Invesco Ltd

Welcome to Invesco's first quarter results conference call. All participants will be in a listen-only mode until the question and answer session. At that time, to ask a question, press star 1. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'd like to turn over the call to your speakers for today. Marty Flanagan, President and CEO of Invesco. Lauren Starr, Chief Financial Officer. Colin Meadows, Senior Managing Director and Head of Global Institutional and Private Markets, Andrew Schlossberg, Senior Manager Director and Head of Americas, and Greg McGreevey, Senior Managing Director, Investments. Marty, Mr. Flanagan, you may begin.

Thank you very much, and thanks, everybody, for joining. I'll spend a few minutes just talking about the environment in the quarter. Lauren will spend a bulk of the time talking about the results. Colin has joined. He's going to talk about the institutional business. Andrew will talk about the Americas. Greg will also join us, be available for questions. And I am also especially pleased to introduce Allison Dukes, who joined Invesco as Deputy CFO and will be taking over as Senior Managing Director and CFO on August 1st when Lauren Starr takes on the new role. I would note that we're not in the same room and taking a call from different locations as you would imagine in this environment, and you're also welcome to follow along using the presentation that's available on our website. So first, I hope you, your families, colleagues remain safe and healthy during these unprecedented and challenging times. I'll tell you, we've been intensely focused on protecting our employees, their families, while continuing to robustly engage with our clients and serving them in any way possible in this environment while running a disciplined business in this highly turbulent environment. We've been dealing with the impact of COVID from the time it first impacted our business in China in January. Several weeks ago, we reached a point where literally 99% of our workforce globally was working from home. The operating outcomes have been outstanding. a testament to my colleagues in the strength of our global operating platform. And despite working in remote environments, we've been highly engaged with our clients from, as I said, supporting them in any way necessary during this period. We've had thousands of digital and virtual interactions with our clients since the start of the crisis, which have been incredibly effective. And this experience will no doubt change permanently how we operate and interact with clients, according to all of our Financial pressures and the client demands presented by the coronavirus will only accelerate global trends where global, multi-channel, multi-capability firms with operating scale will grow in the years ahead. For the past decade, we've had the discipline to act on our high-convection industry views and invest in business ahead of key macro trends in our position as well. It helped us achieve record operating results in 2019. So today, we now have a diversified platform processing 90% of our business. Key growth areas when you look to the future, including our leading presence in China, our leading global ETF and battery franchise, broad range of global equity, international and virtual markets equity, alternative capabilities, strong fixed income, liquidity capabilities, and our leading digital wealth platform. Our efforts over the past years have placed us in a very strong position to manage through the current crisis while continuing to meet our client needs. The resilience of our employees, the strength of our client relationship, the breadth of our capabilities were reflected in our solid operating results. We've stable total flows during the quarter with net outflows of only $2 billion. Despite the extreme market volatility, long-term gross flows, increased nearly 40% to a record $87.4 billion, resulting in net inflows in a number of diverse areas for the quarter, including institutional, China JV, money funds, and ETFs, global fixed income in particular. Long-term investment performance during the quarter remained strong in capabilities with high demand, which would include international equities, emerging markets, and a number of fixed income capabilities. In light of the current operating environment, a key priority for us is supporting our long-term financial strength and flexibility to ensure we continue to operate in a position of strength for the benefit of our clients and shareholders. Last year, we captured $500 million in efficiencies post the Oppenheimer transaction, creating an operating scale as we entered 2020. This was a significant achievement. We met the target, the synergy target ahead of schedule. Since the start of the COVID-19 crisis, we've been executing a set of tactical opportunities across our expense base, while working in a certain or uncertain environment to create further operating flexibility and strengthen our liquidity position. We see these actions as creating roughly $80 million in average quarterly expense savings relative to guidance we previously provided for 2020, and this includes variable compensation in a number of discretionary expense areas. Lauren will provide more detail later on in the call. Importantly, beyond the short-term tactical responses, we're building on the program we started with the integration of Oppenheimer to leverage our experience to drive further efficiencies and scale into our operating platforms. I'm confident in the experience and team that the track record does deliver. In addition to these expense measures, we believe it's imperative to maintain financial flexibility during this uncertain market period, and let me highlight a few of those. First, our partnership with MassMutual continues to yield positive results, including the recent approval of $425 million in capital for student real estate strategies and ongoing discussions about further commitments across our alternative platform These investments and others that may follow lead to the strength of our growing partnership capabilities. We also plan to redeem approximately $200 million of seed capital from certain of our investment products during the remainder of the year. Finally, we will produce our quarterly common dividend from $0.31 per share to $0.155 per share, which will establish a sustainable dividend going forward to provide almost $300 million to be cashed annually. Laura will touch more on our decision to reduce the common dividend, but I want to say up front, this is a proactive decision you're making. Our liquidity is good, and it puts us in a position of unity and protection should the market deteriorate from here. It's clear that 2020 is going to have to be much more challenging than any one of us ever would have anticipated. These combined actions will help us maintain financial flexibility, build ample liquidity, and further strengthen the balance sheet through present, uncertain environment, which will allow us to continue to operate from a position of strength. So with that, let me turn it over to Warren, who will run through some of the details of the results.

