Janus Henderson Group plc Ordinary Shares

Good morning. My name is Nicole, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janice Henderson Group's Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. In the interest of time, questions will be limited to one initial and one follow-up question. In today's conference call, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors including, but not limited to, those described in the forward-looking statements and risk factors sections of the company's most recent Form 10-K and other more recent filings made with the SEC. Anna Sunderson assumes no obligation to update any forward-looking statements made during the call. Thank you. And now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Henderson. Mr. Weil, you may begin your conference.

Welcome, everyone, to the third quarter 2020 earnings call for Janus Henderson. As usual, I'm joined by our CFO, Roger Thompson. Let me start by saying that I hope all of you, your friends, your family continue to be safe and healthy. I'm really pleased to be back physically in our London office taking this call at a safe distance alongside Roger. As we've said on previous calls, we like to take a long-term view of our business. That's somewhat at odds with the quarterly reporting cycle, so to that extent, what we've done is to say on the first and third quarter calls, we'll run through quarterly results, and then we use the second and fourth quarter calls to do a bit of a deeper update on the business and strategy. In line with this, in today's presentation, I'll just give a brief summary at the start of the quarter from my perspective. And then I'll hand over to Roger, who will go through the results in some more detail. Following our prepared remarks, we'll take your questions. So turning to slide one. Our third quarter results were strong. AUM increased 6%. Our long-term investment performance was solid. Adjusted EPS of 70 cents was better compared both to prior quarter and to a year ago. Our balance sheet and cash flow generation remained very strong as we continued to return capital to shareholders during the quarter, both by dividends and also repurchases. Roger will take you through the financial details in more depth. But what I'd like to do is just try and tell you how I think about the quarter sitting in the context of our broader story, which really is about our strategy. If you turn to slide two, it's a reminder of our strategy, which is simple excellence. We're making great progress on delivering our strategy, building a strong and resilient foundation, which is designed to deliver organic growth and to increase profitability. Our path to achieving simple excellence is founded on the five planks referenced on page two. And let me just quickly turn to each one of those five planks. First, producing dependable investment outcomes. Our long-term investment performance remains solid. Some of our strategies took a hit in the change in markets and COVID-related beginning part of this year, but a number of our other strategies have done extremely well, and we've had the diversity and the resilience to continue to drive forward, and overall, long-term investment performance remains solid. The second plank is that we have to excel in distribution and client experience. We've seen a significant improvement in net flow in this quarter. We can definitely see those numbers moving around, particularly with lumpy institutional flows over time, and it's hard to draw sort of an extrapolation line from quarter to quarter. But to me, I'm seeing good momentum in a number of areas in our business, and I'm seeing improvement in the execution. And so I think we are definitely getting closer to excelling in distribution and client experience, which puts us on a path to achieve our objective of organic growth. Just as an example, our fixed income retail flows were positive across the U.S., EMEA, and APAC, and have grown at double the industry rate in U.S. retail during the quarter. Another example is we're capitalizing on a strong list of global focus products, which has been for our global head of distribution, Suzanne Kane, and her team. They put in this global focus product program, and it's working well. We're focusing on products with high growth potential and are pleased with the year-to-date growth in those particular products. The third plank is focusing on an increasing operational efficiency. In the quarter, we've completed some major projects that simplify the way we operate our business, and that also served to free up capacity so that we can turn our attention not only to current BAU business improvements, but also generational steps forward in our infrastructure. We completed back office systems lift out. We consolidated TPAs. We took a number of other important steps during the quarter that move us forward. We told you last quarter also that we'd be taking a hard look at our business model and expenses. We're doing that, taking a careful and thoughtful approach. We need to balance cost savings against appropriate levels of continued investment that are required to effectively drive our growth strategy and get us to simple excellence. We're making really good progress in the project. It's been a focus and gotten attention from our board as well as the management team, and we've had the help of some excellent third-party consultants. And so we are really making progress. We've identified