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?