Thanks, Marty. So before I cover the topic of flows, expenses, and capital management, I want to pause. on the investment performance slide, which is slide five of the deck that we have posted on our website. You'll see our long-term investment performance does remain strong at the end of March. We reported 60 percent and 69 percent of our capabilities in the top half of years for the five-year and ten-year time periods, and that's up slightly from the end of 2019. Marty talked about our diversified global platform with exposure to the industry's key growth areas. Our platform is aligned with these growth trends. It's in these areas that we're delivering strong investment performance, particularly in global emerging markets and international equities, global fixed income, liquidity, and alternatives. So next, let's move on to flows. As you can see on slide seven, we had net inflows in our institutional channel, and we continue to see positive net long-term flows in Asia Pacific, positive net flows of $11.2 billion In our institutional business, we're driven by the partial funding of the previously disclosed amalgamated solutions win. We also saw inflows into our stable value products as well as other active fixed income mandates. Additionally, we had just under a billion dollars in net long-term inflows into our China joint venture driven by our balance fund but also across equities and fixed income products. Colin's going to talk a little bit more about the institutional business a bit later. Our retail flows do remain challenged in the quarter. You'll see $30.3 billion in net retail outflows. That was driven by ETF net outflows of $6 billion, which did include $1 billion from previously disclosed ETF closures. We also saw outflows in the OFI global equity funds, senior loan funds, UK equities, and high-yield muni funds. Our ETF product range in the U.S. is weighted to domestic U.S. equity, and that was impacted by the flight to liquidity in the period offsetting this with $2 billion in net inflows in our European commodities ETFs, particularly in our physical gold ETF. In fact, we were number two in terms of net new assets or new flows in ETFs in the EMEA market. And you'll hear Andrew Schlossberg talk a little bit more about the wealth management in America's business a little bit later in the presentation. So next, let's move to revenues and expenses, turning to slide eight. you'll observe that our results were impacted by the reduced market value of our AUM. The decline in revenues in the quarter was driven by lower average AUM, one less day in the quarter than in 4Q 2019, and lower performance fees relative to the prior quarter. It's important to note that the impact of the March market declines and the flight to liquidity were actually quite impactful to our mix and the level of AUM as we entered the second quarter. In fact, the pro forma net revenue yield reduction due to market and mix in the month of March alone is approximately two basis points in net revenue yield, and you'd see that on a go-forward basis. In addition to the impact of the market declines in the period The weakening of the pound and the Euro against the US dollar in Q1 impacted operating expenses. We saw operating expenses flex down in the period by a net 29 million and that was comprised of a $40 million market, combined market and FX impact, which was offset by a net $11 million increase in other expenses, largely in compensation. As you know, compensation expense is typically higher in the first quarter due to the seasonality of payroll taxes. So in light of the uncertainty in the markets and the economic environment, we have undertaken a thoughtful review of our operating expense base with a focus on what we can do in the near term to minimize costs. We've determined that we will freeze hiring for the time being. Additionally, we're aggressively managing discretionary expenses and reviewing other aspects of the firm's expense base. You'll remember in the last quarter we offered quarterly run rate operating expense guidance of $755 million a quarter. We now expect our quarterly operating expenses to be approximately $80 million per quarter lower on average for the remaining quarters of 2020, largely due to the lower compensation as well as the reduced G&A and marketing line items. These expense numbers were based on market. on FX levels as of March 31st and they will of course fluctuate up and down based on seasonality and the nature of certain areas of spend. Now while a portion of the reduced expense base is tied to the temporary suspension of travel, events, consulting and other spending affected by this unusual environment, we remain highly focused on identifying additional discretionary and structural levers that we can pull such that we deliver most effectively and efficiently for our clients both in the present environment and longer term. Let me move on to slide nine and just briefly point out that non-operating factors impacted our EPS by about 14 cents. That was driven by non-cash mark-to-market losses on our seed portfolio as well as an elevated tax rate this quarter. The 27.9% in Q1 tax rate, that was elevated for two primary reasons. Our lower share price resulted in less of a deduction on the vesting of shares, and the fact that our seed capital is domiciled in Bermuda, where there's no tax deduction for the seed mark-to-market losses. We would expect the tax rate to return to the 23% level going forward. So moving on to slide 10, let's get the capital management. You will see that we have a credit facility balance of approximately $500 million at the end of the quarter, reflecting the typical Q1 drawdown on our facility to fund annual bonus payments, as well as we also had $190 million prepayment of a portion of our forward contract liability with respect to the share repurchases we made last year. As Marty mentioned, we've determined to reduce our common dividend to allow us financial flexibility and to strengthen our balance sheet. This is a very thoughtful decision and one that we believe is both proactive and prudent in the present environment. I want to spend just a few minutes walking through some of the considerations that led to this decision. First, in light of the present uncertain market environment, a reduction in dividend allows us to preserve liquidity and enhance financial flexibility. It also reflects a more balanced payout ratio, given lower expected earnings as a result of the March ending AUM levels. This action around our dividend also allows us to target the common dividend payout ratio of about 40% to 60%. Over time, and as market conditions firm, the enhanced liquidity will give us flexibility to further strengthen our balance sheet with an eye towards improving our leverage profile and continuing to invest in the business for growth. We're committed to a sustainable dividend and the return of capital to our shareholders. We do not anticipate additional share buybacks in 2020. Reducing our common dividend leaves us with ample capacity to buy back stock in the future, however. So in the combination of the dividend reduction, continued focus on expense management, and our operating cash flow generation creates ample cushion for liquidity and provides us with financial flexibility. We generate significant cash flow each quarter, and I want to just take a moment to walk you through a few key elements on our cash flow. As a reminder, our net income includes some fairly significant non-cash elements, particularly this quarter with $74 million in non-cash speed money market declines. In addition, net income includes deductions of $48 million for non-cash depreciation and amortization and $47 million for non-cash share-based compensation expense. Also, as part of our efforts to improve our financial strength, we're looking to redeem about $200 million of seed money investments, all done without impacting our clients. That will be done in 2020. It's also important to keep in mind, as I mentioned a moment ago, that in the first quarter, we prepaid $190 million of the forward share repurchase liability in connection with in connection with posting additional collateral. We have a remaining 220 million obligation, which is net of 90 million of collateral that we posted, which will be fully settled by April of 2021. And then finally, and perhaps most importantly, we have no debt maturities until Q4 of 2022. The combination of our actions this quarter puts us in a position to be thoughtful about managing our capital structure. improving our leverage profile and also including the ability to reduce our revolver borrowings to zero and to pay off our 2020 maturity. We're not committing to any specific actions right now in our capital structure. It would be premature but our objective is to maintain flexibility through a volatile environment. Nevertheless, we feel good about the optionality that we will have to strengthen our balance sheet while further improving liquidity. So in summary, we remain prudent, indulgent in our approach to expense and capital management. The steps that we're taking will further strengthen our balance sheet and provide us with enhanced liquidity to manage through the market volatility and uncertainty, while allowing us to create flexibility for investment and growth in the future for our business. So let me now turn it over to Colin, who will have a discussion about our institutional business. Colin?

