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Edited Transcript of DST earnings conference call or presentation 27-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 DST Systems Inc Earnings Call

Kansas City Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of DST Systems Inc earnings conference call or presentation Thursday, April 27, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregg William Givens

DST Systems, Inc. - CFO, SVP and Treasurer

* Stephen C. Hooley

DST Systems, Inc. - Chairman of the Board, CEO and President

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Conference Call Participants

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* Brian Lee Essex

Morgan Stanley, Research Division - Equity Analyst

* David Emerson Ridley-Lane

BofA Merrill Lynch, Research Division - VP

* David John Koning

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to DST Systems First Quarter 2017 Earnings Conference Call. (Operator Instructions) In the course of this conference call today, forward-looking statements may be made regarding DST and its businesses. Such statements are based on the company's views as of today, and actual results could differ materially from the forward-looking statements. There are a number of factors that could affect the company's future results, including those risk factors set forth in DST's latest annual and quarterly reports filed with the SEC. All such factors should be considered in evaluating any forward-looking statements that may be made.

Now I would like to turn the conference over to our host, Mr. Steve Hooley, Chairman, President and Chief Executive Officer of DST. Please go ahead.

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [2]

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Great. Thank you very much. Good morning, and thank you for joining DST Systems' First Quarter 2017 Earnings Call. With me today is our Chief Financial Officer, Gregg Givens.

Overall, our first quarter results illustrate the capabilities and strengths of our teams around the world, and I am encouraged that DST continues to deliver strong and stable results, while growing the business in the face of changing market dynamics.

I'm going to start by covering the transformative changes we executed during the quarter in addition to some financial highlights. I will then turn the call over to Gregg for additional detail on our financial results.

During the quarter, we announced that DST acquired State Street's ownership interest in our BFDS joint venture and IFDS joint venture in the U.K. We believe these transactions deliver significant strategic and financial benefits for DST and our clients. Both BFDS and IFDS U.K. are naturally aligned to DST's core competencies. And due to our historical JV ownership, we have intimate firsthand knowledge of their clients, their operations and the markets they serve.

We also structured the purchase consideration of these transactions in a manner that maximizes the value for our shareholders. As you may recall from the announcement, we acquired State Street's interest in Boston Financial through a nontaxable transaction resulting in the exchange of 2 million shares of our State Street common stock with a fair market value of $163.4 million at closing. Gregg will further discuss the accounting of this exchange later in the call. But importantly, this transaction substantially reduces our noncore equity holdings in State Street in a tax-efficient manner, while enhancing our predictable revenue base and providing long-term growth opportunities for the combined organization.

Additionally, we acquired the remaining equity in International Financial Data Services U.K. and International Financial Data Services Percana as well as certain real estate that the business operates out of for $175 million in cash.

We utilized both cash on hand and existing debt facilities to fund the acquisition. Combined, these transactions are expected to increase annual operating revenues by $660 million, with $220 million contributed from BFDS and $440 million from IFDS U.K.

We expect to generate operating income of $40 million and deliver diluted EPS accretion of $0.33 to $0.41 per share in the first 12 months following the acquisition dates before synergies, restructuring costs and amortization.

Looking ahead, we expect to achieve synergies of $20 million within 18 months of closing, primarily resulting from the integration of Boston Financial. We expect margin contributions for BFDS to be slightly lower than our historical Financial Services segment, given the high content of business process outsourcing revenue within BFDS. The International Financial Services segment, including IFDS U.K., is expected to have near-term operating margins in the mid-single digits primarily as a result of the significant client development and implementation efforts that are underway in both Australia and the U.K. However, we are optimistic that we can improve the operating model and drive higher International Financial Services margins over the next 24 to 36 months.

From a strategic perspective, we're very pleased to become a sole owner of these businesses. When you observe how the markets have changed over time and how closely the services in these 2 businesses align to DST's core business and expertise, it's clear that these businesses are natural fit as fully-owned DST entities.

Overall, we believe these are meaningful transactions from both a strategic and financial perspective and represent a prudent use of capital in our holdings of State Street stock.

