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spk02: We appreciate your patience and ask that you please continue to stand by. Thank you. To all sites on hold, we appreciate your patience and ask that you please continue to stand by. Thank you. To all sites on hold, we appreciate your patience and ask that you please continue to stand by. Your program will begin momentarily. Good evening. My name is Brittany and I will be your conference operator today. At this time, I would like to welcome everyone to the Manning and Appear Third Quarter 2021 Earnings Conference Call. Our hosts for today's call are Nicole Kinsley Bruner, Chief Marketing and Strategy Officer, Mark Mayer, Chairman and Chief Executive Officer, and Paul Pataglia, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 8 p.m. Eastern Standard Time today. The dial-in number is 800-839-5629. No passcode is required. At this time, all participants have been placed in a listen-only mode. If you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Ms. Nicole Kingsley Bruner.
spk01: Thank you, Brittany, and thank you, everyone, for joining us today to discuss Manning and Appear's third quarter 2021 results. Before we begin, I would like to remind everyone that certain statements made during this call, not based on historical facts, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Manning and Appear assumes no obligation or responsibility to update any forward-looking statements. During this call, some comments may include reference to non-GAAP financial measures. Full GAAP reconciliations can be found in our earnings release and related SEC filings. With that, I will turn the call over to our Chief Executive Officer, Mark Mayer. Mark?
spk00: Thank you, Nicole. We continue to execute on our investment disciplines this quarter, helping clients stay on track towards meeting their objectives. while we made further progress on our strategic initiatives. Our performance for clients was muted for the quarter. The quarter saw flattish to negative absolute returns across much of the equity universe and flat returns in fixed income. While the S&P 500 rose slightly for the quarter, less than 1%, the broader U.S. equity market was roughly flat, and equities outside the U.S. declined. Our relative performance was mixed, as a somewhat higher percentage of our strategies underperformed, though generally by very small amounts, than outperformed. Most of the figures we will discuss are available on pages six and seven of the earnings supplement. In our multi-asset class strategies, which represent two-thirds of our AUM, we delivered slightly negative absolute results over the period across all our risk profiles, in all cases broadly consistent with though very slightly, as in tens of basis points, behind the subdued returns in global capital markets during the quarter. All our multi-asset portfolios are ahead of their benchmarks for the year to date, and three- and five-year relative returns remain compelling. This was the first quarter since the pandemic began where broad financial market performance, as well as our own multi-asset class results, were subpar. From the market bottom in late March of last year, global equities had been on a steady, consistent run as economies have recovered and persistently low bond yields have provided some justification for multiple expansion. This equity strength has more than made up the weak bond market performance over that stretch, and our investment teams have capitalized on this environment. In the third quarter, however, both equities and debt markets stalled out. To state the obvious, we are living through a remarkable economic event. The U.S. recovery from last spring's deaths has been so rapid and so strong that we believe the domestic economy is rapidly moving through its economic cycle and is already in a mid-cycle phase, with some signs even pointing towards a later cycle stage. Although there are economic indicators suggesting that there remains some residual slack in the system, weak labor force participation, for example. Numerous other indicators, including healthy consumer demand, supply chain constraints everywhere, rising commodity prices, and the unmistakable uptick inflation are quite extraordinary to see only one and a half years removed from the sharpest economic contraction in American history. To be clear, economic and company fundamentals remain robust at this time, but financial market valuations are elevated, and the rapidly accelerating U.S. economic cycle suggests that systematic risks have begun to build. Our long-term outlook for economic growth is still characterized by certain structural headwinds, such as deteriorating demographics and rapidly rising debt levels. As a result of our evolving views, we began to reduce risk in our multi-asset class portfolios during the third quarter. As we saw last year, our bottom-up research team is agile and can move quickly when they see opportunities emerge, and there are certainly compelling investments around the world. However, at our current positioning, for equity markets to go on a tear, it is unlikely we would deliver better performance than our multi-asset class benchmarks. As noted, fixed income returns were muted in the quarter. Our aggregate fixed income composite performed in line with its benchmark, while our tax-exempt portfolios declined and underperformed very slightly. The bright spot in fixed income markets remains high yields, up about 1% for the quarter, and our high-yield fund continued to