Thank you, Lauren. I would like to echo my colleagues' hopes that all of you are staying healthy and safe in this challenging time. Our institutional business has a strong quarter, as our clients, by and large, are taking a measured long-term view in line with their investment objectives. We realize gross flows of $26.9 billion in the quarter, with mandates funding in a variety of strategies, including custom solutions, stable value, investment-grade credit, and real estate. Redemption stayed largely in line with prior quarters at $15.7 billion, largely the result of rebalancing decisions. These results allowed us to realize long-term net flows of $11.2 billion in the first quarter. We also saw significant net flows of $26.3 billion into liquidity products as clients looked to ensure financial flexibility through the crisis. A growing share of these flows resulted from direct liquidity mandates, which will provide us with the opportunity to help our clients meet their diverse investment objectives as they eventually transition these assets into other strategies. Our while not funded pipeline remains very robust at $31.9 billion. Our focus on becoming trusted partners to our institutional clients has resulted in wins across a variety of strategies, including factors, solutions, alternatives, and fixed income. This result compares favorably to prior periods, as it's twice our while not funded pipeline a year ago this quarter, and it's a 20% increase over our pipeline in the fourth quarter. We're especially encouraged that institutional clients have remained engaged through the crisis, as 14 billion of that total on mandates that were long in the first quarter. As a result of the COVID-19 crisis and social distancing measures across the globe, we've transitioned to a completely digital engagement model, and institutional clients have responded. We've hosted 20 webinars and webcasts that have attracted over 2,000 clients globally. Our weekly Market Pulse webinars have been particularly impactful as we've responded to client areas of interest, including investment implications of COVID-19, updates on global financial markets, government and regulatory interventions, and implications for key investment strategies and products. Institutional clients are increasingly looking beyond the crisis to understand what's next for their portfolios and member plans. Clients have expressed interest in a diversity of strategies, including multi-assets, stress credit, real assets, EM equity, and liquidity. We're also working closely with our Invesco Solutions team to engage clients on changes to their investment priorities and portfolios and are introducing Invesco Vision, our portfolio analytics tool, to these conversations to provide real-time modeling of various scenarios. We believe that supporting our clients as partners through all environments will allow us to deepen these important relationships and ensure client success. Now I'll turn it over to Andrew Schlossberg to discuss our America's Wealth Management and Global ETFs business. Over to you, Andrew.

Great. Thank you, Colin. And I'll refer to page 12 for some of my comments. However, before discussing the flow results, I'd like to take a moment to describe, you know, how our America's Wealth Management intermediary team is matching off with the marketplace. The strength of our newly formed distribution group, our consolidated and diverse product lines, and our total client experience strategy are that were all put in place late last year were in full force in the first quarter and delivered with much success against multiple market environments over the past few months. Through the combination last year of Invesco and Oppenheimer, we've built a distribution engine that is pointed to the future. It's comprised of top talent in the industry. We reapportioned resources to key channels and clients, and we're deploying both traditional and more digitally inclined coverage models and tools to the marketplace. Our go-to-market strategy in the North American wealth management platform and advisor market is anchored on a differentiated three-part client experience model, which includes investment insights and thought leadership, portfolio risk and positioning through asset allocation and investment analytics capabilities, and business consulting for advisors to help them grow and manage their practice. And while our distribution model was not designed to be 100% virtual in its client engagement. We've been operating in this format since early March, and we're deploying this distribution strategy now digitally with really strong success. And feedback over the past six months has been positive. It confirms to us that the winners in this space will need to have scale going forward to maintain strong relationships. We'll need to have advanced technology for both client service and interaction and a holistic client experience like the one I described. Just a few stats to give you a sense of the relevance we've had with clients the past six weeks. We've done over 100,000 virtual and digital engagements with wealth management platforms and advisors. We've had over 200 proactive media placements of Invesco thought leaders, and we've seen a 50% increase in our web and social media traffic, while print fulfillment has declined by virtually the same rate. So the team looks forward to being able to combine this virtual engagement with the in-person engagement soon, but We're confident the past six weeks have validated our strategies, tools, capabilities, and our ability to accelerate next-generation distribution. So now I'll just touch a little bit on the Q1 results in our active U.S. retail business. First, we saw a very strong pickup in gross sales in Q1 following the integration of our distribution team in 2019. So $20.3 billion of Q1 gross sales were recorded. That's our best quarter since combining as – one organization, and it's 50% greater than our Q4 results. We saw record growth and gross sales across all asset classes, in particular global and emerging equities and taxable and tax-free fixed income. And as you can see on the chart, the March acceleration was really marked by unprecedented amounts of money in motion and a retreat to cash and conservative strategies and maybe an early stage equity and risk asset reallocation, which I'll touch on all sort of propelled this gross sales forward in March. The net flows in Q1 were really a tale of the market. In January and February, we showed really strong progress with net flows increasing nearly 30% over the Q4 monthly averages, and improvements were recorded across all major asset classes, and in particular, fixed income moved into positive net flows during that period. However, March changed the picture. As everyone knows, the industry was Net flows declined in the active mutual fund space by over $300 billion, which represented a 2.7% monthly decline February's ending AUM. Our March results in net flows were slightly better than those industry averages at negative 2.5% as investor redemption spiked and clients raised cash and de-risked. Our hardest hit in March were some of the asset classes where we are market leaders and we have high AUM exposure like municipals, international equity, and bank loans. which together were responsible for nearly half of those outflows in the month of March. But we believe these market-leading strategies are some of the same that are positioned to benefit from heavy reallocations and consolidations of clients' portfolios in the weeks and months ahead. So just a little color, since the last week of March, we're seeing flows moderate quite a bit. The benefit of first-stage government interventions, market stabilizing, and early-stage reallocations have benefited our gross sales. While not at the same levels as the large March spikes, they remain 10% stronger than pre-crisis January and February levels and 55% higher than Q4. On the redemption side, it's stabilizing as well. Net flows are about 60% better than the month of March, but still remain below January and February levels by around 20%, primarily due to risk assets like high yield and emerging net continue to have higher than normalized redemption levels in the meantime. Perhaps just a moment or two on ETF flows before I turn it back to you, Marty. While the ETF flows are not detailed on the page, I did want to give you a sense of the global franchise and our results. Industry-wide, the ETF structure has held up very well, pretty well in the market volatility and liquidity squeeze of the past six weeks. We believe the structural advantages of the ETF, notably its liquidity and the tax management benefits in the United States, should encourage high demand as investors cautiously reallocate way back into market. And at Invesco, we're ready for the potential acceleration in those flows. Our business is $250 billion of ETF AUM, which gives us top status in smart beta ETFs and provides us with breadth, scale, liquidity, and most importantly, long-term track records. for managing through volatility, diversifying income, and targeting growth. And the distribution profile we have, both with existing large ETF users in the U.S. wealth advice channels, one of the fastest-growing usage platforms in EMEA, and strong exposure to emerging channels in digital wealth, model portfolios, and asset allocation, puts us in a really strong position. So with this backdrop, just a little more detail on what Lauren mentioned on the global ETF franchise. We had a very strong start to the year in January with net inflows of around $2.5 billion, which was a great continuation from the $16 billion positive of net flows we reported in 2019. But like our active funds, the second half of the quarter saw major declines of the industry ETF levels, and it impacted our business as well. We resulted in negative $6 billion of net ETF outflows globally, but that's inclusive of the $1 billion that Laura mentioned from the pre-announced closures. And, you know, we were negatively impacted by smart beta funds in key sectors of equity and fixed income, which were impacted as investors looked to de-risk. But it was particularly focused on a few funds in U.S. large-cap equities, bank loans, and emerging markets fixed income. But we had several bright spots with the Qs growing by $6 billion in the quarter and alternatives up a billion, led by our commodity and currency strategies. And all of that said, net flows have improved significantly since the heightened market volatility at the back end of the quarter, and we're seeing our U.S. range improve by around 75% on a net flow basis, and we've turned positive in a few important categories in taxable and alternative suites and early signs of people returning to smart beta strategies. And EMEA has remained strong, and we have continued in positive flow territory post the first quarter. So with that, Marty, I'll turn it back to you.

