions that meet customer needs.

As I will discuss shortly in more detail, we recently completed the acquisition of ALPS Holdings, Inc., which broadens the range of products and services DST offers to the investment management and brokerage industries, including a suite of asset servicing and asset gathering solutions. Through this ongoing review, our board concurred with management's plan as reviewed by advisers, which identified strategic opportunities to further strengthen our business, adjust our capital structure and create value for the shareowners. These opportunities include, among others, the monetization of certain of our non-operating assets and investments. The consideration of that monetization would be subject to market timing, pricing and the potential of tax-efficient transactions.

Enhancing the outlook and performance of certain business units through additional investments and strategic partnerships, returning capital to the shareowners through additional share repurchases, those will be undertaken where excess cash from operations and monetization proceeds are not needed to pay down debt or to service other obligations, or where we believe that we can generate a greater return by growing the business organically through acquisitions or forming strategic partnerships.

And also we intend to improve the transparency and frequency of communications with our shareowners and analysts, including providing additional information regarding our unconsolidated affiliates and passive investments, such as our real estate assets.

As you probably have seen from our third quarter earnings release, this effort to provide that transparency is already underway. Separately, DST has had a long and, we believe, successful history of returning capital to shareowners through significant share repurchases and the recent initiation of a semiannual cash dividend that was instituted in 2010. Since January 1, 2005, we repurchased approximately 46.2 million shares, and that represents approximately 51% of the shares at the beginning of that period that were outstanding, and that was for a total consideration of approximately $2.7 billion.

During the third quarter of 2011 and through the end of October, we repurchased 2.5 million shares and that was for an aggregate consideration of $112.9 million. In order to continue this strategy, our board has authorized an additional share repurchase program of 2 million shares of common stock. The new share repurchase program will become effective on January 1, 2012, and run through December 31, 2013. We are pleased with the progress made so far on our comprehensive review, and we hope to achieve additional value for our shareowners through these ongoing and focused efforts.

Growth will continue to be related and driven by a disciplined acquisition strategy to expand our presence in the markets we currently served as well as markets that are adjacent to the current ones. And to that end, I'd like to spend a little time discussing the strategic acquisitions we have completed recently.

On October 31, DST closed the previously announced acquisition of ALPS Holdings, Inc. It's a provider of a comprehensive suite of asset servicing and asset gathering solutions, open-end mutual funds, closed-end funds, exchange traded funds and alternative investment funds. ALPS offers a wide range of services, including fund and tax administration, accounting, transfer agency, compliance and administration services. ALPS has a range of distribution capabilities, which include medallion distribution services, active marketing and wholesaling services and a fully bundled closed-end fund IPO launch platform. ALPS brings a comprehensive solution set that allows DST to service market segments that we have previously been unable to address. These segments of the market typically demand a solution that's bundled with the attendant distribution support. ALPS has approximately 340 employees and recorded revenue of $65.4 million for the 9 months ended September 30 of this year. ALPS has demonstrated a strong track record of growth. For the years 2003 through 2010, revenue grew at a compounding annual rate of 35%. Revenue growth for the year ended September 30 was a little over 24%, 24.4%. We expect the addition of ALPS to be accretive to earnings before taking into account anticipated synergies that we think we'll derive from the transaction. We now estimate that ALPS will contribute approximately $0.22 per share in 2012 on a GAAP basis and again, that's prior to synergies and the costs associated with the transaction. Earlier in the second quarter, we had estimated that contribution to be $0.06 per share. The increase is a result of really an updated estimate of the amortization of ALPS intangible assets. So excluding the net income effect of non-cash expenses and the anticipated synergies, DST projects ALPS will contribute approximately $0.31 per share in 2012. We continue to estimate that about $5 million of synergies will be realized by year end 2013. We believe that ALPS and its customers will benefit from DST's market presence and our significant data center and technology infrastructure that we can apply to their operations.