outperform as it has all year and over the longer term. This Morningstar five-star fund ranks in the top decile of its peer group over one, three, five, and 10 years. Its inclusion in our multi-asset class portfolios has been additive, and we are seeing interest from third-party advisors. In an environment of such high risk and fixed income, Characterized by sharply negative real rates and tight credit spreads, how has our credit team been able to add value in high yields? Well, because of our lesser size, we can identify smaller, often unrated bonds that larger investors simply ignore. These credits require substantial research and have contributed to our strong results. Our unconstrained bond series is similarly capitalizing on our flexible, truly active approach. The strategy's goal is to deliver maximum absolute returns with the least amount of risk, and we believe the team is excelling, having provided total returns of 492 and 356 basis points annualized over the past three and five years, respectively. Results were mixed for our fundamental bottom-up equity portfolios. Our U.S. core equity composite underperformed slightly, but remains about 100 basis points ahead for the year to date. Our core equity unrestricted and global equity strategies both outperformed for the quarter. Global equity is 287 basis points ahead for the year. The standout, again, was the core non-U.S. equity strategies. Our international equity composite provided 192 basis points of outperformance in a negative return environment this quarter, bolstering the year-to-date outperformance to nearly 700 basis points. On a three- and five-year rolling basis, the composite is outperforming by 713 and 309 basis points annualized, respectively, and it remains well ahead of benchmark over the past 10 and 20 years. Our real estate series bounced back with a strong quarter, outperforming its MSCI U.S. REIT benchmark by over 200 basis points. It is now ahead of its benchmark for the year and is well ahead over three, five, and ten years. REITs have been a bright spot among equities all year, consistent with economic recovery. We believe our strategy is particularly compelling for its consistent emphasis on quality. Our Rainier International small cap strategy underperformed slightly versus a flat benchmark and remains behind for the year. Outperformance over three and five years remains outstanding for Rainier at 557 and 485 basis points, respectively. Our discipline value series modestly underperformed as the strategy's bias to quality within the value style was again a headwind. While investment results overall were muted for this quarter, we are proud of what our investment team has delivered for clients, both recently and over the longer term. We were named Barron's best actively managed fund family for 2020 for a reason, and we look forward to delivering excellent investment results and well-architected solutions to clients in the years ahead. I'd like to now turn to progress on our key strategic initiatives. Net flows remain slightly negative. While we are seeing continued reductions in the rate of outflows, improving gross and net flows in our intermediary business are more than offset by small declines in our institutional and wealth management businesses. As noted last quarter, we made important management changes to accelerate the progress in our sales organizations, and we are just beginning to see the fruits of those management changes. The results of our actions and investments lead us to target modestly positive net flows in 2022. In prior quarters, we said that our most performance-sensitive business, the intermediary channel, was the one most likely to see acceleration in the short term, reflecting our strong investment results. This has occurred. We are investing in this channel, hiring new advisor consultants who come to us with significant experience and strong relationships with third-party advisors. We are leveraging our positive press, such as Lipper Awards, and we are seeing good sales momentum across our strategies, multi-asset class strategies, Rainier, international small cap, high yield, and international equity in particular. Our intermediary channel has had positive net flows each quarter this year, and we target flows to be positive in 2022. The rate of client retention in our wealth management business continues at a very high level. However, sales productivity has remained static for the past few quarters, despite our increased hiring in this channel. We have added six new financial consultants this year on top of the four we added in 2020. Why, then, has new business growth remained muted? Our staffing model in wealth management is distinct from the advisor acquisition strategies prevalent in our industry. Unlike most competitors, we are not acquiring advisory practices with associated books of business and revenues. We are hiring experienced financial consultants and financial planners, but they come without associated books, and they have to do two things. One, they are critical in the transition of some large client books where we have long-tenured financial consultants who are retiring or moving into new roles. And two, they need to develop a pipeline of new business with relationships they have as well as new relationships they develop. This takes time, and the results are just beginning to play out. is common knowledge that advisory practices are being acquired at unprecedented valuations. The advantage of our approach is that it doesn't increase the capital