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DST Systems (NYSE:DST)

Q4 2011 Earnings Call

February 07, 2012 8:30 am ET

Executives

Thomas A. McDonnell - Chief Executive Officer and Director

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

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

Analysts

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

James F. Kissane - Crédit Suisse AG, Research Division

David Togut - Evercore Partners Inc., Research Division

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

Greg Smith - Sterne Agee & Leach Inc., Research Division

Operator

Good morning, and welcome to the DST Systems Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions] I will now turn the conference over to your host, Mr. Tom McDonnell. Please go ahead.

Thomas A. McDonnell

Good morning, and thank you for joining us this morning. Here with me in Kansas City are Steve Hooley, DST's President and Chief Operating Officer; and Ken Hager, our Chief Financial Officer.

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. Such statements are based on our views as of today, and actual results could differ materially from forecasted results. There could be a number of factors affecting future results including those risk factors set forth in our latest annual and quarterly reports, which we filed with the SEC. All such factors should be considered in evaluating any forward-looking statements that we will make today. Since the participants on the call have had access to our detailed earnings release, we'll focus our comments on those areas that we think are particularly significant. As a reminder, all of our comments on our financial results refer to our non-GAAP results. The reconciliation to the most comparable GAAP measures are included in the fourth quarter earnings release itself.

On an adjusted non-GAAP basis, diluted earnings per share for the quarter were $1.05 per share, that's a decrease of $0.02 or 1.9% from the fourth quarter of 2010. Consolidated operating revenues for the quarter were $457.3 million, that's an increase of $32.4 million or 7.6% from 2010. That, of course, reflects the inclusion of ALPS, the Lateral Group and Newkirk. Overall, consolidated operating income decreased by $4.2 million or 5.7% from the fourth quarter of 2010.

DST's employee healthcare and retirement benefit costs were $7.6 million lower in the fourth quarter of '11 as compared to the fourth quarter of 2010. $4.2 million of that decrease was included in the Financial Services segment, and $3.4 million was included in the Output Solutions segment. This decrease in healthcare cost resulted from the absence of some large healthcare claims last year and favorable healthcare claim experience for 2011. When we look at the past history and the current plan designs, we now think this is a trend of favorable experience that you can extrapolate into 2012, but that is the comparative data for '10 and '11.

Financial Services operating income declined from lower mutual fund shareowner processing. We had higher cost associated with business investments, those solutions in the brokerage, insurance and retirement verticals. However, these were partly offset by a lower employee healthcare and retirement benefit cost of the $4.2 million in this segment that I mentioned a moment ago.

In addition, ALPS was accretive to our fourth quarter results by approximately $0.02 per diluted share. Output Solutions operating income increased from strong performance at Output Solutions North America. And that, however, was somewhat offset by losses at IOS. The Financial Services operating revenues, overall, increased by $3.4 million or 1.2% over the fourth quarter of 2010. $14.6 million of the increase was the inclusion from October 31 of ALPS. While DST Global Solutions had increased revenues, we had lower mutual funds shareowner account fees and lower revenue at DST healthcare. Software licenses were $2.4 million, and that's 17% less than the fourth quarter of 2010.

The Financial Services cost and expenses increased by $12.6 million over the fourth quarter of 2010. Again, that includes the operating cost of ALPS and other businesses acquired during 2011. We also continue to incur business development and start-up costs for insurance, brokerage and retirement. Deferred comp costs increased by $1,400,000, that represented the investment appreciation. There is further offsetting costs, where lower employee healthcare and retirement benefits of the $4.2 million that we referred to before. Depreciation and amortization increased by $1 million. And we had increased intangible asset amortization of $2.4 million, and that was from the 2011 acquisitions. This amount, however, was partially offset by certain DST Health Solutions' intangible assets that became fully amortized. Overall then as a result, Financial Services income from operations decreased by $10.2 million or 13.9%.

Turning to the business development and start-up costs for insurance, brokerage and retirement. They were $7.4 million during the quarter or an equivalent of $0.10 per share. We expect in 2012, business development and start-up expenses for those business lines, brokerage, insurance and retirement to be between $0.60 and $0.65 of after-tax expense per diluted share. Expenses are currently in place, so that's kind of a run rate. And we anticipate they'll approximate $0.15 to $0.16 per quarter throughout the year of 2012.

