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 second quarter 2021 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. If you require operator assistance, please press star then zero. 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 assumes 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 second quarter 2021 earnings call for the Janus Henderson Group. I'm Dick Weil, and as usual, I'm joined by our CFO, Roger Thompson. As we've said on previous calls and in line with taking the long-term view of our business, we use the second quarter call to run through a more robust discussion on our business as well as our strategy. We also include the usual updates on quarterly flow, performance, and financial results. In line with this, in today's presentation, I'd like to start with a summary of our second quarter results, and then I'll touch on progress we're making towards delivery of our strategy of simple excellence. And then, as usual, I'll hand it over to Roger, who will take you through the results with some more precision and detail. As always, we'll follow our prepared remarks with taking your questions. Turning to slide two, here's the story of our quarter as I see it. First, investment performance. It's solid with 66% of our assets beating their benchmarks over three years. Second, net outflows of $2.5 billion is an improvement over the first quarter. Markets were strong and lifted our AUM 6% to a new high of $427.6 billion. Third, our financial results. These are very strong and better than our strong prior quarter. This is mainly driven by a combination of higher markets and extremely strong performance fees. Roger will take you through that. Adjusted EPS was up 27% to $1.16 compared to $0.91 a quarter ago. We generated more than $260 million of cash in the second quarter, and we remain committed to returning excess cash flow to our shareholders. As a consequence, we declared a second quarter dividend of 38 cents per share. And today, given strong earnings and cash generation, we are also announcing the board has authorized a new $200 million accretive share buyback, which we expect to complete by April 2022. Looking a bit deeper at the net flow result, let me call out some positive underlying trends to highlight. First, net flows in our intermediary channel were flat, with positive flows in EMEA and LATAM and Asia-Pacific regions. This was offset by U.S. intermediate outflows, particularly in mid- and mid-cap growth equities from our team in Denver, which has experienced some pockets of underperformance that we've talked about in recent quarters. Second, looking at institutional, we're continuing to win business from across a very diversified list of strategies, reinforcing the breadth of our investment capabilities. Quant equities remains challenged. Next, as I've told you in prior quarters, our path to organic growth starts with net flows going positive outside of our quant equity business. We're aiming for consistent growth, which we achieved in the fourth quarter last year, but in the first and second quarter of this year, we've fallen short. And that's not okay with us. However, the underlying trends and the pipeline make us confident that we have a good chance to deliver our goal of more consistent positive flows outside of the quant equity in the second half of the year. Turning to slide three, we've continued to make significant progress executing our strategy across the first four planks that you can see on this page. For example, we've continued to hire excellent talent and strengthen our already first-class teams. Last week, we announced the appointment of James Lowry, who will be joining our executive committee in a newly created role of global COO. This will help strengthen our leadership team, and he'll contribute on building the infrastructure as well as firm-wide leadership and hopefully strategy. We've also continued to significantly enhance our risk and control environment, moving towards our best-in-class approach. Importantly, this has been evidenced by lower regulatory capital requirements, which are assisting us in delivering this further return of capital to shareholders as we have announced today. Looking ahead, we remain fully focused on the first four planks of our strategy, which remain key to strengthening and running our day-to-day business and ultimately delivering organic growth. But with progress in those first four planks, we're now able to develop new growth initiatives with greater energy and focus. And this is going to include some additional investment over time, both organically and potentially inorganically as well. Turning to slide four, we lay out the five areas on this slide that are in focus for us as we think about our growth initiatives. Within those areas, let me call your attention to some of the recent highlights. In ETFs, we have a small but successful franchise, particularly in active fixed income ETFs, such as our short-duration vanilla and our mortgage-backed securities JMBS ETFs. The first half of 2021 marked the 10th consecutive half of positive net flows in our active ETFs. We have an innovative pipeline of products, such as the AAA CLO ETF JAAA, which we launched at the back end of last year. In June, we launched a U.S. real estate ETF JRE, which is a natural extension of our existing U.S. real estate equities strategy. We also filed a preliminary registration statement with the SEC for five sustainable active ETFs for investors in the U.S., which we expect and hope to launch in September. This includes three equity and two fixed income sustainable active ETFs. Again, if approvals are granted, we expect to be the only firm offering active sustainable ETFs including both equities and fixed income in the U.S. Turning to ESG. I just mentioned some of the sustainable investing products we're developing, and you should expect to see more ESG-focused product launches in the coming quarters, including in Australia. We have already an excellent track record in our dedicated sustainable equity strategy. For example, our global sustainable equity strategy is celebrating its 30th year anniversary next month, and it's ranked in the top Morningstar decile over both three and five years. We have a strong background in ESG, but we recognize there's an awful lot more work to be done. We're excited about where we are in our growth phase in ESG, We're making investments in our central ESG support available to investment teams growing from four people to a team of 15 people. We are also building a cloud-based approach to ESG data management, ensuring delivery of consistent central data standard to support all of our front office applications. We're also targeting more than half of our Luxembourg domiciled fund range measured by AUM to be an Article 8 or 9 designation by January 2022. under the EU Sustainable Finance Disclosure Regulation. As you can see, we're making great progress in ESG. Finally, in Asia, We have recently further strengthened our leadership in Japan. This is really important to us. Earlier this year, we welcomed Shinichi Aizawa, as we've talked about before, a very senior Daiichi executive, and he's now chairman of our Japanese business. Last week, we also announced the appointment of Tomiyasu Tanimoto, who's a new head of distribution in Japan. We think these two leaders have the chance to really energize and strengthen our efforts in Japan, along with the continued excellent support from our partners at Daiichi Life. Before handing it over to Roger, let me briefly wrap up. We continue to focus on excellence and growth in our business. We're confident that we're on the right path and that simple excellence is working to deliver a stronger, organically growing, more profitable, and more resilient business. But we have an awful lot of work left to do. Let me now turn it over to Roger to take you through the results with some more precision.