intensity of our business, but it does emphasize our priorities. For half a century, we have been providing clients with consistently and thoughtfully architected solutions that have many decades of superior audited, publicly available returns. We prize our distinctive culture and want to carefully integrate our new hires to ensure that they fully embrace our culture and enrich it. We are patient and are confident that results in wealth management will accelerate over time. And we are targeting positive net flows in wealth management in 2022. Our institutional channel, which is dominated by our sizable franchise with Taft-Hartley local plans, is making progress as well. We are engaging productively with consultants and gradually building towards advocacy. Our dialogues with the professional staff and trustees at our Taft-Hartley clients are good, as they have broadly experienced strong investment results with us. Establishing us as a growing presence in the institutional market will take time, and we project continued outflows in this channel in 2022. We continue to make progress on our extensive, exhaustive digital transformation. We completed the installation of Workday for human capital management in the quarter on time, on budget, and this was a massive effort. We migrated to Workday for finance previously, and we are now finally able to integrate talent management, performance reporting, payroll, benefits management, billing and payables, general ledger, and financial planning and analysis. The benefits of this integration will become visible in both greater efficiency and increased effectiveness beginning next year. We are far along in our implementation of Charles River for trade processing and order management and are now fully executing about a quarter of our portfolios in Charles River. We anticipate completing the transition to Charles River around the end of the first quarter of 2022. A migration to InvestCloud for front and middle office functions is coming along. We are simultaneously implementing a new CRM, an advisor portal, a new financial planning system, portfolio accounting system, and client reporting module. This is, needless to say, daunting, and we are working through many complexities. Further, there are substantial interdependencies with Charles Rivers. So we now anticipate completing the front office CRM and advisor portal by the early part of next year. The portfolio accounting and client reporting, which are entirely dependent on the completion of Charles River, are slated to go live in mid-2022. In sum, we continue to move forward aggressively on numerous fronts, striving, as always, to deliver excellent investment outcomes, superior advice, an outstanding service to our clients, while ensuring that the firm enjoys profitable growth. Our focus can enable us to deliver superior total returns to shareholders. And with that, I'll turn the call over to Paul for more details on our financials. Paul?
spk04: Thank you, Mark. Good afternoon, everyone, and thanks for joining us today. Starting with net client flows and assets under management, AUM at the end of September was $22 billion, down from $22.3 billion as of June 30th. The decrease in AUM consisted of 157 million of net client outflows in the quarter and 128 million of market depreciation stemming from volatility that affected markets during the second half of September. Average AUM was actually up 2% for the quarter. When compared to September 30th of 2020, AUM has increased by $2.7 billion or 14%. Gross client inflows were $613 million for the quarter and are approximately $2 billion for the year to date. On the wealth management side, we reported gross inflows of approximately $210 million for the third quarter, which is consistent with the level of production that we've reported during the first two quarters of 2021. Through September 30th, our wealth management team has produced $652 million of gross inflows. We reported intermediary and institutional channel inflows of approximately $400 million for the quarter, which is down from $570 million reported in Q2 and more in line with our quarterly results from Q1 2021 and throughout 2020. Year-to-date, we have reported $1.4 billion of gross inflows from our intermediary and institutional team. Gross client outflows were again excellent and a testament to our outstanding client service and investment results. Q3 outflows of $770 million represent a 9% improvement when compared to last quarter and a 21% improvement from $980 million of outflows this time last year. Our turnover rate for the quarter declined to 14%. Year to date, gross outflows of $2.4 billion are well below outflows of $3.3 billion this time last year, and our separate account retention rate during the quarter remained high, approximately 98%. By sales team, the wealth management team had $26 million of net outflows during the quarter, and the institutional intermediary team had 131 million net outflows. For the second quarter in a row, net flows for our mutual funds and collective trust were positive, with approximately $6 million of net inflows compared to $163 million of net outflows from our separate accounts. Through September 30th, we have had net inflows of approximately $18 million into our fund and collective trust, offset by $370 million net out from our separate account. We remain optimistic that the strength of our track records against peers and benchmarks across one, three, and five-year periods will continue to drive interest in our funding collective