Also during the quarter, DST's IOS subsidiary in the U.K. completed the acquisition of Lateral Group Limited. That's also a U.K. company engaged in integrated data-driven multichannel marketing. Lateral has about 440 employees and had revenues of $80 million for the year ended December 31, 2010. Lateral is comprised of 3 businesses. Data Lateral, that's a marketing service provider, and they specialize in email design and deployment, database design and hosting, customer analysis and targeting, website design, building those and hosting them. Another part of Lateral, Howitt, it's a print service provider that combines top-quality print and fulfillment with some of the key data services referenced a minute ago and the advanced technologies that support those. And the third segment is Dialogue Solutions, and they provide digital printing and print management as well as software development. The acquisition of Lateral complements existing IOS business in terms of services offered and business outlook. This acquisition also allows IOS to extend and development its services and product offerings by further integrating communications through print, data and e-solutions and providing additional products, such as data insight and online marketing to the IOS client base.

On July 1, we completed the acquisition of the assets of IntelliSource Healthcare Solutions. That company's principal, CareConnect, provides automated care management systems. The addition of the IntelliSource suite of solutions broadens our Health Solutions product offering for integrated care management. The integration of IntelliSource into our health claims platforms will be completed in the fourth quarter of this year. And initial clients actually already been converted to the enhanced platform and several client commitments are expected by year end.

So we have invested approximately $360 million in acquisitions to date in this year. We anticipate that those acquisitions will add approximately $270 million of annualized operating revenue for the full year of 2012.

Amortization expense recorded in the third quarter of 2011 from intangible assets, that's primarily customer relationship assets and proprietary software that were acquired in connection with the 2011 businesses, was approximately $1 million. That would have fallen $400,000 into the Financial Services segment and $600,000 in Output.

Amortization expense for the fourth quarter of 2011 from these acquisitions including ALPS which closed on October 31 is projected to be $2.2 million, and that will break down as $1.4 million in Financial Services and $800,000 in Output Solutions.

So for 2012, anticipated amortization expense from these 2011 acquisitions is projected to be $11 million. And again, that will break down $8 million in Financial Services and $3 million in Output Solutions.

So overall, we remain focused on making acquisitions that complement our businesses that allow us to expand our services and that ultimately enhance our results. Before moving to the specific results for the quarter, I'd like to point out a few additional items. After the share repurchases that we previously discussed, the outstanding shares now are at 44.1 million. There were approximately 50,000 shares left under the existing authorization. So that once the other authorization goes into effect January 1, it will be a total of 2,050,000.

On September 20, we declared a $0.35 per share cash dividend that's payable on November 4. We repurchased 3.5 million shares of our Series C debentures for $3.8 million during the quarter. So at the end of September, we had approximately 86.5 million of those Series C debentures that remained outstanding.

Total debt increased by $110.6 million to $1.3 billion at September 30. That's principally from the funding of the business acquisitions and the share repurchase that we mentioned for the quarter and through the end of October.

Looking at the third quarter financial results and just as a reminder, all of our comments on these results refer to our non-GAAP results. There's a reconciliation to the most comparable GAAP measures that's in the earnings release itself.

So on an adjusted non-GAAP basis, diluted earnings per share was $0.90, and that's a decrease of $0.13 or 12.6% from the third quarter last year. The consolidated operating revenues for the quarter were $433.1 million. That's an increase of $29.8 million or 7.4% from 2010. That reflects the inclusion of Lateral Group and Newkirk revenues and also an additional month of the dsicmm Group revenues that was acquired by IOS. Consolidated operating income decreased by $5.7 million or 8.3% from the third quarter last year. That's really a result of lower Financial Services segment operating revenues, higher costs associated with business investment for solutions and new product areas, brokerage, insurance and retirement industry verticals. It also reflects increased losses incurred by IOS and the recognition of charges related to the vacating of a leased office facility. All of those items were somewhat offset by higher contributions from Output Solutions North American operations and a decrease in deferred compensation cost. That's the item we have every quarter, and it is again -- it's offset in the other income area.

