Janus Henderson Group plc Ordinary Shares

Good morning, my name is Harry and I'll be your conference facilitator today. Thank you for standing by and welcome to the Janice Henderson Group second quarter 2022 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 Ali Dibaj, Chief Executive Officer of Janice Henderson. so that you may begin your conference.

Thank you, everyone, for joining us today on Janice Henderson's second quarter 2022 earnings call. I'm Ali Dabaj, and I'm joined by our CFO, Roger Thompson. In today's call, I'll start with a short introduction before handing it over to Roger to run you through our second quarter financial results in detail. I'll then share my initial observations, mind you, after only about a month on the job, and how we're thinking about evolving our strategy. And then following our prepared remarks, we'll take your questions. Before Roger gets into results, I want to start by expressing how pleased I am to be part of the Janus Henderson team. My first few weeks here have validated my reasons for joining. As I speak to you today, I'm even more convinced about the long-term opportunities ahead of us. I took the role of CEO because I clearly saw the tremendous talent and potential in this business. I'd like to take a moment to tell you about the main reasons why I think Janus Henderson represents such a good long-term opportunity on slide two. I go a long way back with Janice Henderson, and it's a very special place to me. It's a people business at its core with very talented and motivated employees who are energized to win. Earlier in my career as a sell-side analyst, I was fortunate to serve Janice Henderson's investment teams where I was struck by the intellectual honesty, depth of research, and focus on client outcomes. We have a true research, security selection, and portfolio management powerhouse at the firm. The client service model also remains strong. I've competed against Janice Henderson's client service teams, and what our clients are telling me is that we're known in the industry for over-delivering for customers and distribution partners. Furthermore, I was attracted to the truly global nature of the firm, forward-thinking corporate functions, and the strong financial foundation. While I'm optimistic about the longer-term potential for Janice Henderson – one must acknowledge that there are also significant headwinds for this business. Those of you who know me know I am transparent, analytical, and collaborative. I will remain that way with all stakeholders, including you. The facts are that we have some investment strategies that have delivered mixed performance, that we are losing market share in the industry, and that our stock has underperformed. All of this, of course, is amidst geopolitical tensions, record inflation, volatile consumer confidence, uncertainty about interest rates, and concerns around global liquidity that are having negative consequences on our near-term outlook. Net-net, there's a lot to like at Dennis Henderson and much work to do. I'll now turn the call over to Roger to run you through the second quarter financial results.

