Janus Henderson Group plc Ordinary Shares

Good morning. My name is Andrew and I will be your conference facilitator today. Thank you for standing by and welcome to the Janice Henderson Group fourth quarter and full year 2020 results briefing. 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. Janice Henderson assumed no obligation to update any forward-looking statements made during the call. Thank you. Now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janice Henderson. Mr. Weil, you may begin your conference.

Welcome, everyone, to the fourth quarter and full year 2020 earnings call for the Janice Henderson Group. As usual, I'm Dick Weil, the CEO. I'm joined by our CFO, Roger Thompson. Let me start by saying I hope all of you and your loved ones are having a safe and healthy start to 2021. In today's presentation, I'll give a brief summary of our 2020 results. I'll then touch on progress we're making in delivery of our strategy of simple excellence and a bit on how the business is starting at 2021. I'll also provide an update on our relationship with our strategic partner, Daiichi. And then I'll hand it over to Roger, as usual. He'll go through the results with some more precision. And following our prepared remarks, we'll take your questions. So let's turn to slide three, which takes a high-level look at our 2020 results. Investment performance is solid and has held up well despite really difficult market conditions in 2020, particularly in the first half of the year. 68%, 65%, and 72% of our assets beat their respective benchmarks over the one, three, and five-year time periods. Our fixed-income teams did extremely well, with at least 90% of our AUM beating respective benchmarks over the same time periods. We had more mixed results in some of our equity strategies. In particular, our mid- and smidgen growth U.S. strategies managed out of Denver faced some really tough times in the first half of the year. But overall, our teams have been terrific. They've been resilient, and they're doing their jobs, and we're proud of their results. Next, despite disappointing outflows, particularly in the first half of the year, with the benefit of markets, our AUM ended up over $400 billion, and we're pleased with that mark. This is up 7% on last year. It's up over 35% from the market sell-off from the bottom in the first quarter. And so that's a good mark for us we're pleased with. The headline flow result for the year masks a really important trend of progress building through the year. We had a really tough first half, but we've seen strong and growing momentum in our flows and are optimistic as we enter 2021 that we can continue on that better path. The first half net outflows of $20 billion, over 80% of the net outflows of the year. The back half was much better. It reduced to $4 billion of net outflows in the second half. And so that's the momentum I was talking about, which even got better in the fourth quarter as U.S. $1 billion of net outflows were the mark in the fourth quarter. We were basically flat or positive across all of our capabilities except for our quant equity capability, which, as we previously talked about, is going to take some more time to heal. Finally, our financial results for the full year were very strong. Our adjusted EPS increased 22% over last year. We generated over $600 million in cash, which allowed us to return $394 million in dividends and buybacks to shareholders. If you turn to slide four, it's a reminder of our strategy, which is simple excellence. Despite the unprecedented events of this past year, I'm delighted that we've continued to make significant progress on delivering our strategy across each of our strategic pillars, building a strong and resilient foundation for our future. Our path to achieving simple excellence is founded on five planks referenced on this page. I've previously said that delivering on simple excellence builds upon positive client relationships, which will drive organic growth as well as increasing profitability. Looking ahead, simple excellence forms a very strong foundation for a stable and resilient business, and it supports sustained growth in the long run. This means organically scaling operations and profitability across our existing core franchise, delivering on the benefits of operating leverage. But it also means, in time, it would enable us to remain alert to inorganic opportunities, which would complement our strategy and operating model. We're taking the right steps as a firm to create value for all of our key stakeholders, for our clients, our employees, and our shareholders. And we're entering this new year with a lot of optimism. Slide five takes a look at some of the progress we've made in the strategic priorities across investments and distribution. Despite the market volatility and challenging conditions, which we've already talked about for our investment team, our near-term investment performance has strengthened throughout the year. We've seen some mixed pockets of performance since the market fell down in the first quarter, but our investment teams have done a really good job. They've remained disciplined and true to their promises to the clients and their investment strategies. We've taken steps also to strengthen our investment teams during the year. We've recruited some excellent talent and filled key roles. We filled a new U.S. head of fixed income. We added a new director of research early last year. Those are crucial, crucial seats for us, and we're really pleased with the talent that we were able to attract. More recently, it was exciting to fill a new head of ESG for our investment team. We'll be leading our ESG approach across all of our investment capabilities. We've also continued to invest in our technology for our investment teams. We're doing a major upgrade to our OMS and portfolio risk systems, and these are really important investments to enable our teams to set our business up for future growth. On the distribution side, we finished the year with real momentum. The