During the quarter, our registered mutual fund accounts declined by $1,700,000. Conversions to non-DST subaccounting platforms totaled $2.2 million. We experienced an organic decline of 100,000 registered accounts and conversions to non-DST platforms of 100,000. However, these decreases were offset by new conversions of 700,000 registered accounts, bringing you back to the net of $1.7 million.

For 2011, total subaccounting conversions were $14.4 million accounts. Currently, we project that 8 million to 10 million registered accounts will convert to subaccounting for 2012. And we estimate approximately 30% of those accounts will convert to DST's subaccounting platform. Both the 2011 actual and 2012 projections are consistent with the range we discussed last quarter. As to the 30% of the accounts converting to our platform, as we've discussed before, a significant portion of the subaccounting conversion coming up will be to -- from affiliates of Bank of New York Mellon that are included in the portion that will not convert to our platform. So the total accounts being serviced were 99.7 million at December 31 of 2011. That's from the third quarter decrease of 1.5 million accounts.

Defined contribution participants increased by 200,000 in the quarter, and that's an increase overall of 100,000 participants from last year. During the fourth quarter of 2011, Argus Health Systems received some new client commitments representing approximately $14 million annual pharmacy claims. The conversion activities around these clients are expected to be completed in the first quarter of '12.

While BFDS recorded increased earnings for the quarter, their average balances for the period decreased to $1 billion from $1.2 billion last year. And the interest rates that BFDS earned on those balances decreased from 19 basis points to 7. And that had, even with the increased earnings, that had a negative impact on their quarter results.

The overall equity and earnings of IFDS declined from the prior year quarter by $4.3 million. IFDS U.K.'s accounts actually increased by 100,000 during the quarter, but they experienced an earnings decline that's from higher costs related to some new business development and client conversion activity. Also, on a comparative basis, in 2010, there was a $2.1 million benefit to DST's earnings derived from ISDS -- IFDS, pardon me, and that was the reversal of an income tax valuation allowance at an unconsolidated affiliate of IFDS U.K.'s. IFDS U.K. is in the process of converting 2 new clients with approximately 800,000 accounts. These conversions should be complete by the end of this year by December 31. But new business development and client conversion costs will have a negative impact on the IFDS earnings throughout 2012.

Turning to IFDS Canada, they came into 2012 with 10.1 million accounts. And they're in the process of a conversion throughout 2012 of approximately 1.7 million accounts. We anticipate that conversion will pretty much be contained into the fourth quarter of '12 and completed by year end.

Going to output now for a few minutes. Output's North American operating revenues were up by $9 million in the quarter. That reflects the Newkirk acquisition and new client revenues. North American income from operations increased by $8.2 million to a level of $11.1 million. And on that basis, it would be an operating margin of 10.3%. However, I want to point out that margin benefited from the lower employee healthcare and retirement benefit costs mentioned earlier of $3.4 million. If you exclude those costs, favorable cost trends, the operating margin was 7.1%.

Also, the inclusion of Newkirk benefited the quarter. Their business has a seasonal peak in the fourth quarter, when retirement plan activity is high. Newkirk's business is more seasonal, actually, than the rest of Output North America's business, as a majority of its profits usually have occurred in the fourth quarter. On an EBITDA basis, the North American EBITDA increased by $6.4 million to $19.3 million.

Our U.K. subsidiary, Output U.K.'s subsidiary, IOS, had an operating revenue of $18.4 million. That was principally from the acquisition of the Lateral Group, which was completed in August of '11. IOS reported an operating loss of $5.2 million for the quarter. That reflected some lower-than-expected sales in revenue, but also facility consolidation costs. We've successfully integrated the management teams of Lateral and IOS, and we're developing plans to fully integrate the operations.

In January of '12, we acquired the remaining shares of IOS from the minority, making IOS a wholly-owned subsidiary. We believe that as a wholly owned subsidiary, it will facilitate our achieving our goals for the company. Ongoing cost reductions from the consolidation of facilities and redistributing work to the remaining locations will have some upfront real estate disposition and staff reductions costs. And we think those will continue through the second and most likely into the third quarter of 2012.

