Janus Henderson Group plc Ordinary Shares

Good morning. My name is Sam and I'll be your conference facilitator today. Thank you for standing by and welcome to the Janice Henderson Group second quarter 2023 results briefing. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll 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 section 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's my pleasure to introduce Ali Dabaj, Chief Executive Officer of Janus Henderson. Mr. DeBasch, you may begin your conference.

Welcome, everyone, and thank you for joining us today on Janus Henderson's second quarter 2023 earnings call. I'm Ali DeBasch, and I'm joined by 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 more detail. After Roger's comments, I'll provide an update on our strategic initiatives, and then we'll take your questions after those prepared remarks. Turning to slide two. Markets remain uncertain, and while second quarter and year-to-date market returns have been positive, the rally has been extremely narrow, led by a few mega-cap stocks. Persistent headwinds, including an opaque economic outlook, higher interest rates, uneven inflationary pressures, and recession fears, notably in the UK and continental Europe, are contributing to a difficult market backdrop. Even amidst macro challenges, we're very pleased that Janice Henderson continues to make progress executing our strategy and, again, delivering good quarterly results. Assets under management increased 4%, to $322.1 billion, due to positive markets, and up 12% since the beginning of the year. The quarterly flows were negative $500 million this quarter. While just negative, the result is the second best quarter in nearly three years. Taking a step back to look at the broader picture, our results this quarter clearly show significant improvement from where we were a year ago. Inflows for the first half of 2023 were $5 billion, a market improvement from the $14 billion of outflows during the first six months of 2022. Let me just say that again. Last year in H1, we were sitting at negative $14 billion in net flows. Now we're at a positive $5 billion in net flows. Clear progress. To remind you, we've also said that our flow trajectory won't be linear, and we're not yet at the point to be able to promise consistent positive flows despite the tangible improvements. As we begin the second half of the year, we need to rebuild our pipeline, which takes time. Our retail flows continue to be negative, especially in EMEA, and there are a few pockets of internal transition that will make us a stronger firm for the long term, but will negatively impact our flows in the near term. That being said, remember that last year's total annual net flows were negative $31 billion, and we expect to show great improvement from that, and believe we're on our way to sustainable organic growth in the future. In particular, we remain encouraged with the momentum and sales activity levels in the business and conversations we're having with clients, given our investments in client service, greater accountability and collaboration, improved selling processes, and investment performance. Given long lead times in this industry, our expectation continues to be that we deliver one or two quarters of positive net flows over the next one to two years as an indication that our strategic plan is taking hold. Turn to investment performance. it is solid and aggregate with 68% of assets ahead of benchmark on a three-year basis. The ability of our world-class investment and distribution teams across all our capabilities to deliver differentiated insights, investment discipline, and world-class service positions us well to navigate these uncertain markets and deliver the best possible investment outcomes for our clients and their clients. In summary, we are clearly showing progress on our strategic path to deliver consistent organic growth, There's still much opportunity for improvement. Our financial results are solid. We're generating good cash flow, and we have a strong and stable balance sheet. I'll now turn the call over to Roger to run you through the financial results.