Thanks, Andrew. And before we get to Q&A, let me just close out this section by saying we had a good quarter in what was an incredibly challenging macro environment. The key points to take away from the conversation we just had, investment performance in key areas continues to be aligned against where marked demand is, and that strong investment performance does matter as we look forward. Total outflows of negative $2 billion, an extremely challenging quarter, really reflects the power of our diverse platform, including long-term flows in areas we consider strategic. Average assets under management rate is flat to Q4, and since that time has gone up since March. And margins are 4% higher than the same period a year ago, reinforcing the power of an accommodation with Oppenheimer. capital, liquidity, allowing us to build ample liquidity and financial flexibility to support our long-term growth. And with that, I'm going to open it up to Q&A.

At this time, if you'd like to ask an audio question, please press star 1. You will be announced prior to asking your question. Please pick up your handset when asking your question. To withdraw your request, please press star 2. One moment for the first question. Our first question comes from Dan Fannin with Jefferies. Your line is open.

Thanks. Good morning. I guess my first question is on the balance sheet and the dividend also. Just, you know, thinking about the actions today and understanding that you're solidifying that for going forward, but wondering how this impacts the institutional business. You know, clients looking at your financial stability at the parent and thinking about large mandates, particularly in areas such as fixed income. As we remember from the financial crisis for others in the industry, this was an issue in terms of winning business or retaining it. Can you talk about how clients are, you know, engaging with you and asking, you know, bringing up, you know, parent liquidity and or the balance sheet strength and how that may or may not impact the kind of business trends going forward?

Yeah, Dan, let me make a couple of comments. I'll turn it over to you. taking proactive measures today around the dividend in particular, and then all the other actions that we talked about today absolutely focused on expenses in this uncertain environment and freedom of capital from the VC capital. And again, our institutional business has never been stronger, and it just continues to grow. Again, these actions today, they're just, again, proactive. It's just not been a topic for us at all, and what we're doing today will probably only strengthen that. Colin, anything you'd add to that? No, I think you nailed it, Marty. Obviously, institutional clients do care very much about the financial stability of the parent. It has not been a topic on clients' minds up to now. I think they feel that Invesco is just a very strong company, and to Marty's point, I think we think that the actions that we've taken today honestly reinforce that and would expect that our institutional clients would view it the same way. And I think, Dan, the other thing, which is a really important point we were trying to make, we built scale in this organization. We came into 2020 with some of the highest even down margins in the industry. So that puts you in a very different cash flow position than a number of your competitors. And again, that with all the other actions we're taking, you know, the coverage is very strong. And again, we're just trying to be very brute at this moment.

Understood. And I guess as a follow-up, I guess the $80 million a quarter in additional savings, you know, it seems like some of that is the kind of run rating, you know, with some of the business practices in place around, you know, travel and other things, I guess, and also market-related with AUM. So if you could maybe talk about specific kind of removal, permanent removal of costs versus temporary, and, you know, kind of how, if this is headcount, if there are certain areas outside of just, you know, kind of people staying home and markets being lower.

Yeah, so let me start on that, and then I'm going to turn it to Lauren. So, you know, as we've talked about really even last quarter, OZOP and I were we already had turned our eyes to driving additional operating efficiency into the platform. And it is platform-type undertakings. So that's where you get the additional scale. And that slowed down, quite frankly, in this first quarter as we turned our attention to making sure that all our employees were safe, that they were able to work from home, that we could interface with our clients and serve our clients. And so the immediate action is to do just what you're talking about. The things that you should do in a crisis is hit the brakes, stop hiring, and where you can stop spending, stop spending. Always with an eye to making sure that you're serving your clients, and that's what we've done. We're now at a place where we're back to looking at – going forward on building this program that we started, and that's where you're going to take the longer, more permanent types of expenses as an organization. Back to the point, we know how to do it. We're just not talking about it. We've proven it time and time again, and last year with the Alpenheimer combination dealer, it's just not an idea. We know how to do it, and we have a proven track record.

I mean, the only thing I would add is, I mean, one of the things that, you know, no one's presuming is that, you know, post this COVID situation that everything's going to be back to normal, right? And so I think we are learning things, as everyone is, around, you know, how we can operate perhaps differently. And that, you know, reflects a whole slew of some of the costs that are sort of business as usual costs around travel. And obviously we've gotten very good at using digital methods for, you know, interacting with clients and how we use space and other things. So I do think there's a variety of things that are being looked at and that we will continue to explore with respect to what should the operating model look like going forward. Beyond that, I think right now we've definitely hit the brakes. We've done this before. This feels very much like the way we manage through the financial crisis, and you can look back to how that worked through. But, I mean, we've been very diligent and good about sort of stopping spend around areas that I think we can, you know, keep a handle on for some period. The bigger opportunity, as Marty already alluded to, is around some of the structural opportunities around technology operating platform, which we're well down the path of looking at.

