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Edited Transcript of MN.N earnings conference call or presentation 28-Oct-20 9:00pm GMT

·23 min read

Q3 2020 Manning & Napier Inc Earnings Call New York Nov 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Manning & Napier Inc earnings conference call or presentation Wednesday, October 28, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Marc Orlans Mayer Manning & Napier, Inc. - Chairman of the Board & CEO * Nicole Marie-Kingsley Brunner Manning & Napier, Inc. - CMO * Paul J. Battaglia Manning & Napier, Inc. - CFO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good evening. My name is Kavita, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manning & Napier Third Quarter 2020 Earnings Teleconference. Our hosts for today are Nicole Kingsley Brunner, Chief Marketing Officer; Marc Mayer, Chief Executive Officer; and Paul Battaglia, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 8:00 p.m. Eastern Time tonight. The dial-in number is (404) 537-3406 and enter PIN# 5742878. (Operator Instructions) It is now my pleasure to turn the floor over to Mrs. Nicole Kingsley Brunner. -------------------------------------------------------------------------------- Nicole Marie-Kingsley Brunner, Manning & Napier, Inc. - CMO [2] -------------------------------------------------------------------------------- Thank you, Kavita, and thank you, everyone, for joining us today to discuss Manning & Napier's third quarter 2020 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 & Napier 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 Chairman and Chief Executive Officer, Mr. Marc Mayer. Marc? -------------------------------------------------------------------------------- Marc Orlans Mayer, Manning & Napier, Inc. - Chairman of the Board & CEO [3] -------------------------------------------------------------------------------- Thank you, Nicole. As always, I'll begin with a review of our results for clients, starting with our multi-asset class solutions. These globally diversified, dynamic asset allocation strategies represent approximately 70% of total AUM, have track records dating back to the early 1970s and are core to who we are as an active solutions-oriented investment manager. All performance figures are available on Page 6 of the earnings supplement. Our multi-asset class results were strong on an absolute basis for the quarter with relative results falling slightly behind blended benchmarks. Strong security selection and asset allocation decisions were offset by more defensive positioning from a sector and investment style standpoint, positioning that we believe is appropriate given the current market and economic environment. Year-to-date client performance remains far ahead of blended benchmarks in all of our multi-asset class solutions. Our flagship long-term growth strategy whose audited track record dates to 1973, is ahead of its blended benchmark by 483 basis points year-to-date. The mutual fund versions of our multi-asset class solutions all rank in the top 11% of their competitive groups year-to-date, and all are well into the first quartile over the trailing 1 and 3 years. Our ability to deliver strong absolute relative results while simultaneously providing a meaningful degree of downside protection during market drawdowns this year, clearly demonstrates the strength of our time-tested investment disciplines. While there is often a material lag between excellent performance and AUM inflows, we believe these results position the firm well for future growth. Similarly, we have a broad suite of Target Day Collective Investment Trusts or CITs which are used in qualified retirement plans. These leverage the same multi-asset class strategies referenced previously. As pioneers in the Target Day space, these CITs are a compelling offering and we have approximately $630 million across the Target Day Collective Investment Trust suite. As of the end of September, all 11 Target Day vintages rank in either the first or second percentile of their competitive sets year-to-date. In core U.S. Equity for the third quarter, we delivered strong absolute performance, but underperformed by 92 basis points, as we began to trim winners and move to balance the growth tilt the portfolio had going into the quarter. The strategy is ahead of its benchmark by over 500 basis points year-to-date and over 1 year. And on a rolling 3- and 5-year basis, by over 300 and just under 200 basis points annualized, respectively. For our Global Equity Strategy, performance was even stronger, having delivered strong absolute returns and good relative results. The strategy is ahead of its benchmark by over 800 basis year-to-date. On a rolling 3- and 5-year basis, Global Equity is surpassing its benchmark by over 550 and 400 basis points annualized, respectively. And in core non-U.S. Equity, results have been stronger still. The strategy delivered terrific absolute results and on a relative basis finished the third quarter over 500 basis points ahead of its benchmark. For the year, core non-U.S. Equity