global distribution roadmap from our head of global distribution, Suzanne Cain, brought real energy and focus to our efforts. We saw double-digit growth across our global focus products, which is our list of products where we see the best competitive positioning and high growth potential. and that program is working really well for us. We also strengthen senior leadership across distribution, client relations, product team, including appointing new global heads of consultant relations of product and product strategy and ESG, which will further support our articulation and delivery of our ESG solutions to our clients. In line with our conviction on the importance of data across our firm underpinning everything we do, we've significantly expanded our distribution intelligence and client analytics capabilities. Next, let's turn to slide six and let me talk you through some of the accomplishments in the year delivering on Simple Excellence. We continue to make significant progress in the execution of our strategy. During the year, we completed some major projects that simplify the way we operate our business and that also served to free up capacity so we can add energy and resources not only to delivering BAU but also to delivering generational steps forward in our infrastructure. In addition to those things, we've also done good work targeting new growth initiatives. During the year, we extended some of our strongest product capabilities to new regions and vehicles. We launched new products like a biotech hedge fund, a multi-strategy fund, a European-focused asset-backed security strategy, as well as a number of new ETFs that are doing well in North America and Australia. We've expanded our presence in key growth areas, including in Latin America. This list of achievements underlines the progress we're making to continuously improve our firm. We feel like simple excellence is working, and we're proud of the progress we're making. Let me turn last on this page just briefly to cost control. We owe you an update, as we've mentioned from prior quarterly calls on cost control. Roger is going to take you through that cost management in more detail, but I just want to set a framework from my perspective. As we think about cost control, it's really important, and we want to be as efficient as we possibly can. But there are boundaries to that. Even more important than that efficiency is we have to make sure that we're delivering excellence, and we have to deliver the growth that we've promised as well, both in terms of AUM and in profitability. So for us, that creates sort of a hierarchy. We need to be as efficient as we can without sacrificing that simple excellence and that growth. And so that boundary is important. And while Roger will take you through the cost savings that we found, and they're important and material, we've also found that we need to make some continued investments in our infrastructure in order to deliver that simple excellence and growth. So what we're doing as a management team is living in that framework and in that balance. And Roger will talk to you more about that a bit later. Let me turn to slide seven. One last thing I want to cover before I hand it back over to Roger. I need to give you an update on our relationship with our strategic partner, Daiichi. Daiichi has made a strategic decision to separate its operational partnership with Janus Henderson from its board and capital positions. It's decided that it needs to focus its capital on its global insurance business. And so while they continue to be an exceptional partner for us, they're going to change the capital relationship. They are going to sell their position and step off the board. Now, we're disappointed because they've been a wonderful board member, but we're also pleased. We have a new cooperation agreement that underpins what we believe will be a strong and growing operational relationship into the future. And so while disappointed that we won't have the benefit of their participation in our shareholder register and on our board, to us the most important thing is that the wonderful operational relationship that we've developed is going to continue and grow, and we look forward to that going ahead. As a result of this, we have today announced the commencement of a secondary offering of common stock through which Daiichi intends to exit its investment in Janus Henderson through an underwritten public secondary offering. We've agreed Janus Henderson will participate in the offering and will purchase up to $230 million of stock using cash. Our participation is expected to be immediately accretive to our shareholders. We're pleased to demonstrate our ongoing commitment returning excess capital to our shareholders and delivering on this commitment in an accelerated and disciplined manner. Just as a little background to that, we currently manage about $10 billion on behalf of Daiichi and its subsidiaries and affiliates. This was $2 billion at the onset of our relationship back in 2012. It's grown nicely to $10 billion today. And we're looking for opportunities to continue to support that and even grow it further in the future. And we look forward to collaborating on the development of new investment products as well. Our relationship will also continue to be supported by an exchange of human resources. We remain absolutely committed to expanding in Japan. We look forward to welcoming a senior Daiichi executive to share in the leadership of our Japanese business going forward. Daiichi has been our largest shareholder for eight years, and while we're disappointed to lose their involvement in that regard, We really do understand the competing needs and the pressure on their capital, and we look forward to continuing our strong operating partnership and growing it in the future. Today's news will reshape our share register. It doesn't change the path we're on with Simple Excellence and across our business. So with that, let me turn it over to Roger to give you some more precision in the results.