When we started last year, we provided expanded disclosure of our U.S. real estate holdings. We own real estate directly and indirectly through unconsolidated affiliates. Our real estate approach has been to leverage our need for facilities to create value through long-term ownership, both controlling our operating costs and creating long-term residual value. We've used joint ventures to own or acquire facilities in and around downtown Kansas City. Some of which are occupied by DST and its affiliates. So when we look at the real estate aspect of the business, the real estate holdings on a consolidated basis had $0.08 of earnings per diluted share for the quarter, and generated about $4.9 million of operating EBITDA. There were real estate related tax credits of $1.2 million in the quarter, and that came from the installation of solar panels. And that contributed to the increase in EPS.

From a different perspective, if you look for funds from operations, or FFO, they were $8.1 million or $0.18 a share for the quarter. When you look at our consolidated -- DST's consolidated real estate debt, plus our prorated share of joint venture debt, it stood at $305.6 million at year-end. Our prorated share of that real estate debt will amortize by approximately $80 million over the next 5 years. And by the way, substantially all the joint venture debt is nonrecourse.

The income tax rate for the quarter was 36.6%, that compared to 35.7% in the fourth quarter of '10. The fourth quarter of '11 rate reflects increased tax expense from the repatriation of certain international earnings. That rate was partly offset then by real estate related tax credits from the installation of the solar panels I mentioned. Right now, we're estimating our income tax rate for 2012 will be approximately 35%.

During the quarter, we repurchased 130,000 shares of our common stock for $5.9 million or approximately $45.45 a share. We have approximately 2 million shares still authorized for repurchase. So reflecting that, the average diluted shares outstanding were $44.7 million during the quarter. That was a decrease of 1.7 million shares or 3.7% from the third quarter of '11, and a decrease of 2 million shares or 4.3% from the fourth quarter of '10. Our total debt on the balance sheet increased by $105.6 million compared to the third quarter. It was primarily financing associated with the ALPS acquisition.

We also put out a press release in addition to the quarterly results. And in that release, we announced that our Board of Directors has nominated 2 new directors: Lowell Bryan, who's a founder of the consulting firm LL Bryan Advisory and who's a senior adviser to McKinsey & Company; and Samuel Liss, who's a Principal at WhiteGate Partners. They will be on the slate for election to the board's 2015 class of directors, and that will occur at the company's 2012 Annual Meeting in May. The third person on that slate will be Travis Reed, who's a current DST Director, and he will serve also in the class of 2015. Lowell and Sam were selected by the board after a comprehensive search that the Governance and Nominating Committee had undertaken and had been conducting for the last several months. We think these will be very solid additions to the board.

Also, in connection with that, 2 of our directors, Tom McCullough and Bill Nelson, will not be standing for reelection. They've been solid long-term board members, and we appreciate the service they’ve provided to DST, but the slate is as I just discussed.

Following the board's engagement of outside advisers and so forth, the company, on an ongoing basis, continues to look at options for various of our non-core assets, either operating or investment. That's a process that continues. There is no specific item that I would refer to at this time that is in any imminent stage of completion. But as I said, it is an ongoing process. So with that, I would now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from David Koning of Avondale Partners (sic) [Robert W. Baird].

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

Okay. So my first question, what looks like one of the bigger headwinds that the last couple of quarters, and you talked about a little bit, is the international Output business, IOS, I'm just wondering kind of the timing. I think you said Q2 and Q3, there is some cost actions continuing through then. Is this something that can be breakeven or better by kind of Q2 or maybe Q3 when these things get done? I mean, is that sort of the thought or maybe even there's an expectation of some mid-single digit margin? Maybe you can just talk through that a little bit, on both timing and profitability.