is ahead of its benchmark by over 1,300 basis points, and on a rolling 3- and 5-year basis by over 450 and 250 basis points annualized. The outstanding success of our fundamental equity strategies in 2020 and in recent years has been driven by excellent individual security selection as well as superior country, sector and investment-style decision-making. Within our Quantitative Strategies, our disciplined value suite performed well on an absolute basis in the third quarter, but underperformed by 103 basis points on a relative basis. For the year, those outcomes are reversed. Absolute results remain negative in a very challenging environment for the value style, but on a relative basis, disciplined value has outperformed by over 220 basis points year-to-date. On a historical basis, disciplined value remains far ahead of its benchmark and peer groups over the trailing 1, 3 and 5 years. Our Rainier International Small Cap team produced another quarter of excellent returns with our Rainier International Discovery Fund delivering 600 basis points of relative outperformance in the quarter. The fund is now ahead of its international small-cap benchmark by almost 24 percentage points year-to-date and by over 25 percentage points on a rolling 1-year basis. On a rolling 3- and 5-year basis, the Rainier International Discovery Series is ahead of its benchmark by 825 and 405 basis points annualized, respectively. As it pertains to our remaining investment strategies, we continue to experience strong relative performance. Our real estate series is now ahead of its benchmark by over 500 basis points year-to-date, although the asset class is down almost 18% and has consistently excellent results over 1, 3, 5 and 10 years. In fixed income, our core bond series diversified tax-exempt series and New York tax-exempt series are all well ahead of their benchmarks year-to-date. Let me put our recent results in perspective and offer a caveat. Value investing has gone through a particularly difficult multiple-year stretch. Our fundamental core equity and multi-asset class offerings have the specific disciplines and dynamic flexibility to find compelling opportunities among both growth and value stocks. Our bottom-up research can lead our core portfolios to be tilted towards either growth or value. For the past 4 years, they have been skewed towards growth, which has been the right style tilt, but they are dynamic, and we have been adding to value holdings over the past few months and have neutralized the style bias. Disciplined value, on the other hand, is quantitatively driven and will always be a true value portfolio subject to value beta trends, which have been severely adverse compared to growth. Conversely, our Rainier International team will always be looking for great, small international growth companies. There is also a great deal of beta in the international small growth style, and we will also be subject to style reversals there. Style cycles are hard to predict, but it's quite likely that better-than-expected developments with respect to vaccines, treatments and outcomes for COVID-19, leading to positive economic and earnings surprises in 2021 and a steepening of the yield curve would correlate with a style reversal that could favor value, perhaps explosively, at least for a while. And we have seen such a value recovery over the past 2 months. Now we are in no way attempting to communicate that investors should expect the performance in our strategies to be subpar going forward. We do, however, believe in realistic expectations. And performance this year in many of our strategies is 1, or in some cases, a few standard deviations above our normal excess return expectations. We firmly believe in the investment philosophies and processes that underpin these strategies and by focusing not on short-term results, but on process execution, we believe we will deliver strong long-term results through a cycle across our investment strategies. Finally, in addition to the nearly universally strong year-to-date performance across our investment strategies, we've made substantial progress in our environmental, social and governance integrations. We view ESG integration as a requirement for our long-term success. And during the quarter, we began formally implementing ESG throughout our traditional core investment processes. These strategies have always formally integrated ESG considerations in our investment processes, and they have always been a key consideration in assessing the risks of an investment. By formalizing the integration of ESG, we are positioning ourselves and our strategy as well for success with future generations. ESG integration is also part of our quantitative efforts, and we have launched 2 dynamic quantitative ESG multi-asset class ETF strategies. As we move through the rest of 2020 and look towards 2021, we believe the current market environment can reward active investment managers with disciplines as well-honed as ours. There's a wide array of economic, political and regulatory uncertainties that investors must grapple with