Looking briefly at each business, Boston Financial Data Services currently services approximately 1/3 of the U.S. mutual fund industry assets utilizing DST's recordkeeping software. As a result, it is directly aligned with our core financial services and represents a significant opportunity to bolster our portfolio and engage our clients with additional BPO service offerings. As a wholly owned entity and combined with DST's full-service offering within our financial services portfolio, we expect to drive further quality, leverage our increased scale and achieve meaningful synergies.

Similar to DST in the United States, IFDS is a market leader serving the U.K. and European collective funds market, providing services to 13 of the top 20 asset managers in the U.K. market. We view this business primarily as having a compelling upside for future growth, as we continue to service the collectives market in the U.K., while building out our wealth management system. Recall, that the base technology for the wealth solution in the U.K. is a DST platform in Australia.

We believe the change in ownership creates an environment that offers more seamless implementation of our wealth management platform and creates opportunities for efficiencies in our delivery model. These acquisitions will allow us to achieve a simplified organizational structure that is expected to create greater clarity for our clients around point of contact and streamline go-to-market strategies.

These efficiencies are also expected to enable more timely responses to market opportunities through targeted investments. We believe that this decision is a testament to our dedication to our clients and our shareholders. And we look forward to continuing to drive enhancements to the client experience, while improving the execution of key initiatives.

And finally, DST and State Street will continue our strong partnership to service offshore and cross-border markets in Canada, Ireland and Luxembourg through our existing 50:50 joint venture International Financial Data Services L.P.

Regarding our other strategic initiatives, we're making solid progress on our IT transformation efforts in order to position the company to take advantage of new and emerging technologies, and we're focused on carefully integrating BFDS and IFDS' capabilities and technologies into our existing operations and road maps in order to realize efficiencies and enhancements across the business.

Before moving to the quarterly results, as stated in our press release, in light of the BFDS and IFDS U.K. transactions beginning in the first quarter of 2017, we modified our reportable segment presentation to reflect the changes in our expanded footprint and business structure.

Our acquisition of the remaining interest in IFDS U.K. substantially grew our international presence, while our acquisition of the remaining interest in BFDS significantly enhanced our domestic operations. Therefore, our historical Financial Services segment will now be presented in 2 new segments, Domestic Financial Services and International Financial Services. Additionally, given the decline of activity in our investment in other segments due to the recent monetization of noncore assets, we have included the remaining activity in this segment into Domestic and International Financial Services segments based on the business reported. Prior periods have been revised to be consistent with our [new] reportable operating segment presentation.

Now turning to the quarter. Earnings per share from continuing operations was $7.62 per diluted share for the first quarter of 2017 as compared to $1.16 per diluted share for the first quarter of 2016. On an adjusted basis, our non-GAAP earnings per share from continuing operations was $1.45 per diluted share, an increase of $0.32 or 28.3% from the first quarter of 2016.

First quarter 2017 consolidated operating revenues increased $18.5 million or 5.1% to $379.8 million as compared to the same period in 2016.

Looking at our segment results for the quarter. Domestic Financial Services segment operating revenue increased 3.1% to $254 million as compared to the first quarter of 2016, primarily driven from the acquisitions that occurred during 2016 and 2017 as well as new and organic growth at ALPS and our Brokerage Solutions business. These increases were largely offset by a decline in mutual fund registered shareowner account processing, primarily due to lower registered accounts.

International Financial Services segment operating revenue increased by 35% to $32.8 million as compared to the first quarter of 2016, primarily driven by 5 days of incremental revenue from the acquisition of IFDS U.K. in March of 2017, partially offset by lower revenue as a result of the sale of our water billing company in the fourth quarter of 2016.

During the first quarter, Health Services operating revenue increased $3.5 million or 3.4% to $107.7 million as compared to the first quarter of 2016. The increase is primarily attributable to organic growth and expansion of high-value services we are offering to existing clients in both the medical and pharmacy businesses.

As previously announced, 2 of our Healthcare Services customers began transitioning off our systems in January of 2017. These transitions were the main offset to the increases in revenue quarter-over-quarter. As we told you last quarter, we continue to expect our Healthcare segment to achieve strong revenue growth through a combination of new client wins and organic growth. However, we expect this growth will derive from a smaller revenue base, the net effect of which will result in lower overall segment revenue growth throughout 2017 as compared to 2016.