Thomas A. McDonnell

Well, just to give you a thumbnail history there, Dave. We had the Output business in the U.K., which was DST Output, which was primarily a transaction mailer in Bristol. And the next move we made in '10 was to combine it with a company called dsicmm and renamed it Innovative Output Solutions. dsicmm had some transaction mail, but an awful lot of campaign management mail and did an awful lot of overall financial printing, a lot with our customer base from the IFDS client base. And in putting those 2 together, we left a minority ownership out there and we're progressing to consolidation of facilities, because dsicmm had grown by acquisition, had a stressed balance sheet and a disproportionate amount of actual operating facilities. In the summer of '11, the opportunity to acquire Lateral, which is a very sophisticated campaign management and data analytics company in connection with the providing of customer communications, print and otherwise, came along. And it looked like an awfully good fit, so we pursued that. With that acquisition, we changed our strategy a bit. As we announced, we went ahead and acquired the rest of the minority. But in the acquisition of Lateral, we picked up a plant in Nottingham, England, which is an excellent plant. And with the addition of that plant to our operating inventory, we were able to make some decisions to close a couple other plants. So in effect, to get to the end result, which we think will be better in the aggregate, we will have a couple more quarters of consolidation expense that we would not have anticipated prior to the Lateral acquisition. I think it's reasonable to assume that third quarter-ish, we should be in sort of a breakeven mode. The costs associated with the plant closings in the U.K. will be the disposition of real estate and a reduction of force. In England, as in many European countries, reductions in force are a little more complex and somewhat more costly. We've mapped those out as of a couple of weeks ago. We think we're on a good timetable to have that stuff occur Q1 and Q2. And hopefully, we'll see some improvement in the overall economy, which does drive some of the revenues there. But certainly, the consolidation costs should pretty much be absorbed in Q1 and Q2. And then, we, I think should be able to move it to profitability subsequent to that.

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

Yes. Great. That was a great review. And then the second question I had, you talked about healthcare costs and the retirement benefit costs being down about $7.6 million year-over-year, and how that sort of swing factor is unsustainable longer term. But how much of that was just that Q4 2010 was too high? And how much of it was that Q4 2011 was too low? Meaning, maybe part of that is sustainable and part of it’s not.

Thomas A. McDonnell

Well, it was about 50-50. And these, like many organizations, we self-insure health with the catastrophic coverage at the top end. So it's a continual process of revising accruals and estimates. And oftentimes, on that basis, you don't see big claims until some period after they've actually been incurred by the employee. And that was one of the things that hit us last year. So I think on a conservative side, we'd say we can't extrapolate it, but I think you're correct that there was a disproportionate amount recorded last year. Like most companies, we're working aggressively to control those costs, introducing plans like health savings accounts and so forth. So hopefully, we can contain them. And maybe there will be some positive there. But it's pretty hard to predict what -- where healthcare costs are going, not only from the absolute amounts but by the utilization. It's probably a little more explanation than you wanted, Dave, but I think your assessment that Q4 '10 was particularly high, which did surprise us at the time, is relevant and so we could see some favorability in '12. But right now, we think we're kind of on course for kind of steady state.

Operator

Your next question comes from Jim Kissane of Crédit Suisse.

James F. Kissane - Crédit Suisse AG, Research Division

Tom, any updated thoughts on the shift to subaccounting? I mean, do you still think that the worst is behind you? I mean, it doesn't sound like you received any notices recently of accounts moving off.

Thomas A. McDonnell

Well, now we think it's going be the $8 million to $10 million this year, Jim. Steve, I'll let him make a couple of comments. But as we indicated, we think of that $8 million to $10 million, that will cycle about 30% over. But as I mentioned earlier, with the Bank of New York Mellon merger and you got the subaccounts associated with their affiliates of the other 70%, the bulk of them really come out of there. And we think the $8 million to $10 million is consistent with where we've been and that's where we see it and then we see a decline. And the $8 million to $10 million, we think it will pretty much be in the first 6 months. Probably 75% of the migration will occur Q1 or Q2. Now having said that, we're not in control of the timing and sometimes, it slips. We don't think it will accelerate. But right now, our guess would be -- we should be seeing a moderated trend substantially by third and fourth quarter of '12, if our assumptions are correct. Steve, you want to add to that? Steve doesn't want to add to that.

Stephen C. Hooley

I think that's pretty much all we know.

James F. Kissane - Crédit Suisse AG, Research Division

And then just on the tax advance accounts are now over 50% of total registered, do you still think that they are less susceptible to subaccounting?

