Janus Henderson Group plc Ordinary Shares

Good morning. My name is Elliot. I'll be your conference facilitator today. Thank you for standing by and welcome to the Janice Henderson Group third 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 session. 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 Dabash, Chief Executive Officer of Janus Henderson. Mr. Dabash, you may begin your conference.

Welcome, everyone, and thank you for joining us today on Janus Henderson's third quarter 2022 earnings call. I'm Ali Dabash, and I'm joined by our CFO, Roger Thompson. In today's call, I'll start with some thoughts on the quarter before handing it over to Roger to run through the details. After Roger's comments, I'll share an update on the work that's been done regarding our strategic path forward since last quarter's call. Then we'll take your questions following those prepared remarks. Turning to slide two, as everyone knows, market conditions remain difficult in the third quarter. Tightening monetary policy from central banks, inflation, geopolitical tension, lower consumer confidence, and liquidity concerns all continue to affect markets, investor sentiments, and our results. The market declines, dollar appreciation, and $5.8 billion of net outflows reduced our AUM by 8% to $275 billion. Long-term investment performance remains solid with 64% of assets ahead of benchmark on a three-year basis, which is up compared to the prior quarter. Short-term investment performance is uneven amidst extreme market volatility. The investing environment remains challenging with high correlation among and between asset classes outweighing fundamentals and valuation. Our investment teams are remaining true to their identities and investment processes that have delivered long-term strong results and are focused on protecting clients against risk while looking for opportunities that have attractive valuations over time. It's during these times of market uncertainty that our clients and our client's clients need us the most. These are the times we as Janice Henderson And we as an asset management industry need to deliver for people all over the world who are saving for retirement, looking for a better life, and thinking of their financial future. In this environment, it's critical that we increase client outreach, share our market insights, and partner with our clients. Inside Janice Henderson, we continue to control what we can control and are looking keenly at expenses as we weather the storing markets while creating fuel for growth. I'll now turn the call over to Roger to run you through the detail of the third quarter financial results.