The equity in earnings of our unconsolidated affiliates decreased by $4.6 million. That was lower earnings at BFDS, IFDS Ireland and IFDS U.K. The other income category showed a decrease of approximately $8 million. That's from unrealized depreciation on investments designated as trading. Again, that's offset in income from operations.

DST's third quarter 2011 tax rate included an income tax benefit that resulted from the ability to utilize foreign tax credits against the U.S. tax obligation. Financial Services operating revenues decreased by $4.3 million, and that was 1.5% less than the third quarter of '10, reflects lower mutual fund shareowner processing and DST HealthCare revenues. Again, there was some offset by higher software license and professional services at DST Global Solutions.

When we look at software license revenues overall, that increased by $3.3 million or 34.5% compared to the third quarter of last year. There were increased license revenues recorded for AWD 10, our newest release of AWD that has a significant new functionality and also increases in the licenses of the investment management software.

Financial Services cost and expenses increased by $1.2 million over the third quarter of last year. When we look at the business development and startup costs for the insurance, brokerage and retirement businesses, they amounted to $8.5 million or $0.12 per share. The deferred compensation costs declined by $9.1 million from market declines. Related foreign exchange rates, they resulted in an increase of $3.2 million. So as a result of all of that, Financial Services income from operations decreased by $4.9 million or 7.4%.

Currently, we expect the fourth quarter 2011 business development and startup expenses associated with those business lines, brokerage, insurance and retirement to be about $0.13 per diluted share. We also anticipate that we'll recognize a $0.60 to $0.65 per diluted share of the expenses related with the development of these businesses in 2012.

During the quarter, turning to mutual funds. Registered accounts there declined by $8.4 million. Getting underneath that, there were conversions to subaccounting platforms, which totals $6.5 million, $300,000 of those were migrated to our subaccounting platform. We had conversions to non-DST registered account platforms of $1.1 million. That was from the full-service client loss that we had reported, I believe, last quarter. And during the period, we also saw an organic decline, in effect, just a reduction of shareowners in the client base of 800,000 registered accounts.

So right now, we expect the total subaccounting conversions in 2011 will approximate 14 million accounts, that's pretty much in the range that we estimated last quarter. Preliminary indications suggest that an estimate of 8 million to 10 million accounts will move to subaccounting in 2012. And currently, we anticipate that approximately 40% of those accounts, the 2012 ones, will migrate to DST's subaccounting platform. So the net effect of subaccounting activities resulted in a decrease of 2.2 million accounts for the quarter, but that decrease consisted of a previously disclosed subaccounting loss. That was a client that's an affiliate of Bank of New York Mellon that converted 2.7 million subaccounts to Bank of New York Mellon's in-house platform. And within that mix, there was somewhat of an offset from the 300,000 registered accounts moving to our platform that I mentioned earlier, 100,000 from non-DST platforms and within the subaccounting, an organic growth of 100,000. So in effect, the $2.7 million netting out $500,000 is what gets you to the $2.2 million. We experienced an organic increase in defined contribution participants of 100,000 for the quarter. Total participants serviced stood at 4.4 million at September 30, and that's an increase of 500,000 participants from the same period last year.

For the full year of 2011, DST Retirement Services projects approximately $45 million in operating revenues, and that's based on the current defined contribution participant levels. As we've discussed before, we have a committed backlog there of clients that were in the process of converting. Right now, Retirement Solutions estimates it will have approximately $65 million of annual operating revenues from that existing client base by -- in some portion of 2013.

So as the Retirement business develops, we believe the margins in that business will attain the same overall levels that the business has been able -- the overall business has been able to generate historically.

At BFDS, there were a reduced level of accounts serviced. Again, they have the issues of subaccounting also, and it was really the subaccounting conversions that accounted for the bulk of the decline in earnings. Also the average balances for the period, the float, increased to about $1.1 billion and that was from $919 million last year. However, even though the balances increased, the average interest rate earned declined from 19 basis points last year to 9 basis points this year. And that results in a pretax reduction of BFDS' earnings because at those levels, the balance earnings really can't offset the transaction costs of maintaining the accounts. BFDS during the recent period executed a workforce reduction of approximately 8%.