strategies and across our entire product set. To wrap up AUM and flows, third quarter net outflows of $157 million when combined with our half-year results brings us to $351 million of net outflows for the first nine months of 2021. We recognize the urgency to turn flows positive to achieve sustainable growth, but we think it's equally important to recognize where we've come from, as the level of net outflows we are reporting through September 30th represents a significant improvement from the 1.5 billion of net outflows we reported for the first nine months of 2020, and from the levels of net outflows we've experienced in the years prior. Lastly, I want to report that we received notice of a $300 million institutional redemption that will occur in January 2022. It is worthwhile to note that the client's decision to terminate was originally made during 2019, and due to various complications on the client side, further exacerbated by the pandemic, the official redemption notice has now just been provided. Given these unique circumstances, we do not consider this to be indicative of weakness in our offerings. Our firm has undergone an enormous transformation since this decision was originally made in mid-2019, and we believe that this decision is a reflection of where we were then, not where we are today. Despite this news, I will reiterate the point that Mark stated earlier. Our goal remains to be net cash flow positive in 2022. Turning to our third quarter P&L, we reported revenue of $37.5 million for the quarter with overall revenue margins of 67 basis points compared to revenue of $36.1 million reported last quarter with average fees of 66 basis points. Operating expenses were $28.2 million in the quarter, no change from last quarter, and a $400,000 increase compared to the third quarter of 2020. When comparing operating expenses against last quarter, Other operating costs are down 7%, partially offset by a compensation increase of 2%. Compensation and related costs increased by approximately $400,000 since last quarter. The increase is primarily attributable to increased variable compensation accruals driven by our revenues, along with severance costs that were incurred during the quarter and an increase in payroll costs stemming from additional sales hiring that took place. Compensation-related costs as a percentage of revenue were 50% in Q3, and our overall headcount rose slightly to 280. Distribution, servicing, and custody expenses increased slightly during the quarter, in line with the growth in revenue. And other operating expenses decreased by 7% sequentially, or $500,000 to $7 million, as a result of decreases in consulting fees related to our InvestCloud implementation. Other operating costs as a percentage of revenue have been steady over the last several quarters at 20%, and that was again the case in the third quarter, with other operating expenses representing 19% of revenue. With revenue increasing and operating expenses being effectively unchanged for the quarter, we reported a 20% sequential increase in operating income for the third quarter to $9.3 million, with an operating margin of nearly 25%. We reported a modest non-operating loss of $73,000 stemming from losses on marketable securities and seeded products on our balance sheet, resulting in pre-tax income of $9.2 million. Looking at our non-GAAP financial metrics, with $560,000 of strategic restructuring costs during the quarter, we reported economic income of $9.8 million. Our non-GAAP effective tax rate returned to the normalized rate of approximately 30% in the third quarter, compared to rates in the mid-teens during the first half of 2021. After accounting for our adjusted income taxes, we reported economic net income of $6.9 million, or 30 cents of economic net income per adjusted share, which is generally in line with 29 cents and 31 cents per adjusted share, as reported in Q1 and Q2, respectively. I'll now summarize our results for the year through September 30th. We've reported revenue of $108 million up 15% from $94 million this time last year, with overall revenue margins of 67 basis points. Our ongoing efforts to control costs and expand profit margins are evidenced by the fact that operating expenses have increased by less than 1% this year to $84.5 million, with an increase of approximately $700,000 in compensation-related costs that has been mostly offset by decreases in distribution expenses and other operating costs. When taking a closer look at compensation, we see the compensation-related costs of $56 million represent 52% of revenue. While we have increased our variable compensation accruals to reflect the 15% year-over-year revenue increase, that has been mostly offset by the implementation of our deferred compensation program in the one-time savings that have been achieved during this initial year of adoption. The size of our workforce is generally unchanged from this time last year, though the makeup of the workforce has changed, as reductions in our middle and back office staff have been offset by six net additions to our sales and client service teams. Distribution expenses have decreased by $470,000 as a result of business mix changes since last year, with changes in the mutual fund share classes that do not have distribution fees attached. Other operating expenses of $21 million were generally in line with this time last year and represent 20% of revenue, down from 23% of revenue for the nine months ended September 30, 2020. As a result, we reported operating income