Janus Henderson Group plc Ordinary Shares

Good morning. My name is Grant, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janice Henderson Group third 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. 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 Janus Henderson. Mr. Weil, you may begin your conference.

Welcome, everyone, to the third quarter 2021 earnings call for the Janus Henderson Group. I'm Dick Weil, and as usual, I'm joined by our CFO, Roger Thompson. In today's presentation, I'll start with progress we're making towards delivery of our strategy of simple excellence. I'm going to give you an update on our view of the sector and how that influences our growth initiatives. And then, as usual, I'll hand it over to Roger, who will take you through the results with more precision. As always, following a prepared remarks will take your questions. Turning to slide three. Five years ago this month, we announced the merger of Janus and Henderson. At the time, Each firm believed that we needed more scale and by that we mean we needed to be more global and have more product breadth in distinct areas to compete successfully in our shifting asset management landscape. Long ago we successfully completed the integration of these two firms. But this five year milestone provides a useful opportunity to reflect on where we've come from and where we're going. Our combined company is vastly better positioned than either of its predecessors were five years ago. Our enhanced platform has allowed us to invest in people, in technology and systems, which improves investment, distribution, and compliance outcomes and enables us to drive strong operating leverage. We've built a strong and unified company culture with a shared purpose. That has contributed to our success in attracting exceptional talent at all levels of the organization, and that is, of course, the key to our business. We've continued to make significant progress executing our strategy across the four pillars you can see on this page. As a result, we're seeing momentum building in our business, which we've laid out on the next slide. We have first-class investment teams delivering active investment excellence and differentiated performance across the breadth of liquid asset classes, backed by a strong legacy of fundamental research, engagement, and investing with conviction. Our solid investment performance forms the foundation for growing distribution momentum. We've globalized our distribution teams and scaled our presence across institutional and intermediary client channels. We've broadened our capability set by product and geographic reach. For example, our balance strategy, which was traditionally strong in the U.S., continues to be in net inflow in all regions of our business. The strategy has grown from an AUM of $19 billion at the time of merger to $48 billion today. Our global strategic fixed income strategy, managed out of London, has more than doubled in size since the merger to over $10 billion in AUM and has seen consistent inflows now in the U.S., We've also made significant progress in the last three years towards our near-term aim of positive net flows, excluding quantitative equity. The organic growth rate over the last 12 months, excluding quant equity, is almost flat, as you can see in the graph on the top right of this page. We've built a resilient high-margin business. We've been driving towards best-in-class operating leverage and growing profitability in the business. Our adjusted operating margin for the quarter is 46.4% and 43.5% year-to-date. Our average net fee rate has expanded by 2.6 basis points over the last two years in a time of fee compression in the broader industry. Let's turn our attention from flows to revenues and think about that for a second. Year-to-date, we've posted $3.3 billion of net outflows excluding quant equity. This has actually delivered almost 10 million of positive adjusted revenue on an annualized basis as a result of replacing lower fee assets with higher fee assets. So despite the fact that we're frustrated with flows not being as positive as we would like, the revenue effects of our net flows are positive and we're very proud of that. We're focusing on the right kinds of business and our clients are valuing our services. So why we acknowledge the positive impact of markets. and changes in the underlying asset mix, we're succeeding in selling high-quality assets, and that's showing up in our business results. This then filters through to higher profitability and also to cash flow generation. Speaking of cash flow, our balance sheet is resilient, and we've been disciplined with our capital. This gives us the financial stability and the flexibility to invest in our business and pursue growth organically and inorganic. We've generated over 800 million in cash flow from operations in the last 12 months. We've also been returning excess cash to our shareholders, both through a stable and progressive dividend, as well as share buybacks. Since we commenced our buyback program three years ago, we've actually reduced our share count by 15%. We've made tremendous progress in the delivery of our strategy of simple excellence, although we still have much more work to do. We've also dramatically improved our flows and trajectory, but we're still not yet consistently delivering the growth that we plan and aspire to deliver. We acknowledge also that our quant equity faces significant challenges. We also recognize that the majority of our business operates in mature markets. Our areas of strength are poised to gain market share, but are not necessarily aligned with the high growth vectors in asset management. However, the strong base that we built through simple excellence and our very strong cash flow generation from our core franchise gives us the strategic and financial resources required to invest in our business to deliver growth. We know that the market continues to evolve and there are several trends that we are observing in relation to our business. I'd like to call out four in particular that we've discussed with our leadership team and board. First, the importance of ESG continues to accelerate changes in the investment landscape and is critical for competitive positioning and active management. Second, in our core retail channels, technologies enabling growth in packaged and customized solutions delivered through multi-asset class portfolios accompanied by the growth of ETFs as a preferred vehicle for tax and transparency reasons. Third, the world continues to need high-quality income solutions and uncorrelated returns, and we expect to see increased allocations to alternatives across virtually all client subchannels. Finally, while still in a nascent stage, Increased institutionalization and evolution and deployment of solutions developed on blockchain technology and digital assets will be an opportunity for asset managers who are able to participate. The good news for us is we have a strong foundation and we've made progress, which means we're well placed to capture growth opportunities both organically and inorganically. Very importantly, our clients value us as a trusted partner. I sit in meetings with some of our biggest institutional and intermediary partners And they tell me that they trust us, they value our relationship, and they want to grow with us. They want to do more business in more areas with us. They tell me that they want us to do more in alternatives, in private debt, and more in model portfolios. Our clients want to do more business with us, meaning we have an opportunity to broaden our capabilities where we can deliver and succeed in higher growing areas. We also have the board's full support in the execution of this strategy. so you can expect us to be more aggressive in responding to the delivery of future growth. Let me now turn it over to Roger, who can take you through the results in some more precision.