Thank you, Dick, and thanks to everyone for joining us. Starting on slide nine with the fourth quarter results. As Dick's already discussed, our solid investment performance and our strong AUM at the end of the year are touched briefly on flows and on EPS. Net outflows continue to trend better at $1.1 billion in the quarter as the results of net inflows into intermediary and strong gross sales in institutional. The financial results were exceptionally good with EPS of $1.04 compared to $0.70 a quarter ago. The significant increase was primarily due to higher average assets, very strong seasonal average annual performance fees, and investment gains on our seed capital. Moving to slide 10 in investment performance. Investment performance remained solid with 68, 65, and 72% of firm-wide assets beating their respective benchmarks on a one, three, and five-year basis as of the 31st of December. The one-year performance improvement compared to the third quarter was primarily from the U.S. concentrated growth strategy within equities. Performance of fixed income, multi-assets, which is dominated by balanced and alternatives, is excellent and very competitive. Additionally, we're encouraged by INSEC's significantly improved one-year performance. Relative performance compared to peers is strong overall, with 57, 66, and 71% of the AUM represented in the top two Morningstar quartiles on a one, three, and five-year basis. Now, turning to total company flows. For the quarter, net outflows were $1.1 billion compared to $2.9 billion last quarter, and continues are significantly improving quarterly flow trend. The quarterly flow number reflects the best gross sales figure since the merger. This gives 2020 our two highest gross sales quarters ever and speaks to the momentum we're seeing in the business. The flow results whilst negative and not yet where we expect it to be is the best quarterly number in over three years. Looking deeper, net flows were flat or positive and strengthening across all capabilities except quantitative equities which as we've said, will take time to turn, even with that solid one year investment performance. Now let's move to slide 12, which shows the breakdown of flows in the quarter by client type. Previously, we've provided this view of flows as a one-off in earnings presentations. However, it is an important way in how we look at and think about our business, and as such, beginning this quarter, we'll present and discuss the flows in this manner regularly. So let's look at the quarterly detail. Intermediary net inflows for the quarter were $1 billion. Across regions, net flows in EMEA, Latin America, and Asia Pacific were all positive, spread across fixed income, multi-asset, and equity strategies. These inflows were partially offset in the U.S. from certain U.S. equity strategies experiencing short-term underperformance. The intermediary result shows our breadth of product and our global distribution footprint. Institutional net outflows for the fourth quarter were $1.2 billion, which included some strong wins in the UK and EMEA, offset by net outflows in quantitative equities of $3.4 billion. Gross sales of $8.8 billion were the best results since the merger and reflects converting some of the strong pipeline that's been building and institutional. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, was $900 million in the quarter. Slide 13 shows the breakdown of flows in the quarter by capability. Equity net flows for the fourth quarter were virtually flat compared to 5.1 billion of outflows in the prior quarter. The improvements in quarterly outflows included a $2.1 billion funding from a large insurance client in the UK into our UK Enhanced Index Strategy, as well as positive non-US retail flows led by European small cap, global life sciences, and global sustainable equity, which is one of our dedicated ESG strategies. Flows into fixed income were positive $1.2 billion in the quarter. Fixed income continues to see positive flows in retail across a wide range of strategies, including our short-duration ETF, Vanilla, PNLA, our developed world bond, European investment-grade credit, and global high-yields. Total inflows from multi-assets were $1.2 billion, driven by inflows into the balance strategy. Quantity of equity outflows declined in the fourth quarter to $3.4 billion. We're pleased with Intec's improving short-term performance, but as we said previously, it will take time for flows to turn. Finally, alternative flows will break even. Slide 14 is our standard presentation of the US GAAP Statement of Income. Moving to slide 15 for a look at the summary financial results. In summary, adjusted revenue, operating income, margin and EPS are all up strongly quarter on quarter and year on year. First, quickly looking at the full year's result. Despite the extreme market drop due to COVID in the first quarter, the market recovery and strong cost control thereafter enabled increases across our adjusted financial metrics even with a 1% drop in average AUM compared to 2019. Although average AUM was down over the prior year, a higher net management fee margin and better performance fees led to a 5% increase in adjusted total revenue for the year. Full year adjusted operating margin improved 2.2 percentage points over 2019 to 38%. An adjusted diluted EPS for the year was $3.01 compared to $2.47 in 2019. Now looking at the quarter on quarter comparison. Our fourth quarter adjusted financial results primarily reflect good market conditions and exceptional seasonal performance fees during the quarter. Average AUM increased 6% over the third quarter, driven by positive markets and currency movements. Higher average assets and seasonal performance fees resulted in an 18% increase in total adjusted revenues from the prior quarter. Adjusted operating income of $232 million was up 43% compared to the third quarter as a result of the higher revenues and our continued strong cost discipline. Fourth quarter adjusted operating margin was 43.8% compared to 36% in the prior quarter. And finally, adjusted diluted EPS was $1.04 for the quarter compared to $0.70 for the third quarter. On slide 16, we've outlined the revenue drivers for the quarter. Higher average assets and particularly high seasonal performance fees were the biggest drivers of the quarterly change in adjusted revenue. Net management fee margin for the fourth quarter was 45.9 basis points, which is up marginally from the third quarter and up from 44.9 basis points a year ago. This marks the fifth straight quarter of higher net management fee margins and demonstrates our resiliency during a period when the industry is