Share repurchases and dividends continue to be an important element of our capital strategy. During the first quarter of 2017, we spent $75 million to repurchase approximately 666,000 shares of DST common stock. Additionally, during April of 2017, $75 million was spent to repurchase approximately 612,000 shares of DST common stock, which exhausted the existing share repurchase plan.

Overall, we remain highly confident in our strategic plan and our ability to deliver solid execution for our customers and create value for investors. We're focused on growing our business through organic initiatives and targeted acquisitions, investing in our business to position DST for the future, driving efficiency throughout our global operations, assisting with our clients' regulatory compliance, managing our balance sheet to provide additional financial flexibility and returning capital to shareholders.

Looking ahead, our entire organization is motivated and focused on achieving our objectives on behalf of our customers and our shareholders. We remain highly confident in our Health and Wealth strategy and the future success of our business.

With that, I'd like to turn the call over to Gregg.

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Gregg William Givens, DST Systems, Inc. - CFO, SVP and Treasurer [3]

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Thanks, Steve. Before we discuss the operating results for the quarter, I'd like to spend a little time discussing the BFDS and IFDS acquisitions. As Steve mentioned, we acquired the equity interest in IFDS U.K., IFDS Percana and certain real estate on March 27 for $175 million of cash. And we acquired the equity interest in BFDS for a nontaxable exchange using the $163.3 million State Street shares on March 30.

In the first quarter of 2017, we recorded our 50% share of equity in earnings of both IFDS and BFDS through each of their respective acquisition dates. Effective with the March acquisition dates, we began consolidating 100% of the acquired entities within our consolidated income statement. Now given our prior ownership of each of these entities, the acquisitions were accounted for as step acquisitions, which has the accounting effect of us selling at fair value our previously held 50% equity interest of both IFDS and BFDS. This resulted in the recognition of a $43.8 million pretax gain. We then treated each of the acquisitions as if we had acquired 100% of the businesses and applied purchase accounting on this basis, which requires all assets and liabilities to be reflected at fair value on the opening balance sheet as of the acquisition dates.

The BFDS acquisition was structured as a nontaxable transaction, whereby DST exchanged 2 million shares of State Street common stock for State Street's ownership interest in BFDS. The exchange resulted in a $145.1 million realized gain on the disposition of our State Street stock. Due to the nontaxable nature of the transaction, there was no tax expense recorded on this realized gain.

As a result of the change in geographical revenues resulting from the acquisitions and the manner in which the operations will be directed, we changed our reportable segments. Beginning in the first quarter of 2017, we are splitting the Financial Services segment into 2 segments, Domestic Financial Services and International Financial Services. Our Healthcare Services segment continues unchanged.

Now turning to our results for the quarter. On a GAAP basis, this quarter, we reported consolidated net income attributable to DST of $246.4 million or $7.71 per diluted share compared to $58.1 million or $1.70 per diluted share for the first quarter of 2016.

Our first quarter 2017 earnings per share from continuing operations was $7.62 as compared to $1.16 in the same period last year. The increase primarily resulted from the previously discussed net realized gains resulting from the acquisitions of BFDS and IFDS U.K., the realized gain from the disposition of State Street stock, growth within our Healthcare segment and the accretive impact of our share repurchases.

On an adjusted basis, our non-GAAP earnings per share from continuing operations were $1.45, an increase of $0.32 or 28.3% from first quarter 2016. The remainder of my comments will focus on our adjusted non-GAAP results.

Consolidated operating revenues for the quarter were $379.8 million, an increase of $18.5 million when compared to the first quarter of 2016, primarily due to increased revenue from the businesses acquired in 2016 and 2017 as well as the year-over-year organic revenue growth and expansion of services provided to existing clients within the Healthcare Services segment. These increases were partially offset by decline in mutual fund shareowner account processing revenue in the Domestic Financial Services segment.

Consolidated operating income increased by 12.1% or $7.2 million to $66.6 million. And consolidated operating margins were 17.5% in the quarter as compared to 16.4% in the first quarter of 2016. The increase in operating income is primarily due to growth within the Healthcare Services segment as well as reduced cost from previously implemented restructuring initiatives in our Domestic Financial Services segment.

Within the Domestic Financial Services segment, operating revenues for the first quarter of 2017 increased $7.6 million or 3.1% to $254 million as compared to the first quarter of 2016. The operating revenue increase is primarily driven from a full quarter results from Kaufman Rossin Fund Services, which was acquired in late February 2016 and 2 days of operating revenues from BFDS in 2017, which on a combined basis contributed approximately $7.1 million of incremental revenues during the first quarter of 2017.