Turning to IFDS. The overall equity and earnings there declined from the prior year quarter by $1.2 million. IFDS U.K. accounts actually increased by 400,000 during the quarter. But the decline in earnings came from higher costs related to client conversions, including a onetime payment for a software license extension that allowed us to -- in effect facilitate a client conversion. The combination of those things decreased our share of IFDS' U.K. earnings by approximately $700,000 in the quarter, that's pretty much all a onetime event. Also IFDS U.K. is in the process of converting 2 new clients with approximately 800,000 accounts. Those conversions should be fully completed by year end 2012.

In Canada, IFDS Canada, account service declined during the quarter by 500,000. That was due to a client loss of approximately 240,000 accounts and then an organic decrease in accounts of about -- the difference 260,000. However, IFDS Canada has received a client commitment for the conversion of approximately 1.7 million accounts. That conversion will occur in the second half of 2012. That will be an increase of about 17% on the current account base. Prior to that conversion, however, IFDS Canada will be incurring the conversion costs to get that book of business across, it's a large book. And those costs will continue to be a drag on earnings for a while.

In IFDS Ireland, we continue to invest in the adaptation of our Percana Life Insurance software to support its introduction into the U.K. marketplace. We also have a number of costs associated with the conversion of full-service processing client in that market.

Turning to Output Solutions. As noted in the press release, we're now going to provide information in 2 pieces, both the North American and the United Kingdom operating business. There are some difference in the nature of those businesses. The North American business is substantially a provider of print and electronic delivery service for client bills and statements that are related to transaction events. With the acquisition of Newkirk and Capital Fulfillment Group, however, it expands the North American business to include participant enrollment and compliance communications related to retirement accounts, insurance, mutual funds and healthcare. And in retirement and healthcare, we see good cross-selling opportunities with the other 2 business lines of DSTs there.

United Kingdom business is oriented to data-driven marketing communications, a management of direct mail campaigns. And over there, the transaction-based printing really represents less than 20% of revenues.

So on the financials for North America, the operating revenues increased by $13.8 million in the quarter, that reflects the Newkirk acquisition and higher fulfillment revenues. And North American income from operations increased by $3.9 million to $8.9 million. That's an operating margin of 8.2%, driven by the increased revenues, also improvements in operating efficiencies and lower compensation cost. The North American EBITDA also showed an increase, an increase of $2.5 million to $17.5 million. In the United Kingdom, the operating revenues went up by $19.3 million, that's as a result of the Lateral acquisition that was completed in August and on a comparative basis, an additional month of revenue from dsicmm. However, the U.K. reported an operating loss of $7 million for the quarter. That reflected lower than expected revenues. And also we continue to incur costs associated with the consolidation of facilities and the reductions in workforce to achieve synergies of the initial merger and then the subsequent acquisition of Lateral.

So the ongoing cost reduction from the consolidation of facilities and redistributing work to the remaining locations will have some upfront onetime real estate disposition and staff reduction costs, and those will continue to be incurred probably through the second and possibly the third quarter 2012. We have successfully integrated the management teams of Lateral and IOS and are in the process of fully integrating the operations.

Included in the press release and we talk about it for a moment or two here. We have tried to present more effectively a view of the real estate holdings. As we say, we're working to improve the transparency regarding the unconsolidated affiliates and pass of investments which, of course, includes our real estate assets. So in the press release, we provided expanded disclosure of the U.S. real estate operations.

DST. We own real estate directly and indirectly through joint ventures. Our real estate strategy over time has been to leverage our need for facilities and to create value through long-term ownership, both controlling our own operating costs and creating residual value.