Thanks, Dick, and thank you, everyone, for joining us. Turning to slide six. Investment performance remains solid, with around two-thirds of the firm-wide assets beating their respective benchmarks on a one-, three-, and five-year basis as of 30 June. Relative performance compared to peers reflects 33%, 67%, and 55% of AUM represented in the top two Morningstar quartiles on a one-, three-, and five-year basis. As called out in the bullet at the top of the page, 42% and 41% of our AUM is in the first Morningstar quartile on a three- and five-year basis. These longer-term metrics tend to be the better indicators for flows. Now turning to total company flows on slide seven. For the quarter, net outflows improved to $2.5 billion from $3.3 billion last quarter. The outflows masked some good underlying trends that we're seeing in the business, which I'll talk about on the next few slides. Slide eight shows the breakdown of flows in the quarter by client type. Net inflows for the intermediary channel were flat. By region, intermediary flows were positive in EMEA, Latin America, and Asia Pacific, and these were offset by outflows in the US. In looking closer at the regions, for EMEA and Asia Pacific, Second quarter flows reflect an annualised organic growth rate of 6% and 11% respectively, and mark the fifth consecutive quarter of positive flows in each region, with momentum carrying into Q3. Within EMEA, continental Europe saw a billion dollars of net flows in the second quarter, equating to a 17% growth rate. It's important to note that the management fee rate in the EMEA, Latin America, and Asia intermediary business is higher than the other areas of the business, and these flows are contributing to our strength in net management fee rates that I'll talk about in more detail later. In U.S. intermediary, we're seeing a diverse set of products in inflow, including multi-sector income, contrarian, and developed world bond, offset by the impact of the performance challenges in our SMID and mid-cap growth strategies. Moving to institutional, here we saw $1.8 billion of outflows in the second quarter, which was primarily driven by quantitative equity outflows, masking some smaller but significantly higher fee wins. As we've said previously, quantitative equity flows will take longer to heal, but elsewhere we're encouraged by the progress being made in globalising the institutional team and the solid, diversified pipeline. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, were 700 million in the quarter. Moving to slide nine and the breakdown of flows in the quarter by capability. Equity net outflows in the quarter were $1.9 billion. The quarterly outflows were driven primarily in the U.S. by the small and mid-cap U.S. growth, as well as the liquidation of certain value strategies managed by the team in Chicago that we talked about in the prior quarter. Outside of the US, equity flows were slightly positive, driven by European equities and global real estate. Flows into fixed income were negative $100 million in the quarter compared to a positive $400 million in the prior quarter. Whilst the overall result was negative this quarter, we continue to see positive flows in retail across a wide range of strategies, including multi-sector income, global strategic fixed income, US buy and maintain credit, and tactical fixed income in Australia. Total inflows for multi-asset were $500 million driven by the continued inflows into the balance strategy across North America, EMEA and Asia Pacific. Quantitative equity outflows in the second quarter were $1.3 billion. Finally, alternative inflows were $300 million compared to $900 million of outflows in the prior quarter. The inflows were primarily driven by the absolute return strategy and in our multi-strategy product, which is one of our hedge funds, which is seeing momentum in several geographies. It's really pleasing to see the positive flows in our high-fee alternatives business, which shows another benefit of our diversified product set. Slide 10 is our standard presentation of the US GAAP Statement of Income. Moving to slide 11 for a look at the summary financial results. As you can see on this slide, our financial results are extremely good, with metrics up strongly quarter over quarter and year over year. The second quarter results reflect strong seasonal performance fees and higher average assets. Average AUM in the second quarter increased 4% compared to the prior quarter and 30% from the same period a year ago, primarily from market gains. Total adjusted revenues increased 17% compared to the prior quarter, mostly due to higher average assets, seasonal performance fees and a further improvement to our net management fee rate. Adjusted operating income in the second quarter of £269 million was up 34% from the prior quarter and 95% from the same period a year ago. Second quarter adjusted operating margin was 44.6% compared to 39% in the prior quarter and 33.5% a year ago. And lastly, adjusted diluted EPS was $1.16 for the quarter compared to $0.91 for the prior quarter and $0.67 a year ago, representing a 73% increase year on year. Before moving on, I wanted to clarify the difference this quarter between US GAAP and adjusted diluted EPS. There were two non-cash items behind the difference. First, our proposal to increase UK corporation tax to 25% from 19% with effect from the 