In addition, operating revenues increased from organic growth and increased market movements at ALPS and new client growth at our Brokerage Solutions business. These increases were partly offset by lower mutual fund registered shareowner account processing revenues.

Domestic Financial Services segment income from operations increased $5.2 million or 12.8% to $45.7 million during the first quarter of 2017 as compared to first quarter of 2016.

The increase in operating income during the quarter was primarily due to higher revenues as well as increased cost savings resulting from our previously implemented restructuring and other cost-containment initiatives, offset by a slight increase in IT transformation spend.

Domestic Financial Services operating margin was 18% in the quarter, which is an increase from the 16.4% operating margin in the first quarter of 2016.

Within the International Financial Services segment, operating revenues increased $8.5 million to $32.8 million compared to the first quarter of 2016. The operating revenue increase is primarily driven from the acquisition of IFDS U.K., which contributed $6 million of incremental operating revenues for the last 6 days of the first quarter of 2017. These increases were partially offset by lower revenues as a result of the sell of DST Billing Solutions in the fourth quarter of 2016 and $500,000 of lower software license revenues during the first quarter of 2017.

International Financial Services income from operations was $1 million during the first quarter of 2017, a decrease of $300,000 as compared to first quarter of 2016. The decrease in operating income during the quarter is primarily due to increased operating costs associated with the development and implementation efforts for wealth management platform clients in Australia and the U.K. as well as lower software license revenue in 2017.

International Financial Services operating margin was 3% in the quarter, which is a decrease from the 5.3% operating margin in the first quarter of 2016.

Our multi-year development and implementation efforts for the previously announced 2 clients of IFDS U.K. are continuing to progress, and as we have discussed previously, the scope and timing continues to be adjusted as client requirements evolve. We continue to expect some volatility in our International Financial Services segment earnings on a go-forward basis, as these efforts are completed.

Our Healthcare Services segment operating revenues were $107.7 million, an increase of $3.5 million or 3.4% from first quarter 2016. The increase is primarily attributable to organic growth and the expansion of the services we are offering to existing clients in both the medical and pharmacy businesses. The increases were partially offset by a reduction in claims processing revenues from the previously announced customer migrations.

During the first quarter, Healthcare Services income from operations increased by $2.3 million or 13.1% to $19.9 million, primarily due to higher revenues and improved operating leverage. The Healthcare Services segment operating margin was 18.5% in the quarter, which is an increase from the 16.9% operating margin in the first quarter of 2016.

Looking at DST's equity in earnings of unconsolidated affiliates. We reported an increase of $1.9 million compared to the first quarter of 2016 for a total of $8.6 million in the quarter. The increase is primarily from higher revenues from client conversion activities at IFDS U.K. and from increased revenues at BFDS. As previously mentioned, we recorded equity in earnings for BFDS and IFDS U.K. from the beginning of the first quarter 2017 through each of their respective acquisition dates in late March.

Our income tax rate for the first quarter 2017 was 34% compared to 36.6% for the same quarter last year. Given the changes in our business during the first quarter, we now expect our income tax rate from continuing operations, excluding discrete period items, to be approximately 36.5% for 2017. This is slightly lower than our previous guidance of 37%, but is a result of the changes in the mix of the sources of domestic and international earnings resulting from the acquisitions.

Turning to our share count during the quarter, the company repurchased 666,000 shares of DST common stock for $75 million. Average diluted shares outstanding for the quarter were 32 million shares, a decrease of 6.7% from the first quarter of 2016.

We closed the first quarter with a very strong balance sheet that was comprised of $260.4 million of cash and $730.7 million of debt. During the first quarter of 2017, we have $15.8 million of capital expenditures associated with our continuing operations. As a result of the acquisitions of BFDS and IFDS U.K., we are increasing our guidance for 2017 capital expenditures from $70 million to $95 million for the full year. We continue to maintain a strong balance sheet and believe that our ongoing liquidity gives us the flexibility to be opportunistic in the marketplace.

I'll now turn the call back to Steve for concluding remarks.