We've used joint ventures to own or acquire facilities in and around the downtown Kansas City area, some of which are occupied by DST or affiliates. Our U.S. real estate holdings from a GAAP standpoint were breakeven for the quarter but they generated $4.2 million of operating EBITDA. We have provided and intend to continue to provide information on the basis of funds from operations. Funds from operations or FFO is one of the measures we use to evaluate our real estate holdings, and we think that's consistent with the way many real estate operations are valued. So if you look at it from a funds from operations standpoint, the U.S. real estate holdings had a total of $4.6 million of funds from operation, and that translates to $0.10 per share of FFO for the quarter.

We also think it's relevant to provide debt information relative to the real estate. Substantially all the joint venture debt is non-recourse to the property owner. When you look at the consolidated real estate debt plus our pro rata share of the joint venture debt, it stood at $311.9 million at September 30, 2011. And our pro rata share on the same basis of debt is expected to decline by approximately $80 million over the next 5 years. So we would intend to provide sort of a rolling update on the debt position on a rolling 5-year basis. The income tax rate for the quarter came in at 29.4%, that compared to 35.2% in the third quarter of '10. And we currently estimate our tax rate for the remainder of the year to be approximately 33.6%. The estimated tax rate for the full years declined due to changes in the mix of earnings and from increased utilization of foreign tax credits. So at this point, we would like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Dave Koning with Baird.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

And I guess, first just on the registered account decline. Thanks for the disclosure on this year and next year. It looked like this quarter you mentioned 6.5 million reductions from switches out that I don't think were highlighted before and usually we get a heads-up I think a quarter or 2 beforehand when something comes. So this seem to have developed a lot quicker. Maybe you can just describe maybe what happened with that group of 6.5 million accounts that went away this quarter?

Thomas A. McDonnell

Yes, let me let Steve take that. I mean, basically, Dave, we're still in the ballpark of the total number. We just didn't get accelerated in those quarters, but I'll let Steve comment on that.

Stephen C. Hooley

Sure, Dave. We -- as Tom said, we kind of -- we've been trying to give you a forward-looking rolling 12-month number. And the reason is, these conversions can move quarter-to-quarter pretty easily, right? This quarter was a big quarter. I would tell you that 60% of the movement in the quarter was in 2 events that were forecasted and known to major conversions and the rest was kind of across the customer base. So I wouldn't tell you that there's any cyclicality to the subaccounting conversions. Our model currently for next year shows that first quarter we'll have a more significant number of subaccounts moving in the other 3 quarters. But again, that could certainly move. So you should -- there's nothing more to it than happens to be the quarter when these customers decided to move the accounts.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And just couple of others, one is you said $0.60 to $0.65 for 2012 investments. How much is in this year? I guess, I'm wondering what the swing factor is, if there's $0.30 in this year, it really only means $0.30 incremental next year. So maybe...

Thomas A. McDonnell

Well, we had $0.12 this quarter, and we anticipate $0.13 for Q4, so that's $0.25. That -- some of that investment really didn't start to occur until late first quarter, second. So we'll see if we've got an exact -- close to an exact number, Dave. But I would say if you take $0.25 for the second half of the year, there is probably 6 to 10 for the first half. So you can round it out to maybe somewhere around the $0.30 to $0.35 range. Next year, it will be $0.65. Now that's the level of investment. Hopefully, some of that investment will accelerate the opportunity for revenue but that's not a net number, that's just the absolute cost of bringing these products to a marketplace level or in the case of retirement solutions. The investment in filling out specific client requirements for the 2 that I mentioned. Because once we complete the conversion of those 2, that will get us to that $65 million run rate of revenue. That will also get us, I think, to about 6.5 million accounts, which we think will actually put us as the #2 provider in that segment.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And just, I guess, one last one. Affiliates, I think you, mentioned $4.3 million of affiliate income in one place. But then I think on the income statement, if I read it right, I think it was $1.7 million. And I'm just wondering why the income statement wasn't $4.3 million?

Kenneth V. Hager

Dave, this is Ken Hager. The biggest difference is that the -- on the GAAP income statement, we included the full cost of the severance action taken at BFDS, which we excluded from a non-GAAP perspective.