And look, I do want to reiterate Lauren's comment, and I tried to highlight that. The way that we're operating, I'm sure many organizations have, it is absolutely going to change how we operate point forward, just how we operate our business, but really the client interactions, they have never been more robust, more frequent, more meaningful than for this period that we're in. And it's good for our clients, it's good for the organization, and it will just create a very different dynamic. And You know, the operating model and costs associated with that will change going forward. Do we know what the exact answer is right now? No, we don't, because, frankly, our head has been down on taking care of our clients and taking care of business, but it is going to be a changed world, and I'd say for the better, but frankly.

Got it. Thank you. Thanks, Dan.

Thank you. Our next question comes from Ken Worthington with JP Morgan. Your line is open.

Hi. Good morning. You cut the dividend by half, but it still seems like you're taking a defensive position here given market conditions and outflows. You talk about the preservation of capital in the press release. You talked about not buying back stock this year. It sort of seems like the cut may have been a half measure. I'll cut the dividend further or outright eliminate it altogether. Maybe why not consider dropping the preferred dividend for a number of quarters in order to strengthen the balance sheet, allow yourself to buy back stock and really take advantage of the downturn in the market that we see.

I think a good question. Our decision to reduce our common dividend by 50% was done certainly with an understanding that the environment could weaken from here. It wasn't necessarily our working assumption, but certainly we're not thinking we're seeing a snapback going forward. But we don't intend and we certainly don't intend to make another difficult decision like this again. And we do feel confident that this was the right action at the sufficient level to give us the flexibility that we desire to manage a balance sheet even if the environment were to deteriorate from here. And we've stress-tested all which ways. So I do think it's important to note that while 2020 is emerging to be more challenging than we anticipated, We are still operating, as Marty mentioned, from a position of strength. This isn't a reactive move, sort of driven by liquidity concerns at all. Instead, we're proactively addressing the opportunity that we have to improve our leverage profile and to maintain financial flexibility, which is going to be required to invest in client-enhancing projects. and growth capabilities going forward. So, we feel comfortable that this was absolutely enough that, you know, what you were suggesting is sort of, you know, not needed. And, of course, we looked at everything when we were setting this. It was not a decision taken, you know, sort of casually and there was a lot of stress testing involved.

And then I think you guys regularly disclose quarter-to-date net flows on these earnings conference calls. How do things look so far in 2Q for long-term net sales?

Yeah, I don't think we typically have done that. We've sort of stopped that practice a while back, Ken, so I think we're going to sort of continue to not do that just because it's still too short a time frame to really judge what is going on. I think obviously March was a horrible month. Things are better, clearly, in the way the market is evolving. But beyond that, I don't want to sort of get into actual numbers.

Okay, great. Thank you very much.

Thank you. Our next question comes from Brian Vidal with Deutsche Bank. Your line is open.

Great. Thanks. Good morning, folks. Just a clarification, Lauren, on a couple of the guidance points you made, just the absolute level of the fee ratio in 2Q, the down two basis points, is that implying a little under 37 basis points? Do I have that right or is that a different number? And then the cost run rate, I think you said, if I'm not mistaken, 80 lower than the 755. So the second quarter quarterly expenses, adjusted expense run rate should be about 675. Do I have those correct?

Yes. So on the latter one, yes, 675 is what we're suggesting as sort of the average run rate for the remainder of 2020. And so, yes, we're saying that in terms of the net revenue yield, less performance fees, that would be suggesting, you know, sort of two basis points off of where we ended in Q4. So that was the guidance that we're providing. I'm sorry, so where you ended in Q4, could you... I'm sorry, for Q4, sorry, not where we ended, for the Q4 net revenue yield.

Yes, so it's trying to get the actual level of the revenue yield that you're talking about for 2Q on an X performance-y basis.

All right, well, so the actual quarter was 38.7 for the quarter, so we're talking about two basis points less, so 36.7. Okay, so it is 36.7.

Okay, yep, just wanted to make sure I had that. And then just on the, you know, it sounds like obviously the sales momentum is a good story here, both on the institutional and retail sides. Maybe can you talk about, you know, which areas institutionally that you're seeing that sales momentum and sort of the timing of that $31, $32 billion, one but not funded pipeline in terms of actually getting getting funded. It sounds like the solutions mandate, I think there's only a few billion left that's included in that $31 billion pipeline. So maybe if you could just kind of talk to the sales momentum on the institutional side in particular.

Alan, will you pick that up? Sure, happy to. So momentum has been strong. As I mentioned before, the pipeline is growing. In fact, it's actually grown into the last five quarters consecutively, and so we feel that we're being quite responsive to institutional client needs, and that's reflected in us in WINS. In terms of when it will fund, what typically happens is that pipeline will largely be funded through the end of the year. It usually takes about two to three quarters for the pipeline at any given time to be funded. There's obviously some things that will fail off beyond that, but that's kind of a good expectation. In terms of product, it really is going to be client-dependent and depending on needs. We are seeing strong momentum, continued momentum into our solutions and factors, capabilities, continued momentum into alternatives, particularly in real estate and real assets, continued momentum into various fixed income categories. In many ways, it reflects the portfolio dynamics of institutional clients.

And have you been able to create institutional products for the Oppenheimer funds yet, or is that still a work in process? And what would be the timing of availability for those separate accounts?

So it's still a work in progress, but we are getting increased inquiry, particularly in the current environment. So it's not reflected enormously in the pipeline as we see it, but in the longer term, pipeline that we have that's beyond long-not-funded. So these would be things that were more on the qualified side. We're starting to see early interest. In particular, where we've seen it so far is on the retail side of the platform. It's global equity, emerging markets equity, and institutionally, that is exactly what's happening now. So those are the conversations that there's a lot of interest. But...

I think that's particularly in Europe and Asia. Europe and Asia.

I was going to say, yeah, on the CCABs and Luxembourg common sales product, are you getting traction there on the Oppenheimer side?

I mean, there's still strong interest. It hasn't grown dramatically. I mean, you're still talking about, you know, a couple hundred million in terms of AUM. But the interest is still there. The product is still considered very attractive. Obviously, in the current environment, things slowed down. And that number is with all the market, you know, impacts.