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [4]

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Thanks, Gregg. DST is continuing to take steps to perform and create value over the long term. The progress we have made thus far in 2017 reflects the hard work and dedication of all of our employees. We look forward to continuing to deliver on our objectives and are confident in the continued success of our balanced approach to growth. We believe we have the right strategy and the right team executing to deliver on our objectives.

At this point, I'll go ahead and open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from David Ridley-Lane of Bank of America Merrill Lynch.

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [2]

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If we look at the disclosures in the 10-K in the past around BFDS, IFDS U.K. and so forth, you know the margins have ranged in sort of that mid-single-digit level. I was just wondering, could you provide a little bit more clarity on what the margin for BFDS is versus IFDS U.K.?

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [3]

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Yes, so David, we don't break out the specific margins. But let me give you a little bit of color on the businesses and then I'll let Gregg answer the core of the question. So if you think about Boston Financial, predominantly what they're providing is business process outsourcing. And they're running on the DST record-keeping platform, right? And so in those kinds of businesses, they tend to be heavily people-weighted, right? And so we expect them to run at a lower margin. And so we'll see some downdraft in our core financial services domestic business this year due to the inclusion of the $220 million of revenue there with approximately $20 million of margin, right, all of which has been reported. Look, we think we can improve that somewhat. We think there are some efficiencies, and we've talked a bit publicly, right, about the synergies we expect to be able to achieve, but we don't expect that, that business would run at the same profit levels or margins as our core business. In the U.K., there is a lot going on in the U.K. Obviously, the revenue there is up at -- reported about $440 million on a full year basis. And in addition to a core business providing collectives servicing, which again is mostly a business process outsourcing full-service business, we also have these significant development activities going on with our platform for the wealth market in the U.K, right? And so we've used the technical term in the past that earnings and revenue there would be lumpy. And I think Gregg mentioned, he continues to believe that we'll be somewhat uneven quarter-to-quarter and that's probably for the next 24 months. So in the U.K., look, we're making an investment alongside of our customers. We think long term it will pay great dividends. We're going to run lower margins there. And to guide you, we'd say somewhere in the mid-single digits for at least the next 24 months as we get through this investment phase. But -- in the meantime, we are building a really solid business over there. Gregg, anything you want to add?

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Gregg William Givens, DST Systems, Inc. - CFO, SVP and Treasurer [4]

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Yes. Look, I think -- maybe additional color I'd add to that, Steve, I agree with all your comments is that, as Steve indicated, what we disclosed is that BFDS should add incrementally $220 million of operating revenue and directionally $20 million of operating income, which is just a little less than 10% operating margin. We expect $20 million of energy -- synergies from that particular acquisition, but it's not necessarily out of BFDS. It's across all of the Domestic Financial Services segment, okay? And I would tell you that as we go into future earnings calls, our ability to report on BFDS I think will decrease as we integrate that operation into the overall Domestic Financial Services segment. Now as you turn to IFDS U.K., what we disclosed there was incremental revenues of $440 million and an operating income of $20 million, which is just a little less than 5% kind of mid-single digits operating margin. That one -- that particular entity will be the largest part of our new segment called International Financial Services segment. And so we'll be able to monitor that and speak to that as we go forward. As we look out, we think that the operating margins of that particular segment will be sort of mid-single digits going forward, and we'll be focusing our attention to how we increase that in the future.

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [5]

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And just switching gears over to the Healthcare business, do we see the full run rate impact in first quarter of the 2 client migrations? And then could you sort of describe the deal pipeline? Any recent changes in terms of the competitive landscape there?

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [6]

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Yes, we've predominantly seen the full impact in the first quarter. We had a few days in early January where we had some revenue and we also had some revenues that were associated with the deconversion of the previously announced clients. So you can think about it, David, as being fully in there-- we get a little bit of benefit in the first quarter, but not anything material. Look, relative to the pipeline, I think the most important thing I'd comment on there is we continue to have-- to be successful working with our clients to increase the solution set that we're providing to them. And so what we have seen across both our pharmacy and our medical business is an increase in revenue per claim, which tends to be on higher-value products. So specifically speaking about analytics-based products where we see higher revenues and attractive margins. And so the majority of the growth there was driven from our existing client base and the marketplace continues to be interesting. And through all of that, we expect that there's going to be opportunity for us in the future.