Thank you, Ali, and thank you again to everyone for joining us on today's call. Turning to slide three and investment performance. Investment performance versus benchmark remains solid, with over 60% of assets beating their respective benchmarks over all time periods. Short term fixed income performance versus benchmark improved this quarter and the longer term time periods remain very strong. Investment performance compared to peers continues to be competitively strong with 70, 61, 78 and 87% of AUM in the top two Morningstar quartiles over the 1, 3, 5 and 10 year time periods. Slide 4 shows company flows. As Ali mentioned, net outflows were $500 million this quarter, And while we're pleased with year-to-date flows compared to the prior year, our goal is to deliver consistent organic growth over time. And we're not there yet. Based on the items that Ali's discussed, we wanted to provide an outlook for third quarter flows. As we sit here today, we expect net outflows in the third quarter to be in the range of negative 3.5 to negative $5 billion. Turning to slide five for a look at flows by client type. Net outflows for the intermediary channel were $1.6 billion, compared to $700 million in the first quarter. The quarterly decline was primarily from the EMEA and LATAM regions, as higher interest rates and recessionary fears are weighing on flows. This is not unique to Janus Henderson, as the industry in general has experienced a challenging flow environment in those regions. US intermediary flows were virtually flat, supported by strong positive flows in several strategies, including the AAA CLO ETF, our mortgage-backed security ETF, and US mid-cap growth. We told you before that US intermediary is a key initiative under our Protect and Grow strategic pillar, and we're pleased that we've shown a significant improvement in net outflows in the first half of 2023 compared to the same period a year ago, and that we are capturing market share. Institutional net inflows were $1.9 billion, versus $6.9 billion in the first quarter. Pleasingly, the quarter included a $3 billion enhanced index mandate from a global insurance client, adding to flows in Q1 from sovereigns and other insurers. In addition, in Q2, we had our largest emerging market debt mandate fund to date. We are not anticipating any similar-sized fundings in Q3, in line with our comments on last quarter's call, that our distribution team is working to replenish and build a sustainable pipeline and that this will take time. Redemptions were normalized in Q2 after a benign Q1. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, were $800 million. The US direct business is a strategically important pool of assets, and to better deliver for our clients during the second quarter, we started to offer an investment advisory service to our direct investors in the US. This is a service we haven't offered previously and helps us guide our direct clients so that they are better positioned to achieve their desired financial outcomes. Slide six is flows in the quarter by capability. Equities flows would break even in the second quarter compared to net inflows of $3.3 billion in the prior quarter. A good result considering the challenging environment for active equities. Net inflows for fixed income were $1 billion compared to $3.6 billion in the prior quarter. We remain encouraged that despite the challenging short and medium-term investment performance in fixed income, we have differentiated breadth of product that is able to capture flows across multiple channels and regions. Several strategies contributed to positive fixed income flows, including emerging market debt, which had $600 million in net inflows for the quarter and has crossed the $1 billion market of assets under management. Elsewhere, fixed income ETFs had positive flows of $870 million in the quarter, led by the AAA CLO ETF and our mortgage-backed securities ETF. For the year, our fixed income ETFs have gathered $1.7 billion in inflows, and our ETF AUM has grown to over $7 billion. Total net outflows for multi-assets was $700 million, driven by the balance strategy within the US retail channel. Whilst the net outflow is in part due to short-term underperformance back in 2022, the strategy is currently outperforming versus benchmark and peers across one, three, five, and 10-year time periods. Finally, net outflows in the alternatives capability were $800 million, primarily from the multi-strategy and the absolute return strategies in the UK and continental Europe. Moving on to the financials, Slide seven is the US GAAP statement of income. And on slide eight, we explain the adjusted financial results. Adjusted revenue increased 5% compared to the prior quarter, primarily due to increased management fees on higher average AUM in addition to seasonal performance fees. Net management fee margin for the second quarter was 48.5 basis points compared to the prior quarter of 49.8. The decline is primarily due to the impact of large institutional mandate fundings during the first half of 2023. All else equal, we anticipate the net management fee margin to stabilise in the third quarter. Second quarter performance fees were negative $6 million and include negative $17 million of US mutual fund fees, partially offset by performance fees primarily generated from the European Smaller Companies Investment Trust. As we sit here today, based on current investment performance, our estimate of aggregate performance fees for the full year remains unchanged towards the lower end of negative 35 to negative $45 million. This includes roughly negative $65 million from US mutual fund performance fees. Clearly, the result will be dependent on future performance. Continuing on to expenses. Adjusted operating expenses in the second quarter were $280 million, up 1% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was up 5% compared to the prior quarter, primarily due to higher variable cost accrual. Adjusted LTI was down 30% compared to the prior quarter, largely due to seasonal payroll taxes attributed by annual vestings in the prior quarter. In the appendix, we provided the usual table on the expected future amortization of existing grants for you to use in your models. The second quarter adjusted comp to revenue ratio was 45.6% in line with expectations. Adjusted non-comp operating expenses increased 13% again in line with expectations compared to the prior quarter, primarily due to higher G&A and marketing expenses. Adjusted operating income increased 15% over the prior quarter to $121.5 million in Q2. Second quarter adjusted operating margin was 30.2%. Finally, adjusted diluted EPS was $0.62. Updating on our expectations for full year 2023 operating expenses. We continue to be disciplined on costs and are always looking for ways to operate more efficiently. We now expect to deliver at least to the high end of the $40 to $45 million in previously communicated cost saves to provide fuel for growth to strategically reinvest back into the business. Our compensation and non-comp guidance remains unchanged. We expect our adjusted compensation ratio to be in the mid-40s. We expect adjusted non-compensation expense percentage growth of mid to high single digits compared to the prior year, which implies an acceleration in our non-compensation costs for the second half of the year as we continue to execute on our strategy. This will include our previously mentioned brand campaign, increased but very disciplined T&E expenses, and the amortization of capitalized costs associated with our OMST project, which just began following the successful go-live of this important project in June. Skipping over slide 9 and moving to slide 10 and a look at our liquidity. Our balance sheet remains very strong. Cash and cash equivalents were $966 million as of the 30th of June, an increase of approximately $137 million, resulting primarily from strong cash flow generation, partially offset by capital return and strategic spend. We've maintained a strong liquidity position and we continue to balance the capital needs and the investment opportunities of the business with returning capital to shareholders. As I stated on last quarter's call, Given the opportunities we see in investing in the business organically and inorganically, we do not anticipate buying back shares at this time. We'll continue to return cash to shareholders through a strong quarterly dividend, and the Board has declared a $0.39 per share dividend to be paid on the 30th of August to shareholders of record as at the 14th of August. With that, I'd like to turn it back over to Ali to give an update on our strategic progress.