seeing fee margin compression. We've provided the 2020 net management fee margin by capability in the appendix. We'll continue to disclose this metric on an annual basis and we hope that you find it useful. Performance fees were $59.3 million in the quarter compared to $7 million in the prior quarter. The fourth quarter was an exceptionally good result with many strategies outperforming and was primarily driven by annual performance fees on segregated accounts within our global life sciences and global tech strategies, but also supplemented by several smaller amounts spread across multiple strategies. For mutual fund performance fees, the fourth quarter improved to negative two million from negative five million in the third quarter. Because the performance fees I think are important to understand more fully, on slide 17 we've provided some more details on the change in performance fees year over year. Performance fees in 2020 were 98 million dollars compared to 17.6 million in 2019. In looking at the two years, 2019 was on the lower end of what we'd expect in a given year, while 2020 was one of the better years for performance fees. The biggest factors in the increase were the performance fees earned from global life sciences, global technology, core plus fixed income, and in-tech, inseparated mandates, the UK absolute return in the UK OIC and CCAS, and global market neutral, real estate, European equity strategies also earned performance fees in the CCAP fund range. As you can see, it was a wide range of outperforming strategies that drove the increase in performance fees, which is great to see. Turning to operating expenses on slide 18. Adjusted operating expenses in the fourth quarter were $297 million, which were up 3% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was up 5% compared to the prior quarter, primarily as a result of higher variable costs, given the higher pre-bonus profit, partially offset by the impact of year-end adjustments in our cash and non-cash payout mix. Adjusted LTI was up 5% from the third quarter, largely due to market-to-market. In the appendix, we've provided further detail on the expected future amortization of existing grants, along with an estimated range for the 2021 grants for you to use in your models. The fourth quarter adjusted comp to revenue ratio was 39.2%, which reflects the leverage in our business. For the full year, the total comp to revenue ratio was 42.9%. Adjusted non-comp operating expenses were flat compared to the prior quarter, For the full year, 2020 non-comp operating expenses were down 1% compared to 2019, which is in line with guidance. And finally, our recurring effective tax rate for the fourth quarter was 22.1%. And for the full year, the firm's effective tax rate was 22.9%. On slide 19, we've given more details on our expense discipline, the specific exercise we went through in the summer and our thoughts on 2021. Our philosophy has always been to maintain strong financial discipline whilst reinvesting in the business to deliver against our strategy of simple excellence and position us for growth. This disciplined approach allowed us to take out $125 million in costs post merger, which was ahead of schedule, and to keep expenses well controlled over the last three years. However, with the onset of COVID, coupled with the passage of time since the merger, we felt like 2020 was the right time to take a fresh look at our cost base. Alongside engaging an outside consultant to help us, we took a real wire brush to our expenses and are delivering on $40 million of additional cost-saving opportunities, which we expect to realize over the next two years. The savings will offset the investments we're making in the business. A few examples of those investments are retooling our client-facing technology and reporting, implementing an upgraded order management system and streamlining our data architecture. These are all critical things for us to do. These investments will improve our operational efficiency and support a growing business and enable us to do that cost efficiently by keeping expenses relatively flat. With all that said, I wanted to walk you through what that means for 2021 and our expectations around expenses. Given how we run our business with tight cost controls and a higher AUM entering 2021, you should expect to see increased operating leverage. At current market levels, we anticipate the adjusted compensation ratio to decline further to the low 40s. And by that, I mean in the range of 40 to 42%. This results from our higher AUM and our ability to keep fixed comp expenses relatively flat year over year, even when considering annual pay rises and the impact of a weaker dollar entering 2021. For non-compensation expense, we would expect to see an increase in the mid single digits. Note that over half of the expected increase is due to currency rates, given the higher sterling to US dollar as we enter 2021 compared to the average rate over 2020. The majority of the remaining increase is from higher marketing expenses as we take the learnings from the new way of interacting with clients and potential clients that we learned in 2020 and apply that knowledge in 2021. Marketing spend will be higher than 2020, but still below 2019. And finally, the firm statutory tax rate is expected to remain at 23 to 25%, which is similar to 2020. but it could of course be affected by future changes to tax laws, and the overall tax rate will be impacted by various differences which arise quarter to quarter. Lastly, slide 20 is a look at our balance sheet. Cash and cash equivalents were $1.1 billion as of the 31st of December, an increase of $182 million, resulting primarily from operating cash flow generation during the fourth quarter. The strength of our balance sheet and the cash flow generation has allowed us to complete $131 million of accreted buyback in 2020, and would also allow us to repurchase the $230 million of our stock in the registered secondary offering that was announced earlier today. Assuming the successful completion of the offering, our participation effectively accelerates our buyback for the current year. Our capital philosophy is unchanged, and we will provide updates on future earning calls regarding our thoughts about any future buybacks as we evaluate our cash position and cash flow generation. Turning back to the fourth quarter, we paid approximately $65 million in dividends to shareholders and today have declared a 36% per share dividend to be paid on the 3rd of March to shareholders of record as at the 17th of February. Now I'd like to turn it back over to Dick for a few comments before we begin Q&A.