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David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [7]

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Okay. And last one from me. You exhausted the buyback, should we expect reauthorization shortly? And how quickly do you plan on paying down the debt?

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [8]

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I'll take the buyback, I'll let Gregg talk to the debt. On the buyback, yes, I think the comment that I'd make there is, I think, our board has been extremely diligent and focused on returning capital to shareholders. And so that's obviously a board decision, but I expect that they'll take it up in the relative short term. Gregg, on the debt?

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Gregg William Givens, DST Systems, Inc. - CFO, SVP and Treasurer [9]

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Yes, so look, the debt increased from the end of the year, increased from $508 million to $730 million, but also what happened was our cash actually increased from $195 million to $260 million. So from a net debt standpoint, net debt actually increased directionally $160 million. We will look to take a large portion of the cash that's on the balance sheet at the end of the quarter and use that to pay down our debt in the second quarter.

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Operator [10]

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Your next question comes from Brian Essex of Morgan Stanley.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [11]

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I guess, one question I had was around the synergies, do you have any detail on exactly where those synergies going to come from, degree of confidence? And then after that kind of 18 months view is there incremental opportunity or upside to that number in your view?

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [12]

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So Brian, the synergies are going to come, I think, broadly we'd say in 4 categories, right? One is location rationalization. The second is around IT spend, right? So we are going to be able to leverage a significant amount of the IT spend happening at DST across both of the joint venture. There is obviously overhead costs, right, which will be eliminated. And then the fourth area will be around comp and benefits as we see opportunities for efficiencies. And I think, as Gregg mentioned, that's across not only the joint ventures but within the core of DST. As it relates to visibility, look, we're confident in the $20 million. Is there a potential upside? Yes, there is potential, but the number we wanted to put out there for our investors so that they had some visibility as where -- we're quite confident in our ability to capture $20 million of synergies in the 18-month time frame that we talked about.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [13]

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Right. I guess, kind of to follow up. Lot of moving pieces and it's nice to kind of see how you're thinking about aligning the businesses. And I guess, once we get past this kind of 18-month time frame, is there a way that you can highlight how you think about these businesses both for Financial Services as well as Healthcare? Do you think of them as -- are you targeting kind of mid-single-digit growth with mid-20% EBITDA margins? Or how do investors from a longer-term point of view take a look at what the composition of the business is going to look like when other reorganization is done?

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [14]

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Yes. I think a little bit regardless of the reorganization, if you think about the markets that we operate in, the Financial Services marketplace is going to have a lower overall growth rate, right? And so, again, as we've talked about, we like to think that -- between organic growth and providing additional solutions to our existing clients, coupled with a focused and targeted acquisition strategy, we'd like to think that we could get our growth rates in the Financial Services sector of the business somewhere kind of in the mid-single digits, okay? In the Healthcare side, we obviously, historically, have had a higher growth rate there. And we expect that it will be a higher growth rate in that market segment than in the Financial Services market segment, probably not quite as robust as it's been over the last 4 or 5 years. But we do think that there's opportunity there. And, again -- so we think both from an organic perspective and through providing new solutions to our existing customers and attracting new customers, we think we ought to be able to get a higher growth rate in that Healthcare sector of our business. So again, kind of regardless of the activities that are going on, we think that's kind of the -- that's the scope of what we think is going to happen in the two markets that we service.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [15]

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Okay. And I guess, on a consolidated basis, any effort to kind of throw out a target model in cash flow conversion rates? Or are we still kind of too early stages for something like that?

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Gregg William Givens, DST Systems, Inc. - CFO, SVP and Treasurer [16]

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Brian, it's probably too early. But once again, we haven't really provided that type of guidance going forward either.

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Operator [17]

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Your next question comes from Dave Koning of Baird.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [18]

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And I guess, first of all, just looking at the domestic business, do you expect -- you kind of talked about mid-single-digit growth being possible over time and you kind of shoot for that. Is there much of a difference over time in how you look at the growth of the BFDS business that's getting added and the legacy business? I know the legacy business has had some of the headwinds, probably BFDS has had some of the same ones, but maybe any real difference next couple of years in growth rates there?