Thomas A. McDonnell

We think they’re less susceptible, but we're always watching that. The only movement we've seen was the 1529 [ph] plan of significance. And that, we think, was pretty well isolated. So one, they're smaller dollar accounts, which makes them far less interesting. And also, there is the complexity of the trustee and a number of other features there that really require some additional software and scrutiny to monitor the size of contributions, monitor the age of required distributions and stuff like that. And so we think it's far less likely.

James F. Kissane - Crédit Suisse AG, Research Division

And outlook for healthcare, when you take into account the lower volumes that you're seeing but also the addition of the new business, I think like 14 million new claims being added at Argus, will that business grow this year or is it going to decline?

Thomas A. McDonnell

I think it'll grow, but it's a little bit of A Tale of Two Cities. In healthcare, we have Argus, which as you're fully familiar with the prescription claims. And I feel pretty good about that business. That's where the 14 million claims are coming on and they have some other new client activity that, hopefully, will materialize. On the health claim side, is where there's more static. The activity there is much more static. That's far more influenced by concerns about where the overall healthcare environment is going. So a lot of the customers that are there, the Blues and so forth, are reluctant to make any investments. And the investments that they're willing make, like this IntelliSource acquisition that we made, that's proved pretty good. We've got that integrated with the systems and had pretty good pick up on it. I would see that side of the business kind of sideways until we have a little more clarity out there. But having said that, it is profitable, it generates cash. But probably, combined, the healthcare business will improve in 2012, but it will be driven substantially by the prescription claims. And of course, on the Argus side, that runs -- that software runs on our data center. That's all a processing business, very much like a mutual fund business in that it's a per script type revenue unit. On the healthcare side, a substantial portion of the business is BPO and ASP processing, but there's also quite a bit of installed licenses out there. So the Argus business will have much more positive elasticity as claims come on. So the net of it is, I think, combined to be positive. But it will be substantially driven by the prescription side of the business.

James F. Kissane - Crédit Suisse AG, Research Division

And the margins there will be up? And can you maybe give us a sense of the ballpark where the margins are today and where they could go on healthcare?

Thomas A. McDonnell

I don't think we actually break those out. But I think you can assume that it is a business, but particularly on the processing side that has a significant amount of fixed costs and that increases in revenue for reasonably extended periods do not attract that much incremental cost.

Operator

The next question comes from David Togut of Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

Tom, you indicated North American Output posted a 7% EBIT margin in 4Q, if you strip out the reduction in healthcare costs. Do you still expect this business to get to 10% EBIT margin? And if so, when?

Thomas A. McDonnell

Well, I think 2012 may well tell the tale on that. We do expect to be able to get to a double-digit margin. And we stripped out the whole healthcare cost. But if it were normalized, I'm not sure you'd reduce all of it. David, going back to comment earlier, because of the way accounting works for those costs and the accruals, it can be lumpy by quarter. So I think we have a shot at it in '12.

David Togut - Evercore Partners Inc., Research Division

What additional steps do you need to take to reach double digit?

Thomas A. McDonnell

Increased revenue, and we do have, I think, some positive activity going on there. And we'll be able to, I think, announce end of the first quarter some new client additions. So over the past several years, we've absorbed a lot of down, the loss of the one large telecom client that involved that recognition. And a couple of years ago, the termination fee. But also, particularly in the telecom area, the big customers have rationalized their bills, so they no longer produce detailed billings. We lost a lot of images over that period. And we pretty much replaced all that volume. So I think, we're in a position now where the cost structure and the business are pretty well positioned to absorb increased revenues at some enhanced margins. And I think over the next couple quarters, I think you should see some positive announcements in those areas.

David Togut - Evercore Partners Inc., Research Division

Can you give us an update on retirement services? You've indicated this is a major area for investment. How big do you expect this business to be over the next couple years? And how much will be competitive wins versus otherwise?

Thomas A. McDonnell

Let me let Steve Hooley comment on that. In that business, I think Steve would agree with me, most of it is going to be competitive wins in one way or another. There's a huge in place set of systems out there supporting this, primarily from one major competitor. Our strategy is somewhat different in that we're a processor versus installing software. So we think we're well positioned competitively. There will be, of course, some new plans. Those will primarily be sold by our mutual fund customers to small companies and others starting up. But most of it is going be moving from an in-house or a competitive system. Steve, would you agree with that?