Thank you, Dick, and thanks, everyone, for joining us. I'm pleased to report another strong set of financial results. Looking at the third quarter, investment performance remains solid, with 64% or more of assets beating their respective benchmarks over the 1, 3, 5, and 10-year period. Market strength during the quarter provided a good backdrop for average AUM and revenues. For the quarter, average AUM increased 3%, but market weakness at the end of September left closing AUM down 2% from June. Net outflows of 5.2 billion, while disappointing, were concentrated in our quantitative equity capability. The overall flow figure masks positive flows in our intermediary business and continued strength in our multi-asset, fixed income, and alternative capabilities. Adjusted EPS was $1.16 flat to the strong prior quarter and up significantly compared to the 70 cents the same period a year ago. Finally, we returned $140 million of cash to shareholders during the quarter via dividends and share repurchases. Turning to slide eight to look at investment performance. Investment performance remained solid with at least 64% of firm-wide assets beating their respective benchmarks over all time periods as of the 30th of September. Starting this quarter, we've begun providing 10-year investment performance against benchmark and peers in an effort to provide greater transparency into investment performance. We hope you find it useful. Short-term relative performance compared to peers improved during the quarter, with 47% of AUM represented in the top two Morningstar quartiles on a one-year basis compared to 33% in the prior quarter. As stated at the top of the page, the longer-term important Morningstar metrics show that almost one half of our IUM is in the top quartile against the competitive universe on a three and five year basis, a further improvement from the second quarter. Now turning to total company flows. As said, net outflows were 5.2 billion compared to 2.5 billion last quarter. These outflows were dominated by quantitative equity outflows, as I've said. And over the next few slides, I'll discuss some of the many encouraging trends we're seeing in the business. Slide 10 shows the breakdown of flows in the quarter by client type. Net inflows for the intermediary channels were positive 1.2 billion, resulting in a 2% annualised organic growth rate. By region, intermediary flows were positive in EMEA, Latin America and Asia Pacific, and these were partially offset by small and improved outflows in the US. In looking closer at the regions, For EMEA and Asia Pacific, third quarter flows marked the sixth consecutive quarter of positive flows for each region. Within both regions, all major geographies were positive, including the UK and continental Europe for EMEA, and Australia, Japan, and Asia in APAC. It's important to note that the management fee margin in EMEA, Latin America, and Asia Pacific intermediary is higher than other areas of the business, And these flows are contributing to our strength in the management fee rate, as Dix just mentioned. In US intermediary, we're seeing a diverse set of products generating inflows. In fixed income, we had more than 10 strategies with positive flows during the third quarter, led by multi-sector credit, JAAA, which is our AAA CLO ETF, and Develop World Bond. Elsewhere, the balance strategy continues to gather flows. These areas of momentum are being offset by the impact of the 2020 performance challenges in our SMID and mid-cap growth strategies, but we note that investment performance has improved in 2021. Moving to institutional, the 5.8 billion of outflows in the third quarter were primarily driven by quantitative equity outflows. Elsewhere, we've taken steps in globalising the institutional team and bringing on talent, including a new head of North American Institutional and head of North American Consultant Relations. I've talked about our strong and diversified pipeline in prior quarters, and whilst funding this quarter has been modest, we remain confident for 2022. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors with $600 million for the quarter, a further small but sequential improvement. Moving to slide 11 and the breakdown of flows in the quarter by capability. Equity net outflows for the third quarter were $2.6 billion. The quarterly outflows were driven primarily by small and mid-cap growth strategies in US retail, as well as a billion dollar global enhanced index institutional redemption. Areas of strength included contrarian, global sustainable equity, and overseas. Flows into fixed income were $700 million positive in the quarter, compared to a negative $100 million in the prior quarter. The result included a billion dollars in intermediary flows across a wide range of strategies, including multi-sector