Okay. Thank you. I don't know. Do you want to add anything, Craig?

No, I think you captured it. I think the interest is in the areas that you kind of mentioned, and we're seeing that interest continue to pick up. So I think we're pretty excited about the longer-term opportunity or the intermediate-term opportunity for a lot of the products there. That demand is strong, and our performance in those products is incredibly strong. Great.

Thank you. Thanks, Brian.

Thank you. Our next question comes from Bill Katz with Citigroup. Your line is open.

Okay, thank you very much for taking the questions. I appreciate some of the new disclosure in your supplement as well. First question, just you had mentioned a targeted payout ratio of 40% to 60% for the dividend. Is that a GAAP payout ratio or an adjusted payout ratio?

That's based on adjusted bill.

Okay, is that a forward 12-month type of dynamic?

That's a forward 12-month type of dynamic, yes, absolutely.

Okay, and then just turning to the fee rate for a moment, I appreciate some of the color from the conversation as well. Could you break down sort of the net impact of volumes coming in versus going out in both retail and fixed income, you know, setting market dynamics to the side? Because there seems to be a lot of different moving parts. Just trying to get a sense of how to think about the fee rate other than, you know, outside market moves.

Yeah, I mean, there's a lot of ins and outs. I mean, we had some dynamics where you had, you know, money market was a huge – That's at a lower fee rate, you know, typically 10 plus basis points but lower fee rate. You had the funding of a significant, you know, solutions win which was also sort of single digit fee rate. You had queues coming in which are sort of non-fee driving. So it's hard to parse all that through. That's why I provided the guidance just because it was really hard I think for anybody to really understand the full impact. You know, plus you obviously had the market which was sort of obviously compressing some of the higher fee equity components within our mix. So, you know, again, it's a complicated fee rate thing and even hard for me to forecast, you know, which is why I typically don't do it. But we wanted to give you that two basis points which we think sort of puts you at least sort of statically where you should be based on March.

Okay, and just one final one. Thanks for taking all three of them this morning. In terms of looking at your balance sheet, debt went up, cash went down, how do we think about a targeted leverage ratio, whether it be a function of market cap or enterprise value or maybe more focused in terms of debt to EBITDA? What's a reasonable target and when do you think you can get there?

Yes, so it's a good question. As I mentioned, we're not committing at this point in terms of de-levering. We are very confident though that we have the ability to have the financial flexibility to do so. In terms of what that could mean, obviously taking our credit facility down from 508 to zero, eliminating the obligation that's remaining on the forward purchase of, you know, $220 million by April. And then finally, you know, we have the $600 million that's coming due in November of 2022 under sort of a very dire sort of scenario, you know, sort of going forward. We covered that, those requirements handily through the existing liquidity without further borrowing. So our focus would be on having the flexibility to, to deliver as we come up to those events or maybe even sooner if we decide that's the right thing to do. I think if you were to look at our debt to EBITDA ratio, we're higher than we are comfortably wanting to be right now. You know, I think we're sort of would rather see if I'm just looking at debt to EBITDA where debt is our long-term debt, you know, let's not provide anything around the preferred at this point. you know, sort of getting closer to, you know, sort of one and a quarter times to one times has been, you know, kind of the long-term target that we've had in the past. And we're not that, you know, far away from that number, but there is opportunity for us to bring that down further going forward.

And, Bill, I think the main point that we're trying to do today is literally optionality, right? And it's such an uncertain market, and I don't think any one of us has the answer to what it looks like. But these steps, again, are very proactive. This is a much stronger position to respond to. That's the case. If the market starts to recover, then that gives us the different options. But that's the main point.

Okay. Thank you very much for taking all the questions this morning. Thank you. Thanks, Bill.

Thank you. Our next question comes from Michael Carrier with Bank of America. Your line is open.

Hi, guys. This is actually Sean Calnan on for Mike. Just with the pullback in the seed capital, can you give us an update on the outlook for launching new strategies and products?

Yeah, maybe I'll just touch on it, and then Marty or Greg or I was concerned. I mean, I think we have been... very focused on launching products to the benefit of our clients around, particularly in the area of ETFs. We've been very fortunate to have the seed provided by our clients effectively, so we have not had to put seed in to launch those products. That is our preferred method of launching products generally. Now, we can't do that with all products. Some alternative products and others do require some co-investment. I think As Marty mentioned, we've actually seen partnership with MassMutual really opening up some doors where they themselves have stepped in in certain cases to provide seed and co-investment to some of these product launches, which has been really helpful because it offsets our need to use our own balance sheets. I don't know if, Marty, is there anything you'd like to add to that?

Why don't I ask both Andrew and Colin to make a comment or two? Andrew, do you want to start?

Yeah, I mean, from a seeding perspective, the only thing I'd mention is the product line that we have across the ETF complex and the mutual fund complex has given all the work that we did over the course of the last year or two in consolidating acquisitions and right-sizing our product line. You know, our seed capital needs in those areas are fairly limited at this point, and as Andrew As Lauren said, much of it coming from clients where we do have launches on the drawing board for the ETF side.

From an institutional standpoint, I think we feel quite comfortable with the support that we've received over the years from a seed capital standpoint. So I can't think of anything that's been slowed down, nor would I anticipate anything going forward. I might reinforce that Marty's point, Lauren's point, MassMutual has been a fantastic partner to us and the support that they've shown for a number of our strategies, particularly in alternatives, has been just tremendous. And we would expect that relationship to continue to blossom going forward.

Okay, thanks. And then just going back to flows, again, are you starting to see any improvement in Asia since they're a little bit further along with dealing with the pandemic?

Yes. So they were net influence in the quarter, right? So, you know, it just continues to accelerate at a retail level and institutional engagements with, you know, the important clients out there also continues to be quite strong. So, again, you know, that's continuing as we move into this quarter. Maybe, Greg, you want to add anything from your perspective because there's a lot of demand from the fixed income group, too, over there.

No, I think you've got it covered, Mike.

So did I get your question?

Yeah, I would just mention I think Asia continues to be a positive contributor to flows. They've continued to even in the height of this, produce positive long-term flows. There is nothing sort of indicating that that's slowing down. People, you know, we're still launching products. People still are interested in the products that are being launched. And it is broader than just China. I think Japan as well is beginning to sort of show up as a potential contributor with, you know, sort of opportunities around fixed income in particular.