1st of April 2023 was enacted, and this required the deferred tax liability to be re-measured at the 25% rate. We recognised an income tax expense of $31 million related to this re-measurement. And secondly, we recognised a $40.8 million impairment on intangible assets related to certain investment management contracts. Turning to slide 12, which outlines the revenue drivers for the quarter. The biggest drivers of the quarterly change in adjusted revenue were higher average assets, strong seasonal performance fees, and an increase in net management fee margin. Net management fee margin for the second quarter was 47.1 basis points, which was up from 46.8 basis points in the prior quarter and up from 45.7 basis points a year ago. This marks the seventh straight quarter of higher net management fee margins. The increase in the margin is due to both positive markets and changes in the underlying asset mix. We continue to be focused on high-quality assets, and that's showing up in the fee rate. Inflows are coming into higher fee margin areas, such as EMEA and Asia-Pacific Intermediary, and our multi-strategy products that I've just talked about. and with outflows being in relatively lower fee margin areas, including quantitative equities. Performance fees for the quarter were $77 million versus $17 million in both the prior quarter and a year ago. Given this exceptional second quarter performance fee result and the diversified mix of funds which have delivered it, I wanted to give you a little bit more insight into what drove this, and I'll do that on slide 13. Performance fees from the CCAV range in the second quarter were $50 million, compared to $12 million in the first quarter and $9 million a year ago. The increase compared to the first quarter was the result of second quarter seasonality, as our CCAVs pay annual performance fees in June. And additionally, this reflects strong performance in the absolute return strategy, which has a quarterly measurement period and payout. Second, Q2 performance fees in the UK OICs and unit trusts were $15 million, compared to $4 million in the first quarter, driven by strong performance in the Absolute Return Fund. Third, performance fees in UK investment trusts during the quarter were $13 million, compared to zero in the first quarter. Again, this was driven by seasonality from trusts that pay annual performance fees in the second quarter. The trusts' only performance fees were the smaller companies and European growth investment trusts. US mutual fund performance fees were negative 3 million in the quarter compared to negative 4 million in the last quarter. Finally, I want to point out that the absolute return strategy has already or will be switching from a quarterly measurement period to an annual measurement period in line with regulations. The UK OIC switched, that occurred on the 1st of June, with a last quarterly payout in May. The CCAV will pay out, if earned, one more quarterly fee in the third quarter and will then switch to an annual measurement starting on the 1st of October. In the appendix, we've provided updated AUM eligible to earn a performance fee by quarter, which reflects this change, and I'm happy to talk you through that offline. Turning to operating expenses on slide 14. Adjusted operating expenses in the second quarter were $334 million, which was up 6% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was up 10% compared to the prior quarter, primarily as a result of higher variable compensation on higher profits. Adjusted LTI was down 7% from the first quarter, largely due to payroll taxes on annual vestings in Q1. The second quarter adjusted comp to revenue ratio was 40.1%. For the first half of 2021, the ratio was 42%, and for the full year, we still anticipate a range of 40 to 42%. Adjusted non-comp operating expenses were 6% higher compared to the prior quarter, primarily from higher G&A. For 2021, the expectation of non-comp operating expense growth of mid-single digits remains unchanged. And finally, our recurring effective tax rate for the second quarter was 22.4%. Turning to slide 15, which is a look at our liquidity. Cash and cash equivalents were $965 million as of the 30th of June, an increase of $141 million, resulting from the strong cash flow generation from the profits we've just mentioned. As a reminder, we now exclude cash and investments related to VIEs and VREs from this slide as it more accurately reflects our true liquidity. It also aligns with how we discuss our liquidity and capital resources in the NV&A section of our 10Q and 10K filings. During the second quarter, we paid approximately $65 million in dividends to shareholders and declared a 38 cent per share dividend to be paid on the 25th of August to shareholders of record as at the 9th of August. Finally, as Dix previously mentioned, with our strong balance sheet, significant cash flow generation and reduced regulatory capital requirements, the Board has authorised a $200 million buyback, which is expected to be completed by the next AGM in April 2022. The $230 million buyback completed in the first quarter, the quarterly dividend, including a 6% increase announced last quarter, And the additional $200 million of buyback that we've announced today demonstrates our commitment of returning excess cash to shareholders. Now I'd like to turn it back over to the operator for Q&A.