of $23 million compared to $9 million through this time last year. Our year-to-date non-GAAP earnings per adjusted share of $0.90 continues to be a notable improvement from $0.17 per adjusted share in 2020. Turning to the balance sheet, we reported approximately $90 million in cash and investments as of September 30th, an increase of $10 million compared to what we reported on June 30th. This change in cash is another example of our improved capital structure with only about 2% of the remaining adjusted shares outstanding held by legacy unit holders. Our simpler, more efficient capital structure allows us to accumulate cash more rapidly, even during periods like Q3 when we have mid-year incentive payouts taking place. We continue to maintain a debt-free capital structure. Regarding our return of capital initiatives, Yesterday we announced that the Board of Directors approved a $0.05 per share Class A dividend for the fourth quarter, following the reinstatement of our dividend last quarter. The pace of share repurchases slowed during the third quarter, and through September 30th we have completed $5.7 million out of the $10 million authorized by our Board of Directors at the start of the year. Upon payout of the fourth quarter dividend next month, we will have returned $1.9 million of cash to shareholders through the dividend. And in total, we will have returned nearly $8 million of capital to shareholders during 2021 prior to considering any remaining share purchases that may take place. We'll provide further updates on our progress in returning capital to shareholders on our next call. Turning to ownership, our adjusted share count decreased during the quarter by approximately 200,000 shares to 23 million adjusted shares outstanding as of September 30th. The components of our adjusted shares outstanding are provided on slide 15 in the investor supplement. As of September 30th, our employees and directors own approximately 36% of the adjusted share count, including unvested awards, and approximately 23% of the votable Class A common stock. As we look ahead, there are upcoming vestings of previously awarded restricted stock units that will take place in December 2021 and again in February 2022. These unvested RSUs are already accounted for in the adjusted share count of 23 million. However, upon vesting, they will be added to the Class A share count. We are estimating that the Class A share count will increase by approximately 600,000 shares when these awards vest. though the precise amount will not be known until the time of vesting. In connection with the vesting of equity awards and the exchange of stock options, our historical practice has been to withhold shares of Class A common stock to satisfy employee income tax withholding requirements. These net share settlements have the effect of shares repurchased and retired by the company. As a result, we expect the Class A shares outstanding will increase as a result of the RSU vestings and the adjusted shares outstanding will decline because of the way taxes are settled upon vesting. We'll provide updated share count metrics on our next call. In closing, our goals for 2022 are clear. First and foremost, we must continue to deliver exceptional investment results for our existing clients to help them achieve their financial goals. We must leverage those strong investment results along with increased sales activity to boost gross client inflows and turn net client flows positive. Sustainable top line growth will be our best way to achieve margin expansion and further increase shareholder value. Thinking more about our 2022 P&L, we remain committed to managing our overall cost structure, including headcount, prudently given our current revenues. We are equally committed to continuing to make investments in our business to support growth initiatives. We expect to continue accumulating cash from operations that can be deployed to support strategic initiatives or to return to shareholders, especially with the majority of our spending to support the digital transformation now behind us. That said, it is also important to remember that our 2022 P&L will include an increase in non-cash expenses as a result of the technology-related investments that have been made over the past few years, namely depreciation and amortization. The amount of depreciation and amortization and the timing of when those non-cash expenses begin to ramp up will be contingent on the remaining costs incurred and the timing of final completion of these technology installations over the next few quarters. It is a plausible scenario that during 2022, we will generate strong cash from operations with earnings that decrease compared to 2021 as a result of these non-cash expenses. Under virtually all P&L scenarios, however, our balance sheet will continue to be an area of strength and afford us the opportunity to pursue initiatives that will be in the best interest of clients while also driving value for shareholders. That concludes today's call. If you have any questions on the topics we've addressed today, please contact us using the inquiries portal on our investor relations website, and we'll promptly address your inquiry. Thank you again for listening and for your interest in Manning and Appear. And I'll now turn the call back over to the operator to wrap up. Operator?
spk02: Thank you. This does conclude today's conference call. Please disconnect your line at this time and have a wonderful day.
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