income, tactical income in Australia, global strategic fixed income, and asset-backed securities in the UK. Total inflows from multi-asset were $800 million, driven by continued inflows into the balance strategy across North America, EMEA, and Asia Pacific. Quantitative equity outflows in the third quarter were $4.4 billion. Finally, alternative inflows were $300 million, flat to the prior quarter. The inflows were driven by our absolute return and multi-strategy products. We continue to see growth in our higher fee alternatives business, showing another benefit of our diversified product set. Slide 12 is our standard presentation of the US GAAP statement of income. Moving to slide 13, which shows a strong set of summary financial results. The solid green on the right hand side of the slide shows the improvements in our financial results from just one year ago. with EPS flat to our very strong prior quarter. Total adjusted revenues decreased 10% compared to the prior quarter, as higher management fees were offset by seasonally lower performance fees. Adjusted operating income in the third quarter of $253 million was down 6% from the prior quarter, but is up 56% from the same period a year ago. Third quarter adjusted operating margin was a very strong 46.4%, compared to 44.6% in the second quarter and 36% a year ago. Lastly, adjusted diluted EPS was $1.16 for the quarter, up 66% on a year ago. Turning to slide 14, which outlines the revenue drivers for the quarter. As I've just mentioned, the biggest drivers of the quarterly change in adjusted revenue were higher management fees from average assets, which were more than offset by seasonally lower performance fees. Net management fee margin for the third quarter was 47 basis points, which is down very slightly from 47.1 basis points in the second quarter, but up compared to 45.8 basis points a year ago. The strength in net management fee margin was due to both positive markets and changes in underlying asset mix. As Dick's just discussed, inflows are coming into higher fee margin areas such as EMEA and Asia-Pacific intermediary, with outflows being in relatively lower fee margin areas, including quantitative equities. Performance fees were $600,000 in the quarter versus $77 million in the prior quarter when there were more accounts and funds eligible for fees. Turning to operating expenses on slide 15. Adjusted operating expenses in the third quarter were $292 million, which was down 13% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was down 14%, primarily as a result of lower variable compensation on lower revenues and particularly lower performance fees. Adjusted LTI was down 30% from the second quarter, largely due to mark-to-market and fair value adjustments related to certain LTI awards. We provided the usual table in the appendix to allow you to model LTI for future years. Due to lower variable compensation and market adjustments to LTI, the third quarter adjusted comp to revenue ratio was 36.9%. Through the first nine months of the year, the ratio was 40.3%, and for the full year, we still anticipate the ratio to be at the low end of the 40% to 42% range, demonstrating the operating leverage in our business with higher assets under management. Adjusted non-comp operating expenses were 1% lower compared to the prior quarter, as higher marketing was offset by lower G&A. For 2021, we now anticipate non-comp operating expense growth to be at the upper end of mid-single-digit expectation we previously communicated. This implies significant growth in the fourth quarter as we invest in the business through technology, brand and marketing, for example, in supporting the recent launch of our five sustainable ETFs. And finally, our recurring effective tax rate for the third quarter was 21%. The lower tax rate included $2.1 million in one-time benefits, primarily due to a state tax refund. Turning to slide 16, which is a look at our liquidity. Cash and cash equivalents were $931 million, At the 30th of September, a decrease of 34 million, a strong cash flow generation, was offset by capital return and C capital funding. The funding included approximately $160 million into five sustainable ETFs launched in September. This shows our strong commitment to investing in the business where we see opportunities for growth, including in ETFs and ESG. During the third quarter, we paid approximately $65 million in dividends to shareholders and declared a $0.38 per share dividends to be paid on the 24th of November to shareholders of record as at the 8th of November. And in the quarter, we purchased 1.8 million shares of our stock for a total of $75 million. As Dix mentioned, since we started our buyback programme in Q3 2018, the stock buyback programme has been 15% accretive. Now I'd like to turn it back over to the operator for Q&A.