some very tangible areas of savings that we'll be pursuing, and we also have a number of other ideas that we'll continue to work through. I look forward to updating you on progress in this area as the work progresses, and I expect to be able to give you more detail about how we're doing this in the fourth quarter when we give you our expense guidance for the upcoming year. The fourth plank in our strategy is proactive risk and control environments. We further strengthened our team with some senior hires, especially me ahead of compliance, which is an important position for us. And we're taking steps to further strengthen control environments and relationships with the regulators around the world. So I'm pleased at the progress in this area. The fifth plank is to develop some new growth initiatives. We're focusing on areas of strength for us combined with where we see our clients moving. Here we're committed to delivering growth in a profitable way. Example, we continue to support growth in ETFs. We've seen really good momentum in our VLNA and our JMBS ETFs in the U.S. Last week, we launched a AAA CLO ETF called JAAA in the U.S. It was the 11th largest ETF launch out of 1,600 in the last 10 years. Outside of ETFs, earlier this month, we also launched a UK asset-backed securities fund. I think we're doing good work in continuing to develop targeted new growth initiatives. Before turning it to Roger, let me reiterate a commitment to delivering the benefits of our strategy to all of our key stakeholders, our clients, our employees, and our shareholders. We are driving forward in this regard with as much urgency as possible. We know that time is expensive and not always our friend, and we are really working as fast as we can to deliver on this strategy. Let me say just a word about in-tech. We've talked before about how we are facing some real challenges in our in-tech business, driven primarily because of a couple of periods of underperformance in recent history in their investment strategies, and also facing the challenge that a number of our clients are barbelling their portfolios, which can leave in-tech in the middle with a bit of a challenge to find its space. They've been fighting this battle for a while, and this quarter represents improvement. They had better investment results. They also had better flow results. And so as we work to face the challenges in the in-tech part of our business, we know it's going to take time to fully heal and get back to health. But this quarter does represent a step forward in our in-tech business, and that's good. But as we think about the lumpy nature of that business and the large institutional account size that they deal in, it's hard to extrapolate from quarter to quarter. And it's fair to say there's still some very significant risk remaining in our in-tech business as we go forward. And it's difficult to predict exactly the quarter to quarter path on the return to health of that part of the business. Looking away from in-tech, when I look at the rest of the business, I think we can see a clear path to continuing to drive forward towards organic growth, perhaps a bit more quickly. I'm optimistic that the rest of the organization can continue on the path and continue with the steps that we've made to this quarter. And I really believe we are on the right path to achieving organic growth and driving greater profitability and building our business for the long term. So with that, let me turn it over to Roger to take you through the quarter's results.

Thank you, Dick, and thanks, everyone, for joining us. Starting on slide four with investment performance. Investment performance remains solid with 58%, 61%, and 73% of firm-wide assets beating their respective benchmarks on a one, three, and five-year basis as of the 30th of September. The one-year performance result in our equity capability is primarily from segments of our U.S. equity business, which we've previously noted. We're encouraged by Intec's improvement in its one-year performance, as Dick just mentioned. However, the longer-term performance will take longer to turn and hence remains a concern. Relative performance compared to peers is strong, with 68%, 74%, and 78% of the AUM represented in the top two Morningstar quartiles on a one-, three-, and five-year basis. Now, tending to total company flows. For the quarter, net outflows were $2.9 billion compared to the $8.2 billion last quarter and $12 billion in the first quarter, and they're the best they've been in the time series that we show here. The quarterly flow number reflects lower redemptions primarily from the institutional business, which were partially offset by lower gross sales in the intermediary channel, as we typically see seasonally lower retail sales during the third quarter. We remain encouraged by the institutional outlook given our diverse pipeline across strategies and regions. Additionally, we're optimistic that we're through the majority of the redemptions that were likely as a result of the changes in the investment management team that we made over the last 18 months. The intermediary business saw positive flows in our fixed income and multi-asset capabilities, while outflows continued in our U.S. mid and SMICAP capabilities due to short-term underperformance, which we identified as a risk on last quarter's call. We're pleased with the improving flow trends and the broader business momentum as we progress