Thank you, Ali, and thank you again to everyone for joining us on the call today. Starting on slide three, I'm going to look at investment performance. Performance results versus benchmark are very similar to the prior quarter. Market conditions continue to generate considerable volatility. As Ali mentioned, our investment professionals remain disciplined in their approach and are focused on managing risk for clients and identifying opportunities that will deliver positive long-term outcomes for our clients. Long-term investment performance, as at the 30th of September, remains solid, with 64%, 67%, and 75% of assets beating their respective benchmarks over the three, five, and 10-year time periods. Investment performance compared to peers continues to be competitively strong, with over half of all AUM in the top two Morningstar quartiles over all time periods. Slide four shows company flows. For the quarter, net outflows were $5.8 billion compared to $7.8 billion last quarter. As you can see on the page, gross sales and redemptions are down significantly this quarter as global retail investors increasingly sat on the sidelines due to continued market volatility. Turning to slide five for a breakdown of the flows by client type. Net outflows for the intermediary channel were $2.5 billion compared to $5.7 billion in the second quarter. The improvement is attributed to lower net outflows in the U.S. and EMEA. In the U.S., the improvement came from equities and was spread across several strategies led by MidCap Value, Overseas, and Triton. In EMEA, the positive change was primarily from European equities and also from the one-off $1.3 billion liquidation of the UK property fund that occurred in the second quarter. Although net outflows were better, gross sales numbers are low, as intermediary clients across the globe are choosing to monitor current events and are not putting money in motion. Institutional outflows were $2.6 billion, which were primarily driven by the EMEA region. and include $900 million from the previously announced redemption in the sterling buy and maintain credit strategy from a long-standing European insurance client. There is approximately $2.6 billion remaining in the mandate, which is expected to be redeemed in the fourth quarter. Pleasingly, the APAC region had $800 million in positive net inflows, including $500 million from an Asian client into our global adaptive tail risk hedge strategy. Finally, Net outflows for the self-directed channel, which includes direct and supermarket investors, were $700 million. Similar to the intermediary channel, gross sales and redemptions are down considerably over the last year as retail clients remain on the sidelines. Slide six shows the flows in the quarter by capability. Equity net outflows in the third quarter were $4.1 billion compared to $5.8 billion in the second quarter. The outflows were driven by global technology strategies, UK Enhanced Index, US Mid-Cap Growth and Global Life Sciences. Third quarter net outflows for fixed income were $1.2 billion, reflecting the $900 million sterling buy and maintain institutional redemption that I've just mentioned. Total net outflows for multi-asset were $200 million, driven by the balance strategy within our retail channels. Whilst the net outflow is in part due to short-term performance, the medium and long-term performance of balance remains very strong. And the net outflows in balance were partially offset by the $500 million institutional funding I mentioned earlier. Before moving on, I do want to call out a redemption that will impact the fourth quarter. A European institutional client has made the decision to bring the management of their equity assets in-house. This decision was not specific to Janus Henderson and impacts equity mandates across multiple asset managers. For Janus Henderson, the equity AUM to be redeemed is approximately $4 billion and will occur in the fourth quarter of 2022. The AUM had performance fee potential but had relatively low base fees, representing approximately $5 million in annual management fees. Moving on to the financials, slide seven is the US GAAP Statement of Income. And on slide 8, we explain the adjusted financial results. Adjusted revenue decreased 8% compared to the prior quarter, primarily due to lower average AUM. Net management fee margin for the third quarter was 49.5 basis points compared to 49.2 basis points in the prior quarter. The increase is primarily due to accounting adjustments made during this quarter, which will not repeat. Third quarter performance fees of negative $13 million include negative $17 million from US mutual funds. All else equal, underperformance will continue to impact performance fees in the fourth quarter and into 2023. Based on current investment performance, we estimate aggregate performance fees for full year 22 will range from negative $38 to negative $42 million. We expect this will include roughly negative $64 million from U.S. mutual fund performance fees. Continuing on to expenses. Adjusted operating expenses in the third quarter were $269 million, down 3% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was down 2% compared to the prior quarter, primarily due to favorable FX and lower variable costs given lower pre-bonus profits, which is partially offset by a true-up in the cash LTI split. Adjusted LTI was up 4% compared to the prior quarter, and in the appendix we've provided the usual table on expected future amortization of existing grants for you to use in your models. Adjusted comp to revenue ratio was 46%, which was up compared to the second quarter and in line with expectations, given the decrease in adjusted revenue. Adjusted non-comp operating expenses decreased 9% compared to the prior quarter, primarily due to favourable FX and lower discretionary expenses. Adjusted operating income in the third quarter of $125 million was down 16% over the prior quarter, driven principally by lower average assets, partially offset by our cost discipline. Third quarter adjusted operating margin was 31.8%. And finally, adjusted diluted EPS was 61 cents. I'd like to quickly touch on expectations for the fourth quarter and for the year 22. Average AUM in the third quarter was 11% higher than closing AUM. All things equal, you should therefore expect management fees to be lower by this amount in the fourth quarter. And as closing AUM is significantly lower than year-to-date average AUM, all else equal, you'd anticipate 23 revenues to reflect this lower AUM. In terms of 22 guidance, we still anticipate a compensation ratio in the range of 44% to 45%. For non-compensation, we continue to proactively manage our discretionary expense base, and we anticipate the 22 non-comp expense growth to be in the low single digits. Finally, our recurring effective tax rate for the third quarter was 21%. The lower effective rate in the quarter resulted from various state tax items. For the full year, the firm's statutory rate is still expected to be in the range of 23% to 25%. Skipping through slide 9 to slide 10 for an update on cost efficiencies. 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. During the third quarter, our executive committee reviewed the business, seeking ways to drive efficiencies without compromising client delivery or regulatory requirements. As part of this extensive review, we've identified $40 to $45 million in gross run rate cost efficiencies, which will be equally split between compensation and non-compensation expenses. We expect to realize approximately one-third of the gross run rate savings by the end of this year, with the remaining two-thirds to be realized by the end of 2023. The implementation of these reductions will result in estimated non-recurring charges of $30 to $35 million. Our intent is to reinvest most or perhaps all of these savings back into the business to fuel growth, which Ali will talk about later in the presentation. It's important to note that we expect a mismatch in timing between the gross cost savings and the reinvestment in the business. Moving to slide 11 and a look at our liquidity. Cash and cash equivalents for approximately $1 billion as of the 30th of September, an increase of $170 million, resulting primarily from the continued strong cash flow generation, partially offset by the return of $65 million to shareholders via the quarterly dividend. Given current market volatility, we've been conservative and purposeful in our approach to capital management and have elected not to buy back stock this quarter. We have a strong liquidity position, and will continue to balance the capital needs and the investment opportunities of the business with shareholder interests. Along these lines, the Board has declared a 39 cent per share dividend to be paid on the 23rd of November to shareholders of record as of the 7th of November. With that, I'd like to turn it back over to Ali to give you an update on our strategy.