Thank you, Ali, and thank you, everyone, on the call for joining us today. Starting on slide three, and I'll look at our second quarter results. Historically challenging market conditions around the globe and continued outflows have had a significant impact on our results. Our long-term investment performance does remain solid, with 60% of our assets beating their respective benchmarks over three years, which is similar to the prior quarter. June ending assets under management were just under $300 billion, down 17% from March, due to lower markets, US dollar appreciation against other currencies, and net outflows. Regarding FX, A little over 30% of our AUM is denominated in sterling, euro and Australian dollar, all of which weakened against the US dollar in the second quarter. Net outflows were 7.8 billion. We've seen a significant slowdown in intermediary sales across all regions due to rising interest rates, inflation, recession fears and geopolitical unrest. The financial results are down compared to the prior quarter as revenues were significantly affected by those weaker markets FX, and net outflows. In the quarter, we completed $56 million of the $200 million of share buybacks authorised by the Board, and today announced a $0.39 per share quarterly dividend. Moving to slide four, and a look at investment performance. The one-year investment performance reflects the extremely challenging market conditions in the first half of the year. Inequities, inflation, aggressive monetary policy, recession fears, and supply chain issues have created significant volatility. Our investment professionals remain disciplined in their approach and are focused on looking through the near-term uncertainty and being steadfast in delivering positive long-term outcomes for our clients. Fixed income continues to be impacted by the worst bond sell-off on record, and our short-term underperformance to bench has been modest in most cases. Switching to long-term investment performance, this remains solid, with 60% and 65% of assets beating their respective benchmarks over the three and five year time periods as of the 30th of June. Investment performance compared to peers continues to do well, with over 60% of AUM represented in the top two Morningstar quartiles over all periods. Slide five shows company flows. For the quarter, net outflows were $7.8 billion compared to $6.2 billion last quarter. With the flow trends we've seen in the first half of 2022 and the market volatility expected to continue through at least the end of the year, we anticipate flows to remain negative in the near term. Turning to slide six for a breakdown of flows by client-side. Net outflows for the intermediary channel were $5.7 billion. The decline in flows is attributed to a 32% slowdown in gross sales, as I mentioned earlier, and the previously disclosed $1.3 billion liquidation of the UK Property Fund, which occurred in June. The lower gross sales are not unique to Janus Henderson, as the industry has seen lower active retail sales in the US, EMEA, and Latin America, but we also lost market share, particularly in equities. Clients are sitting on the sidelines as they monitor curator events and assess the impact of the Russia-Ukraine war tightening central bank policy and ongoing inflation. Until these market headwinds subside, we can expect this risk-off sentiment to continue. Institutional outflows were $1.2 billion. Pleasingly, the quarter included a $3.7 billion funding from a European client into a global commodities mandate in the alternative capability. This funding was offset by the previously announced $2 billion redemption in the Sterling Buy and Maintain credit strategy from a longstanding European insurance client. The approximately $4 billion remaining to be redeemed in this mandate will happen over the second half of 2022 in transfers yet to be determined. And also a total of $2.4 billion in net redemptions in the equities capability, which was spread across several strategies. Going forward, our pipeline is diversified by products and clients, but including the $4 billion mentioned above, we still expect negative flows from institutional over the remainder of the year. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, were $900 million. Slide 7 shows the flows in the quarter by capability. Equity net outflows in the second quarter were $5.8 billion, compared to $3.8 billion in the prior quarter. The outflows were driven primarily by US SMID and MIDCAP growth, and small and MIDCAP value strategies in US retail, in addition to the institutional outflows I previously mentioned. Given the strong recovery in performance of US MIDCAP and SMID, Enterprise, for example, is now in the top quartile over one and five years. we did see outflows slow over the quarter and into July, and we're pleased to have reopened the SMID and small-cap Triton and venture funds, which have been closed for several years. Second quarter net outflows for fixed income were $3.3 billion, reflecting the $2 billion sterling buy and maintain institutional redemption and the market conditions for bonds, which impacted the retail side of the business. Total net outflows for multi-assets were $900 million, driven by the balance strategy within our retail channels. Whilst the net outflow is a result of short-term performance, the medium and longer-term performance remain very strong. Alternative inflows were $2.2 billion. This is the result of the $3.7 billion global commodities win in institutional, which is partially offset by the $1.3 billion outflow related to the sale of the UK property fund. Moving on to the financials, slide 8 is the US GAAP Statement of Income. In the detailed 10Q, you will see an investment loss of $109 million below operating income, which is reversed out in NCI. This is the result of the mark-to-market losses of a fund which we were required to consolidate this quarter, but these figures net out in net income and EPS. Slide 9 is a look at our adjusted financial results. Adjusted revenue decreased 11% compared to the prior quarter, primarily due to lower average AUM. Net management fee margin for the second quarter was 49.2 basis points compared to 49.4 basis points in the prior quarter, excluding Intec. This slight quarterly decline is due to mixed shifts from weaker markets and net outflows primarily in our higher fee retail channels. Second quarter performance fees include negative $15 million from U.S. mutual funds, which were partially offset by performance fees generated from the European Smaller Companies Investment Trust, the Global Multistrat Fund, the Multistrat Hedge Fund, and the CCAV Pan-European Fund. Looking at the second half of the year, all else equal, underperformance will continue to impact performance fees. As we sit here today, based on current investment performance, we estimate aggregate performance fees for the full year could range from negative $35 to negative $45 million. This includes roughly negative $60 million from US mutual fund performance fees. Clearly, the result will be dependent on future performance, but these negative performance fees will cause a significant delta to revenues compared to 2021. Moving to expenses. Adjusted operating expenses in the second quarter were $278 million, down 7% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was down 12% compared to the prior quarter, primarily due to lower variable costs given lower pre-bonus profit, as well as favorable FX and the closing of the intake transaction at the end of the prior quarter. Adjusted LTI was down 3% from the first quarter. In the appendix, we provided the usual table on the expected future amortization of the existing grants for you to use in your models. The adjusted comp to revenue ratio was 42.6%, which is flat to the first quarter. Adjusted non-comp operating expenses were also flat compared to the prior quarter. Finally, our recurring effective tax rate for the second quarter was 25.7%. For the full year, the firm's statutory tax rate is still expected to be in the range of 23 to 25%. Adjusted operating income in the second quarter of $149 million was down 16% over the prior quarter, driven principally by the lower average assets, which are partially offset by corresponding lower variable compensation. Second quarter adjusted operating margin was 34.9%. Finishing up second quarter results, adjusted diluted EPS was 63 cents. In looking at the remainder of the year, I do want to provide an update on expectations for 2022. Average AUM in Q2 was 9% higher than closing AUM. All things equal, you should therefore expect management fees will be lower by this amount in Q3. In terms of guidance, We now anticipate a compensation ratio in the range of 44 to 45% for 2022. The change from the previous low 40s expectation is a result of difficult markets and net outflows negatively impacting AUM and the revenue line. Additionally, as discussed, performance fees are also trending negative, which impacts the comp ratio. For non-compensation, we are proactively managing our discretionary expense base and will look to slow down spend on such items as marketing and C&E. With this disciplined approach coupled with favourable effects on non-US dollar denominated expenses, we anticipate the non-compensation expense growth to be in the low to mid single digits, down from the previous guidance of low teens. Our philosophy has always been to maintain strong financial discipline and invest in the business where it strategically makes sense, whilst looking to operate more efficiently to provide the fuel for growth. That will not change as we still have investments we need to make in our business. However, with the ongoing market turmoil, we will be ever more prudent in our expenses. Finally, skipping over to slide 11 and a look at our liquidity. Cash and cash equivalents were $848 million as of the 30th of June, an increase of approximately $66 million, resulting primarily from strong cash flow generation, partially offset by returning cash to shareholders. we returned $121 million to shareholders via the dividend and share buybacks. We purchased 2.1 million shares of our stock for $56 million and have $144 million of buyback authorisation remaining to be completed by next year's AGM. Since the inception of our accretive buyback programme in the summer of 2018, we've reduced our outstanding share count by 17.3%. Finally, We paid $66 million in dividends during the quarter and declared a $0.39 per share dividend to be paid on the 24th of August to shareholders of record as of the 8th of August. With that, I'd like to turn it back over to Ali.