through 2020, though we know there's still much work to do. As Nick just said, excluding in-tech, which is likely to take longer to turn, we're optimistic about returning to positive organic flows in the near term. Moving to slide six, which shows the breakdown of flows in the quarter by capability. Equity net outflows from the third quarter were $5.1 billion. compared to 4.2 billion in the prior quarter. The quarterly outflows were primarily from elevated outflows in certain US strategies due to short-term underperformance. Flows into fixed income were positive 1.8 billion in the quarter, compared to negative 700 million in the second quarter, primarily due to lower mandate redemptions, but also growing positive flows in retail. In retail, we're capturing market share and seeing positive flows across several strategies around the globe. Intech outflows improved in Q3 to $100 million. The result includes a $1 billion funding out of Australia. We're pleased with Intech's improving short-term performance and the better flow result this quarter, but as we've said previously, Intech is mostly institutional, and the results will likely be lumpy and fluctuate from quarter to quarter. Total inflows from multi-asset was $600 million, driven by inflows into the balance strategy. And alternative outflows $100 million. Slide seven is our standard presentation of the US GAAP statement of income. Moving to slide eight, which shows a strong set of summary financial results. There's a lot of green on this page. Adjusted third quarter operating results were up compared to the second quarter, primarily from a 10% increase in average AUM. Total adjusted revenues in the quarter increased 9% compared to the prior quarter, due to higher average AUM, partially offset by seasonally lower performance fees. Adjusted operating income in the third quarter of $162 million was up 17% over the prior quarter, driven principally by higher revenue, partially offset by higher expenses. Third quarter adjusted operating margin was 36%, compared to 33.5% in the prior quarter and 37% a year ago. And finishing up the financial results, adjusted diluted EPS was 70 cents for the third quarter compared to 67 cents for the prior quarter and up from 64 cents a year ago. On slide nine, we've outlined the revenue drivers for the quarter. Higher average assets were the biggest driver of the quarterly change and adjusted total revenue. Net management fee margin for the third quarter was 45.8 basis points, up from 45.7 basis points in the second quarter and up significantly from 44.4 basis points a year ago. The margin remains resilient, and the increase of 1.4 basis points over the past 12 months reflects the ongoing mix shift and our focus on quality flows. Performance fees were $7 million in the quarter versus $17.2 million in the prior quarter when there were more accounts eligible for fees, but up from $1.4 million in the same quarter of last year. We currently expect Q4 performance fees to be ahead of Q4 last year, but that will obviously depend on final performance for the year. For mutual fund performance fees, the third quarter was a negative $5 million. Turning to operating expenses on slide 10. Adjusted operating expenses in the third quarter were $288 million, which was a 5% increase compared to the prior quarter. Adjusted employee compensation, which includes fixed and variable staff costs, was up 6% compared to the prior quarter, predominantly from higher profit-based incentive compensation. Adjusted LCI was down 13% from the second quarter from the impacts of the mark-to-market adjustments in both quarters and Social Security taxes on vestings in the UK that occurred in the prior quarter. In the appendix, we provided the usual detail on the expected amortization of existing grants. The third quarter adjusted comp to revenue ratio was 43.9%, in line with our mid-40s guidance. Adjusted non-comp operating expenses were up 12% compared to the prior quarter. The increase is primarily related to marketing, FX, and professional fees. For the year, we anticipate our non-comp expenses to be down low single digits compared to 2019. And finally, our recurring effective tax rate for the third quarter was 21.3%, below the statutory rate guidance of 23 to 25%. The lower rate in the third quarter was impacted by a US state refund received during the quarter. And lastly, slide 11 is a look at our capital management. Cash and cash equivalents were $927 million as of the 30th of September, of which Janice Henderson's portion was $909 million. As a reminder, you should think about the amount of cash we have on the balance sheet as what the board and management are comfortable operating the business with due to regulatory requirements, a conservative working capital buffer, and cash set aside to meet the 2025 debt maturity. As we said previously, we remain committed to returning excess from future cash flow generation to our shareholders. During the third quarter, we paid approximately $66 million in dividends to shareholders, and today have declared a $0.36 per share dividend to be paid on the 23rd of November to shareholders of record as at the 9th of November. And in the quarter, we purchased 2.4 million shares of our stock for a total of $50 million. And since we started our buyback program in Q3 2018, the buyback program has been 9% accretive. Now I'd like to turn it back over to Dick for a few comments before we begin Q&A.