Stephen C. Hooley

Yes, I would. A couple of -- we've talked about 2 big conversions that we have currently in play that will run out through '12 and '13, and what the financial impact of those is. We've got a very strong pipeline in this business, and expect that some time during the first half of the year, we'll be able to announce a couple of new wins. I think the other thing that's moderating the growth of this business a little bit is the general economy, and the fact that unemployment is relatively high. So we haven't seen the organic growth that we would expect to see as unemployment moderates in the U.S. and the companies that we're servicing, on behalf of our customers, begin to add staff. So we think this business is -- it's got growth that's kind of in the plan and, again, a strong pipeline. And we think some potential upside as the economy turns around.

David Togut - Evercore Partners Inc., Research Division

Are the 2 new wins for the first half of '12 coming from in-house systems or from a competitor?

Stephen C. Hooley

From a competitor.

Thomas A. McDonnell

And when we say new wins, so we have the 2 that are in the process of conversion and have been for some period of time. And we anticipate incremental business on that. But most of it is from a competitive set of systems.

David Togut - Evercore Partners Inc., Research Division

A final question on capital allocation. Tom, you indicated you have about 2 million shares left in the repurchase. I don't believe you've announced a dividend increase for 2012. Can you give us your thoughts on share repurchase versus dividends and acquisitions?

Thomas A. McDonnell

Well, I think with the acquisitions we've made, ALPS, in particular, was very attractive to us because it expanded the business into some areas that we didn't have a lot of footprint, David, as you're aware, in the ETF, hedge funds and so forth. And also had a significant block of mutual fund processing and then distribution around SPDRs. The rest of the acquisitions, particularly in the Output side, were sort of fill-ins and product enhancements. So I don't think we anticipate any acquisition activity in any of the business lines. So it will be up to the board to take a look at where they see free cash flow and what their view towards share repurchases versus other returns of capital to shareholders is. I can't really comment on that prior to a board meeting that will be towards the end of the quarter. But as I indicated, we continue to review all the other assets of the organization, both operating and non-operating in connection with trying to focus on is there a more appropriate way to create some value. But that's something that -- as to that position, that should be clarified by next quarter.

Operator

[Operator Instructions] Your next question comes from Peter Heckmann from Avondale Partners.

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

In the mutual fund industry, as you see more accounts moving to subaccounting, do you see those customers that are currently servicing accounts in-house? Do you see them looking to outsource more given a relatively high level of fixed costs on falling volumes? And potentially is that an opportunity for BFDS?

Stephen C. Hooley

Yes. Peter, it's Steve Hooley. It is. And we are seeing -- everybody's evaluating their cost structure, obviously, as their number of direct accounts that they're servicing declines. They've got to look at the fixed cost. And we've had a number of instances where people have outsourced a portion of the servicing that they're doing. And I would tell you that on a broader basis, they're looking at whether they should move up the scale of outsourcing. So it absolutely creates an opportunity for Boston Financial.

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

Okay. And along those same veins, within subaccounting opportunity for DST, are you seeing more clients interested in a full-service subaccounting relationship? And what could change the dynamics where your main competitor there has significantly a larger base of accounts than you currently have. What dynamics would it take for you to win some share on the subaccounting side?

Stephen C. Hooley

Well, I think, so let me -- the first part of your question is, do we see more customers looking to go with a full-service subaccounting solution. I'd say the answer is, we haven't seen a big trend in that direction. Customers that, today, currently outsource the subaccounting are tending to stay there. And those that are doing it in-house, again, we haven't seen a big trend towards outsourcing more. Yes. I think the biggest kind of opportunity for us is the technology platform that we've got wrapped with the service group. Part of the reason we did the Phoenix acquisition earlier in the year was to bring on more brokerage expertise and to build out a wider solution set for the brokerage industry. And so the subaccounting solution is one piece of that. The Subserveo transaction where we acquired the compliance capability, again, as part of building a much broader solution set to bring to the broker/dealer community. So we feel like we're pretty well positioned in building out that solution set and are having discussions with a lot of broker/dealers right now about that.