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [19]

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Yes, I think, Dave, you're exactly right. BFDS has experienced the exact same headwinds that we've talked about here in the core DST business. And the growth rates of those 2 businesses, yes, they should be directionally very close. The one opportunity that we're excited about is we obviously have a number of customers who use DST on what we call a remote basis or use as a software-as-a-service and we hope to be able to convert some of those customers over to using some portion of BFDS' business process outsourcing solutions. So again, we think there is some potential revenue synergy there. We haven't modeled any of that into our financials. I'm always hesitant to model revenue synergies, but we do think there's the potential to perhaps grow revenue a little bit faster in BFDS.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [20]

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Got you. Okay. And then, I guess totally switching gears here to Healthcare. 2015 was a tough margin year, but really starting the beginning parts of '16, margins expanded very significantly and you started to hit a tougher comp in Q1, yet margins this quarter Q1 of '17 were up again significantly year-over-year. Maybe can you talk about what's changed in the business to drive margins up so much? And how sustainable that expansion is, because the incremental margins here are extremely high right now?

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [21]

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Well, yes, we would agree. And the first thing I'd say is, I'd say that the management team within the Healthcare business has done a terrific job over the last few years focusing on margin expansion. I really think it comes from two main factors. One is we're starting to see, and we have been seeing, the benefit of scale, right? And so if you look at the scale that Jonathan Boehm and his team are running that business at, we're starting to see incremental revenue coming in at a much higher profit margin. The other thing that they've done a great job of is building out additional components to the solutions that they offer to their customers. And as we've talked about, they've been able to go out, engage with the customers to provide a broader solution set, which has generated additional revenue from existing customers and existing claims. And, again, it's tended to be at a higher margin. So again, we think that business has been very well managed. We're seeing the benefits of being a scale player. I would also be remiss if I didn't mention we have terrific customers in that sector of our business, right? And they've done a great job with their end customers. And so, look, we are very pleased with the margins. And the question of sustainability, we do think the margins kind of at the levels that they're at now are sustainable, right? And so we talked last quarter about kind of high-teen margin target for that Healthcare business. And I would say we really -- we haven't changed that goal. We think we ought to be able to achieve high-teens to 20% kind of margin on a full year basis.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [22]

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Got you. And there wouldn't be any change to the -- I think, historically, I'm looking back, I can't find a year where Q1 wasn't the low point. I mean, is that -- was there anything in Q1 that was different than normal? Or is this kind of the low point of the year?

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [23]

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Yes. I mean, we had a terrific quarter. We had good volumes from -- again from our existing customers. And, again, they're overcoming a little bit of headwinds of the previously announced clients that are leaving, but they've done a great job. And again, we're pleased with the margins where they're at.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [24]

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Got you. And then the last just quick one. Tax rate, I think, most companies, we're hearing them talk about good tax rate in Q1 because of some of the new tax accounting stuff on stock comp, but then they tend to say it's kind of sustainable. I know you guided tax rate down a little bit, but I would have almost thought it would be a little lower than what you guided?

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Gregg William Givens, DST Systems, Inc. - CFO, SVP and Treasurer [25]

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Yes, so that's a good question, David. We had told you that our estimated tax rate was going to be 37%. And so as a result of [disposing] of the State Street stock, that State Street dividend that was coming through was highly tax preferenced. So it was coming through at much lower rate than 37%, okay? We picked up BFDS joint venture earnings at directionally about a 12% rate in our calculations. And so in conversion from being a JV to a consolidated entity and now the rate actually goes to 36%, 37%. So what you're seeing there is that previously BFDS had a tax provision of their own and we had to add tax on it. So we are eliminating double taxation, but it is getting caught up in our tax rate of our own provision. And then once again, IFDS was coming through at a tax preferenced rate of directionally less than 20%, which is the U.K. statutory rate. So when you take everything and put it together, you had the 37% rate that we had. You take out the 3 tax preferenced items that I just mentioned and the rate actually moves up and then you consolidate IFDS U.K., which has a 20% tax rate in the U.K. and it drives the rate down to 36.5%.

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Operator [26]

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At this time, there are no further questions. I will now turn the floor back over to Mr. Steve Hooley for any additional or closing remarks.

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Stephen C. Hooley, DST Systems, Inc. - Chairman of the Board, CEO and President [27]

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Great. Well, thank you very much. We appreciate your interest in DST, and we look forward to updating you next quarter. Thank you.

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Operator [28]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's call. You may now disconnect.