Next question. Thank you. Our next question comes from Kenneth Lee with RBC Capital Markets. Your line is open.

Hi. Good morning. Thanks for taking my question. Just in terms of the – I had a question. You mentioned there's a lot of non-cash items within your net income. What's sort of like your best view of ongoing free cash flow generation for the company, and how could this potentially evolve in the near term? Thanks.

Yeah, so cash flow from operations is strong. You know, we see sort of somewhere between, and this is based on current March end levels, so again, you know, somewhere between, you know, in excess of 950, you know, to a billion of the cash flow from operations going forward. So even in the stress scenario, you know, that number holds in reasonably well. So that's a huge contributor. And again, the non-cash elements, when you sort of add those back to earnings, you get to those types of numbers. So hopefully that gives you a sense of how much cash generation we are providing just from the business.

Great. And just one thought, if I may, just in terms of the mass mutual, I wonder if you could just provide a little bit more detail in terms of that approval of capital for, I think you mentioned, is real estate or alternative strategies or You know, what are the potential timeframes that we could see some initial products, and perhaps you could better frame the opportunity you're expecting there? Thanks.

Colin, can you take that, please? Sure, happy to. So I think, as we mentioned earlier, NAS Mutual has contributed $425 million to two of our real estate strategies. The first is a non-traded REIT strategy, really targeted at the retail market. We'll figure out the timing of when we would launch that strategy as markets start to settle down in real estate so that you can get some sense of value and valuation. But that was a seed capital investment. And then they've also... contributed an anchor LP position in one of our Asia real estate funds as well.

Great. Thank you very much. Thank you. Thank you.

Thank you. Our next question comes from Robert Lee with KBW. Your line is open.

Great. Thank you. Thanks for taking all the questions. And sorry to go back to the Yeah, balance sheet, other questions, but just to clarify, Warren. So is she would be thinking in terms of, you know, use of cash over this year, obviously, you know, the liquidity, but that kind of chip away the revolver over the course of the year, and then it kind of reloads first quarter of next year. Is that the right way to think about it?

I mean, in general, yes. I mean, this is obviously extraordinary times, and I think you've certainly seen other companies kind of draw fully on their credit facility just to get cash. That's not what we've done. But I'd say the normal sequence would be, yeah, there's a normal draw that happens on the credit facility in the first quarter, and then, you know, we generally pay that down. But I'd say that, you know... would be the right way to think about it, and the cash flow that we generate would allow us to do that for sure. It would allow us to pay down the credit facility. It would allow us to, as I mentioned, fully pay back the forward commitments and still generate excess cash.

Okay, great. Then maybe as a follow-up, and I appreciate the disclosure on the pipeline and quantifying it, but it gives a sense of if we look at kind of that mix, I know there's a lot of factor-based strategies there? You know, how would the kind of fee mix compared to the overall, is it kind of, you know, your overall fee rate, is it kind of in line, a little lower? I mean, how should we be thinking of that in the mix?

Yeah, let me make a comment. I don't know if we have that information, but it's not all too well. I wouldn't if you use feed rate, levels of feed rate profitability, right? So the factor business you get has very high margins, even though and quite frankly, same thing with the business.

Yeah, I think the pipeline, you know, has a fee rate because of the growth in solutions. That's, you know, just a handful of basis points below the firm's aggregate fee rate. So it has come down a little bit, but it is still, you know, sort of roughly in line with the firm's overall fee rate.

Okay, great. That was all I had. Everyone stay safe and healthy. Thank you.

Thank you, Rob. Appreciate it.

Thank you. Our next question comes from Alex Blassine with Goldman Sachs. Your line is open.

Good morning. This is Ryan Bailey on behalf of Alex. I actually had a question about the OFI MLP dynamic that was going on. I was wondering if of the kind of $400 million accrual that you guys had taken, about how much of that do you expect to recover? And then if you have any color on timing and whether the full $100 million is, you know, the maximum we should be thinking about underwriting as an expense.

Yeah, so I think you saw in the quarter we basically made, I mean, we reflected the full, it was about 380, I think a little more than 380 million. That was reflected through a purchase price adjustment largely. There was a small component that went through transaction integration. So that's been reflected. In terms of the expectation for recovery, I guess one, it's going to take a while in terms of ultimately figuring out what the final number is. We do believe that the number that we provided and we took through our balance sheet is the right number obviously, but it is an estimate and ultimately needs to get confirmed as we go through the full detail of those client by client impacts. And that's not going to get known for probably many quarters. And so you're probably talking more about the 2021 sort of understanding of where that shows up. In terms of recovery, we have, you know, expectation that we're going to cover the substantial component or, you know, majority of that number, if not all. It is still something where we have to work through insurance, you know, sort of the claims that we're putting through as well as ultimately, you know, the normal indemnifications that came as part of the transaction when we took the business over. So right now, at least in our thinking, there is nothing substantial or material that you need to think about in terms of net cash out as a result of this.

Got it. Okay, thank you. And then maybe just one more. Can you give us a reminder on any impact of fee waivers on the money market business as we kind of roll through maybe another couple of months at kind of lower yields on those products?

Yeah, it's an interesting dynamic. I'd say we're fortunate in that the majority of our business is institutional money market business, which tends to be lower fee, and so the topic of waiving is not nearly as relevant or impactful as it is if you have a large retail kind of component. That said, I think as we move into 2020, there probably could be some amount of fee waiving that we'll need to do in order to maintain a certain limited amount of yield on these products. I don't think it's going to be a material amount of money. I mean, it's probably an order of magnitude. And, again, these are sort of swags a little bit. You know, it could be a little bit more than $10 million on an annualized basis. But, you know, we're still looking at those numbers right now. But it's not, as I said, it's not that material for us given our mix of business.

Got it. Thank you very much. You got it.

Thank you. Our next question comes from Brennan Hawkin with UBS. Your line is open.

Good morning. Thanks for taking my questions. Most of them have been answered. I guess, number one, could you remind us of or maybe update us about any regulatory or other calls on cash and liquidity at this point?