Thomas A. McDonnell

I think, Pete, that's a place where the battles join now between us and our competitor. And we think we have a solid competitive strategy. So, I think over the next several quarters, I'd like to think we will prevail in a number of instances. So it's -- the real answer to that is we be more aggressive on the competitive side, see if we move market share back our way.

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

That would be great. I will stay tuned on that. Last question on ALPS. If I understand the model correctly, ALPS has a number of proprietary products, investment products that may have been developed in conjunction with, let's say, another investment adviser or another distribution partner. Talk about the opportunity around creating new products, whether they be new ETFs, new closed-end funds, and do you foresee that being a growing portion of -- a continuing growing portion to ALPS?

Thomas A. McDonnell

We do see that. They have been very successful in bringing a -- I hate to call it life support system, a kind of a total environment for, say, a successful money manager who is not able to access funds through, say, a mutual fund vehicle. They can put everything together for them about the investment management, that's very positive. I think that their participation in distribution of the SPDR-type products and we see some, obviously -- I shouldn't say obviously, but we see incremental product flow there. Now we're pretty comfortable that they have a solid growth opportunity in front of them, Pete.

Operator

Your next question comes from Greg Smith of Sterne Agee.

Greg Smith - Sterne Agee & Leach Inc., Research Division

Just wondered if you could comment on what your expectation is for organic growth in registered accounts in kind of 2012 and over the next couple years?

Stephen C. Hooley

We don't break out, specifically, the organic. Let me take it from a high level. I expect the organic growth in 2011 was in the low-single digits, I think it was just over 1%. I think organic growth for 2012 will be close to that. So not enough to overcome the subaccounting conversions that take place between the subaccounting -- between the organic growth and new business, we expect to moderate some of that. I don't think we're going to see organic growth rates like we had 5 or 6 years ago for quite some time.

Thomas A. McDonnell

Steve mentioned earlier, some stronger employment would help. It's kind of a double-edged sword on accounts coming in and retirement plans because one, there's not necessarily an employment growth but also, people who have been laid off tend to close accounts. So that's at least one trend. Also, until the economy improves, people tend to be very conservative and concerned. In some cases, that puts them in banks versus funds. So I would certainly agree with Steve. I mean, I think there will be organic growth returning. But this year, if it's a couple of percent, we'd be happy.

Greg Smith - Sterne Agee & Leach Inc., Research Division

Okay. And then just wanted to verify something. As far as the sort of new business development expenses, the $0.60 to $0.65 you're calling out for this year. Now you said that's already in the run rate, so there's no sort of incremental expenses that need to be undertaken during the year, is that a fair assessment?

Stephen C. Hooley

Well, no, that's not exactly correct. Roughly half of it is in the run rate. So we had expense this year. The expense that we're talking about next year, the $0.60 to $0.65, will be on a run rate basis roughly double what we had this year.

Thomas A. McDonnell

Let's not confuse this year and next. I mean, 2011, we think it was maybe $0.30, $0.35 a share. This year, it will be $0.60, $0.65. When I said it was in the run rate, that's when we're saying it will be about $0.15 a quarter. It's already in place now. So it will occur pretty much levelly, $0.15, $0.16 a quarter throughout the year. But on an incremental basis, it's probably, compared to 2011, about $0.30, $0.35. Is that...

Stephen C. Hooley

Are we making it reasonably clear? The overall will be $0.65, but that compares to what would've been like $0.30, $0.35 in '11.

Greg Smith - Sterne Agee & Leach Inc., Research Division

Yes. I just wanted to make sure we're not going to, all of a sudden, see some spike in any given quarter, but it sounds like we're not.

Thomas A. McDonnell

When I said run rate, coming into the year, we've got the staffing and all that stuff that are working on these systems and the development and the implementation of the insurance product in the U.S. So you can pretty much expect it will be that $0.15, $0.16 a quarter. But on a comparative basis, it's a $0.30, $0.35 delta versus $0.65.