Operator

[Operator Instructions] Your next question is from the line of David Togut with Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

Tom and Ken, 2 questions. First, Tom, could you break down the $0.60 to $0.65 of investment for 2012 in terms of the different areas where you intend to spend that money? And can you give us a sense of how it might roll out throughout the year?

Thomas A. McDonnell

Well, we won't break it down by segment because some of those segments aren't disclosed as an ongoing unit. But there is $0.13 in fourth quarter this year, my sense is that, that will step up $0.15, $0.16 and probably stay roughly in that area of $0.16, $0.165 for the rest of the year. The complement of development resources and conversion resources because most of it, David, as you can appreciate, is staffing, so that's pretty much in place. So once we hit the run rate in Q1 it will be pretty much be leveled for the quarters throughout the year.

David Togut - Evercore Partners Inc., Research Division

And do you have a view as to what that spending will be in 2013?

Thomas A. McDonnell

Well, I mean, if you look at the way these businesses have developed historically, as you get the businesses up and running, what was sort of business development and expenses related with that tend to convert over to expense in supporting the ongoing business operation. So I'm not sure that the absolute dollars have declined, but they should be matched against increased revenue levels. And the nature of them, David, will go from sort of a startup business development to ongoing operating support, which kind of gets into the reference I made earlier that once like, for instance, say, Retirement Solution gets up to some critical mass, you'll still have those people but they'll be doing different things, but it should allow us to attain sort of the overall corporate margins we've enjoyed in those types of businesses historically.

David Togut - Evercore Partners Inc., Research Division

I see. And just a quick final question, Tom. The pace of acquisitions has accelerated sharply over the last 3 to 6 months. Have you made any changes to your systems and processes to make sure these acquired companies are integrated smoothly into DST?

Thomas A. McDonnell

Well, first, the pace has picked up. But I think you can expect it to slow. We have added, we believe, critical components to the various business lines. So -- and by the way, ALPS, as we mentioned earlier, it's going to be an individual segment. It will benefit from some synergies, but we don't see it as much of an integration situation. It's just a broader business opportunity. So we anticipate that there will be little risk so to speak of integration. When we get into the, for instance, healthcare and so forth -- and I guess what your question is, is we made any changes. I think what we've done is in these acquisitions, we pretty much mapped out how they complement the existing businesses. As I mentioned, IntelliSource in healthcare, that's pretty much really just a software integration with existing business lines. And then, in getting the sales force up to speed on selling that product, we take that one, as I indicated, is completed, and we're getting pretty good customer response to that. The business of insurance really is a start from scratch business, and it's a separate business line. So for lack of a better term, David, it's actually sort of pre-integrated, so to speak, because we're kind of building it in through DST's infrastructure and what we've added in effect, product and industry experts there. Probably the more -- the one that's going to have the most complication for integration is brokerage where we have 2 or 3 acquisitions there. And in addition to the acquisitions, we're integrating by vertical, the sale of other related products like AWD and so forth. So I think in the case of brokerage, one of the things we felt we have done there in the acquisition of Phoenix in particular, we've got a strong management team that's going to be responsible for the aggregation of that business. So I think we feel pretty good that the approach to bringing those businesses together under DST. And as I indicated, we're going to run them as various verticals, so a part of it is integration, but a lot of it is just building the independent expertise in that area. Steve, do you want to comment on that at all?

Stephen C. Hooley

No, I think that's accurate, Tom. Each of them are somewhat different. Certain of the verticals, we're taking existing DST technology and building out around them. And then, as you mentioned in both the brokerage and the insurance space, we're actually building fairly significant new core capabilities.

Operator

[Operator Instructions] Our final question is from the line of Peter Heckmann with Avondale Partners.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

I wanted to know -- it doesn't appear that you're taking questions from the buy side. Is that -- it doesn't seem that, that's consistent with your goal to increase shareholder outreach.