I mean, I'm not sure if I, the only thing that I, we all know is the amount of cash that we have within our European subgroup, that's nothing different than it's been in the past. It's sort of in the range of sort of $700 million. It's not a range of number, but it was a quote, $700 million. So that has not changed. That's still kind of roughly the number. Beyond that, there is nothing, certainly I'm aware of, where we have any need from a regulatory perspective to provide cash or capital. So if there's something specific, Brendan, you're getting at, please ask. I'm not sure if I'm answering your question.

No, you did. I just was curious whether or not that number had changed or whether or not there was just anything that we didn't know about. So if you don't know about it, then... There is nothing else.

It's the same old thing.

Yep, good enough. Cool. And then thinking about the pay down plans, I appreciate the comments on how you guys view long-term debt to EBITDA and that ratio. The increase or the drawdown of the half billion for the revolver to fund, you know, the obligation that you guys had coming up is significant. Is the idea there that that's going to be a priority to pay that down first, or does the plans around the revolver fold into the overall plans around long-term debt, or is that thought of separately?

Well, we absolutely have the capacity to pay it down. So I think it's a flexibility topic as to would we rather pay down the revolver, would we rather keep cash? I don't know if we're at this point ready to commit, you know, sort of as to the timing of the pay down or when we would pay that down. But I would say that we are going to, in terms of a net debt perspective, it's effectively paid down, you know, as we get into the end of 2020. So you should think of it that way. How we actually manifest it, I think we're still looking at.

Okay. the most important thing to do, you know, until there's greater clarity in this environment. And, you know, the message to take away is we have the capacity to pull any one of those levers, and when we get greater clarity, we're going to pull the lever that we think is most impactful to the organization.

Yep, that is clear and very sensible. Thank you. I was just hoping to squeeze in a follow-up here. The 80 million bucks, I think it was Dan who asked about that initially. A lot of that seems to be based on, and I understand we're not really on terra firma given everything that's going on with COVID on a few different levels. How should we Are you going to update us as you continue to work through thinking about how much of that would go from natural current environment changes to more structural expense declines? Or is there a certain portion of that that we can start to think about as a more structural decline in the expense space?

Yeah, so... It is more that our action is very similar to what we did during the financial crisis. The first thing you do is you protect the organizations and the employees. You can protect the clients and protect the shareholders. That's exactly what we did. And it does all those natural things. It effectively stops spending where you can stop spending. And it creates really some security and some flexibility. That's what we're doing right now. And it's probably not atypical of what you're going to hear from all of our peers, I expect. We happen to be in another position where, coming out of Oppenheimer, we said we're moving to what we call day two to look at greater, more permanent operational opportunities to create ongoing efficiencies in the organization. We were heading down that path. We had to hit the brakes to get on top of this COVID challenge. We're now turning our heads back to that, and as we the greater clarity and confidence of what will be coming out of that. We will absolutely share it with everybody. But, again, I just want to come back to we know how to do the track record of doing it, and we had already started down that path, and we'll just pick it up as things start to settle up.

Yeah, but we'll definitely give you clarity as we get through this. No questions, Brendan.

Yeah, okay. Thanks for taking all the questions. Really appreciate it. Absolutely.

Thank you. Our last question comes from Michael Cypress with Morgan Stanley. Your line is open.

Hi. This is actually Stephanie filling in for Mike. I wanted to get your updated views on ESG maybe. Do you think the environment today lends itself to increased demand for industry products further in the industry, broadly speaking, and then maybe within Invesco as Do you see an uptick in demand and any sort of opportunities you see from here on the ESG front? Thank you.

Yeah. Why don't I make a comment? First, Andrew can speak to it. I want to grade you in the middle of it and make it all happen. So I think there's no question. And, again, I think it depends on where you sit. ESG is just an absolute necessity for any investment organization to be deeply engaged in. What your opinion is is absolute necessity in Europe. If you are not very strong, you are incredibly disadvantaged. It is gaining legs here in the United States and also Asia, but what I will tell you as an organization, we are deeply engaged in ensuring that the ESG capabilities embedded throughout our investment capabilities and various offerings But Andrew, do you want to start? Because some of them maybe talk about the other.

Yeah, no, sure. I'll make a couple of comments and others may want to as well. I think this environment and we're positioned for it is probably going to create more demand around ESG and just more momentum. I go beyond product. I know your question focused a bit on that. We certainly think there will be ESG-focused product, and we've been building that or have built that, and we'll continue to look at it. I think the bigger area that we're focused on, and Greg might want to comment on it, is how we're embedding ESG into fundamental strategies as a factor of the way that we're looking at active investments. And I think that's a growing expectation of all of our investors and, I'm sorry, our clients around the world. So I think that's an area of focus for us, too. And then lastly, I think there's more and more as people are putting together asset allocations and portfolios. At the retail level, it's going to continue to be a factor that drives those aspects, too. So I think we're seeing it on all fronts. Maybe while people are triaging in various environments right now, you may see a short slowdown. But in the medium or long run, I don't see any of that abating.

The only thing I'd add to that is I think that the focus that we're seeing is from a lot of different participants overall, and there's just a tremendous focus that, while it emanated in Europe, I think we're seeing that in a lot of discussions that we're having with clients in Asia and clients in North America overall. And so that's coming in the form of demand, and we've got a number of products that have kind of hit that demand that stem from things that we're doing in our alternative business to things that we're doing in fixed income and other areas. And so we have a wonderfully strong capability, we think, in ESG, and so we're trying to match up that capability to the point that Andrew met in embedding those into our investment teams and making sure that we're kind of proactively really not just touching the surface on ESG, but really embedding that in the things that we can do from an investment standpoint to make decisions that are going to kind of support the ESG mandates overall. So we've got a strong capability. We've got increased demand. We've got a lot of products that we've already put into the marketplace. We think that while it may be stalled for a couple of weeks in light of what's gone on in the environment, you know, once we get through this, which we will, that demand we think will come back online, and we're well prepared to be able to handle that, we think.

Colin, anything you want to add from a institutional point of view? No, I just reinforce the points that were made. It's a core skill, and I think, as Andrew mentioned, ESG both as a product but equally importantly and maybe more importantly as a factor that can be applied across portfolios is of critical importance. In fact, our ESG capabilities have been core to a number of our wins, particularly in the solution space where that ability was critical from a client standpoint. And we feel quite good about our capabilities. So that was the last question. And again, I appreciate everybody spending time with us, engaging, and we'll be chatting soon. Thank you.

This does conclude today's conference. Please disconnect at this time.