Greg Smith - Sterne Agee & Leach Inc., Research Division

Yes. That's clear. And then just lastly, I know it's early but with all the new acquisitions, can you just discuss sort of how they're currently tracking versus expectations? I know some are a little more mature businesses than others, but are things generally tracking as pleased or some ahead of plan? Behind the plan?

Thomas A. McDonnell

Well, ALPS is tracking well and we'd say right on target. IntelliSource, which was a small acquisition in monetary terms, but it is integrated with all of our healthcare solutions. And it allows -- and can integrate, by the way, with other people's healthcare systems. It's been pretty well received. So we see some traction there. I'd say it's going well and should produce some positive results. But again, it was a relatively small acquisition. On the Output side, in the U.S., Newkirk is well integrated. That's turning out positively. We mentioned they're a little more seasonal based on their historic business, but we have seen very good cross-selling opportunities with them, both in healthcare and retirement. So we think that, that may alter some of that seasonality. Although their first quarter should be one of their lowest. So I would say the U.S. acquisition is positive. We didn’t refer to it at great depth, but in North America, when we were talking about the North American margins, we do have a significant increase in the Canadian business and we've doubled the plant size up there. So both in '11 and for part of '12, there'll be some start-up expenses of that plant expansion, and we'll be bringing on some equipment. And as you know, we use an accelerated depreciation for that. So I would say, North America is strong. I talked about IOS at some length earlier. The Phoenix and Subserveo, we’ve built that into our whole brokerage solutions, which is the previous acquisitions some time back at TASS, which is full-service subaccounting, subaccounting and our Vision and Vision Pro products and what we've tried to put together there, Greg, is a more integrated set of services out to the desktop, but particularly, the financial planner community. So those -- and Phoenix wasn't as much a product company as a talent company that was in the business of consolidating with brokerage firms about products, operations and so forth, and had a very strong team. So I think we've been successful in integrating that. When that one's going to -- in the brokerage side as to the incremental revenues from sort of the compliance and new products, it's going to take a little time to get some traction. But we're comfortable that they've been successfully integrated. It's now really a question of successful execution. Does that help address that?

Operator

Ladies and gentlemen, we have time for one more question. Our final question comes from the line of David Koning of Robert W. Baird.

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

Just a few quick ones. First, IFDS, I know you’ve talked in the past about growing the new account, both for the base in both of the U.K. and Canada. It looks like the account base will be up 10% to 15%. And I know there's some conversion costs and stuff, but is that profitably, should that go up in 2012?

Thomas A. McDonnell

Certainly, towards year-end 2012. In the mutual fund business, generally, the clients do not reimburse much of the conversion expense. So throughout Q1, 2 and 3, in the case of Canada and probably the same 3 quarters in the U.K., we will have front-end expenses before we get the clients on. And also, in the U.K., we have introduced the insurance processing solution of Percana into the U.K. marketplace, and actually have 2 clients coming on there already. One, will be converted completely by the end of Q1, I believe. And the other will be coming on in September. So in addition to the investment, sort of the conversion expense, we've had the implementation investment for getting the insurance system up and running in the U.K. And so you'll see some impact of that in the U.K.'s financials in Q1 and Q2.

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

And then just the other 2 short ones. You called out business process and document management revenues being about flat year-over-year. I think it's the first time you kind of mentioned that revenue stream specifically. I could be wrong, but what portion of Financial Services, is that like 10% or something?

Thomas A. McDonnell

I'll pull that number right off, it's a very solid business. I'd say a little below that.

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

And then the last question...

Thomas A. McDonnell

A little below, maybe 7%, 8%.

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

7%, 8%. Okay. And then just the last question. Free cash flow in 2011, do you have just the full year number in cash flow from ops less CapEx?

Thomas A. McDonnell

Ken, what do we show in CapEx?

Kenneth V. Hager

Yes. CapEx for the full year -- well, cash flow from operating activities would be -- we estimated around $404 million. And then, CapEx was $83 million. And that's just using the GAAP cash flow schedule.

Operator

Thank you. 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, we want to thank you all for taking the time to join us this morning. And we look forward to talking at the end of the second quarter. Thanks again. First quarter, sorry.

Operator

Thank you. That concludes today's conference call. You may now disconnect.

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