Thomas A. McDonnell

I don't know that we necessarily precluded that. I mean, I'm not managing the input to the call, Pete, so I really can't tell you who's calling in and who we're taking or not taking.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay. I know that on the last call I talked to several buy siders that tried to buzz in were not allowed to ask questions. In terms of the goals that you put out in terms of strategic initiatives, they're kind of soft goals, no real timetable, do you think -- can you give us a little bit of an idea what the timetable might be and have you identified any of the investments in the portfolio that you might, not by name, but seek to monetize? Are there some of those investments that they have a relatively higher cost basis that would not incur a realized gain that would be easier to monetize? And then last question is that the additional authorization for the share repurchase does not start until January, why is that?

Thomas A. McDonnell

Let me answer those in reverse. One, because of where we are in the acquisitions and the funding of those. And having funded ALPS on Monday, I think our current debt balance is up around $1.5 billion from the $1.3 billion that we mentioned here at the end of the quarter. So really, Pete, at that point we want to see that debt balance come down to some degree before we consider additional share repurchases. Let me transition into the other. I mean, historically, we have run the balance sheet to provide hopefully some leverage on the cost of borrowed funds, so that the shareowners can benefit from a debt component of the balance sheet. But we've always felt that, that balance sheet number has been relatively conservative because a substantial portion of that debt is offset by the valuation of the marketable securities. And then underneath the debt which, say, right now probably $1.5 billion, about 20%, oh, somewhere around 25% of that debt is fixed term, fixed rate. The rest of that debt is floating rate. And so we've always looked at the mix and order of magnitude in the balance sheet relative to the marketable securities. And also, we look through to the balances at BFDS, we mentioned they were at $1.1 billion. We also have balances at Argus. So if you take half of the BFDS and you take $300 million of Argus, there's about $800 million of balances there that while they aren't earning right now, we look at them as a natural hedge to the floating rate component of the debt on our balance sheet. So as we look at altering the capital structure by sale and securities or anything else, we want to take into account how those relative positions on the balance sheet will evolve. So I don't think we will do any one thing independent. If we find some high cost securities we sell, we're going to adjust the balance sheet, so the net debt position of the company doesn't alter materially. Having said that, given the current markets, we haven't seen attractive opportunities to sell. Some portion of the securities also we look at both as to the absolute valuation of the company and what we think it's worth. And then, like I said, I was about to say in a couple of cases, particularly what's the exchange rate for the Australian dollar. We haven't set a particular timetable. One of the things that we have been able to accomplish historically is use of some of these security positions in connection with expanding the business by working with partners to do exchanges and so forth. We also would like to find, if possible, tax efficient monetization strategies. So in many cases, I would tell you that our time frames really haven't changed much. We've continued to look for those opportunities. I think because of the current situation, what we are a little more focused on is there an ability to surface any of those possibilities sooner rather than later. Having said that, we have not put together any specific timetables. So we continue to look at our real estate as an aggregate, by the way, we don't see it as a piece by piece business. We will continue to look at opportunities for structures, private read or things like that, that might enhance that value. But what we will do is, on an ongoing basis, we will to the extent anything has come to a head, so to speak, we will keep the shareowners and the analysts informed of where we are. But we didn't think that -- not that we really didn't think, it's just not advisable to set, particularly in volatile markets we have right now, deadlines or specific time frames. The time frame that we will work towards is the one that accommodates the realization of the greatest value for any monetizations or corporate restructurings.

Operator

And we have time for one more question, and that question is from the line of Dave Koning with Baird.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

I actually have a couple of quick ones. But the first one is the overall Output segment. You've talked for a while about 10% margin. Now that you've broken it out, it looks like the North America margin is getting pretty close to that. But the U.K. is in loss mode. How soon can the U.K. get to a 10% margin? Is that even a realistic target for that group?

Thomas A. McDonnell

I think it's realistic. As part of this consolidation of facilities, and we'll be eliminating a handful of actual physical facilities over there, and real estate in the U.K. is expensive to disengage from. I won't get into all the particulars over there. But it's not even necessarily an issue of length of lease, Dave. If we have a lease that's maturing next year, we can certainly walk away from the lease. But they have something over there called reinstatement, which basically means you got to put it back the way it was when you got it, which by the way, means even if you put a lot of improvements in, theoretically, you have to take them out. But because of their generous natures, the landlords will usually let you just write them a check as opposed to go all through that trouble. So there is some cost of exit to that. And as we will be moving facilities some geographic distance, we will be disengaging with a number of employees and disengagement in the U.K. as in many European economies is an expensive undertaking. Right now, we think, that between now and end of first quarter, we'll incur GBP 3 million to GBP 5 million, $4.8 million to $8 million of cost to get those facilities consolidated. But we think the occurrence of that cost will also offset on a run rate basis, about GBP 10 million to GBP 12 million of ongoing cost. Last quarter, we had -- in the U.K. was particularly soft. July and August are usually soft over there. But this may sound as a minor event but they had sort of a 10-day missing in action where a lot of mail and mail promotions didn't occur due to the royal wedding, which happened to be sandwiched between 2 bank holidays. So literally business was closed about 10 days during the quarter. With the introduction of Lateral, we actually have acquired a very efficient operating facility in Nottingham, and so that has caused us to -- we were in the process of consolidating others. We changed the consolidating plan. That will probably cost us part of this -- it's probably another GBP 1 million or GBP 2 million because we changed direction. And although that's inconvenient in the short term, we think it's very positive long term. I think that business should clearly be normalized like late second quarter, early third quarter next year, and what we intend to report again both segments. So you can see the progress in the U.S. and one reason to describe the U.K, it's fashion, it is a different business. I mean, there, we manage mail campaigns, we manage customer relationships, we actually have some higher value opportunity there. And once we get it integrated, we think it will have attractive margins, and I would think 10% is achievable.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Yes. And just looking at the swing factor, I mean, if instead of the $7 million loss that was due on the 10% margin this quarter, I mean, that's something like $0.15 or $0.18 or something like that of incremental EPS that would be there. I mean...

Thomas A. McDonnell

That's correct.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay okay, good. And the other one was deferred comp. Even in the past, I think given it a couple of different ways, one is a year-over-year impact of deferred comp swing on the Financial Services EBIT. The other was I think the absolute dollar. Was that $9.1 million, was that the absolute dollar impact this quarter?

Thomas A. McDonnell

That was a -- that number, I think, was year-to-year. I mean, basically what that is, is we require as part of our incentive plans for instance that the participants defer a significant component of it. That's sort of a retention thing, and it's also sort of making sure that we have the opportunity to recapture if there is adverse direction in the company. But once it's deferred, the individual can elect to have it deferred into an investment vehicle, usually a mutual fund. So part of the challenge is when you have a quarter like the September quarter where you had a lot of market -- we saw some of our clients have fund declines of 15%, 20%, that's what happens. But the real situation is it shows up at 2 different places in the landscape of the P&L. Because it's an investment, it shows up as a gain or loss there. But then the offset is the increase or decrease and the liability to the planned participants. It will be a lot simpler if we could just net it, but accounting conventions don't let us to do that. So I mean, we've had it in there. As long as I can remember, we end up explaining something about it every quarter. But it's basically when it's all said and done, it's just a net. It just happens to show up in 2 different lines.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Yes. And I guess, the I reason I ask this because it looks like when you normalize it, the last several quarters now have been in a pretty tight margin range at 23 to 26 on a normalized x deferred comp basis, this quarter looks kind of 19%, so a big reduction. And I know a lot of that is because of investments and maybe even core, just the core decline in registered accounts. But you would expect that over time to get back into that 20s I would imagine?

Thomas A. McDonnell

Yes.

Operator

That concludes our question-and-answer period. I would now like to turn the call back over to Mr. McDonnell for closing remarks.

Thomas A. McDonnell

Well, again, just thank you for joining in the call. We hope that the -- some of the expanded information is useful. And we'll be happy to have any comments or input as to what might be more helpful on a going-forward basis. So once again, thank you for joining us today.

Operator

Thank you all for joining us today and for your continued interest in DST. We look forward to speaking with you next quarter.

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