today. Avoiding mistakes and areas of excess is as important as ever. Market sentiment rises and falls, risks come and go, but our time-tested investment philosophies and processes stay the same. We have a tireless focus on driving superior risk-adjusted results for clients across full market cycles. Having addressed our strategic priority of investment excellence in some detail, I'll now address developments within some of our other strategic initiatives, starting with sales productivity. During the quarter, we witnessed continued early signs of momentum in our sales channels. While not yet substantial enough to turn flows positive, we are encouraged by the early results and fully believe we are on the right strategic path. In Wealth Management, we added another financial consultant during the quarter, our fourth hire this year, bringing our total to 18. We have further solidified our team-based approach across key regions. By leveraging teams, we are expanding sales capacity and improving the client experience in the process. In addition, as we'll discuss further, we also began a pilot implementation of InvestCloud's client portal, including modern planning tools. Early client feedback has been very positive. There are early signs of improving productivity, including a strong increase in the number of new relationships being formed within wealth management. Early signs of progress are encouraging, and our Wealth Management strategic plan remains resolutely focused on building for the long term. In our asset management businesses of intermediary, institutional and Taft-Hartley distribution, we are also seeing improving momentum as our excellent investment performance drives growing interest. In the intermediary channel, we are seeing good inflows into the Rainier International Small Cap strategy as well as other ones. It is worth reiterating as we have on prior calls that our outstanding investment results may well lead to a near-term acceleration in gross sales in our intermediary business, which is the most performance-sensitive of our channels. For the first time in years, we are seeing consultant-driven placements, and we are looking to strengthen our consultant relations efforts. Within the institutional and Taft-Hartley business, we recently awarded a number of core U.S. equity wins, demonstrating that there is still demand for truly differentiated active U.S. equity strategies. Turning now to operational efficiency, we continue to make substantial progress in the major technological transformation that we began late last year. We have begun a pilot launch of our new client portal. The new tools will dramatically improve the digital experience of working with us. As the balance of the InvestCloud implementation progresses through 2021, we will streamline operations and improve back-office efficiencies. Our Charles River deployment for trading and account management has moved forward throughout the third quarter as well. When fully implemented and integrated with the data warehouse and performance reporting capabilities in InvestCloud which will occur in 2021, we will have meaningfully improved our processes for implementing and reporting on client portfolios. Our implementation of Workday made key strides during the quarter as well. Workday's industry-leading tools now are underpinning most of the key portions of our finance platform. We will begin implementing Workday for human resources at the beginning of 2021. As the Workday deployment progresses, we look forward to the insights, efficiencies and overall improved internal experience it will provide. Outside of our technology overhaul, we completed an important realignment of our investment offerings that will have substantial economic benefits. During the quarter, we merged our 11 Target Date mutual funds into our 4 Pro-Blend mutual funds. By rolling our subscale money-losing Target Date mutual fund suite into our existing fully scaled, risk-based mutual fund suite, we will realize meaningful cost savings. A number of Target Date mutual fund clients also migrated to our Target Date Collective Investment Trust, whose excellent performance we outlined previously. In summary, we fully believe our strategic initiatives are progressing well, and our overall firm strategy is on the right track. We are seeing a number of positive green shoots of growth in several areas, and we remain resolutely focused on building the foundation of our business for the long term. And with that, I'll turn the call over to Paul for more detail on our financials. -------------------------------------------------------------------------------- Paul J. Battaglia, Manning & Napier, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Marc. Good afternoon, everyone, and thanks for joining us today. I hope everyone on the call is healthy and doing well. My remarks will be focused on the third quarter and year-to-date 2020 financial results, starting with assets under management. We finished September with AUM of $19.2 billion, up from $18.6 billion as of June 30. The 3% increase was the result of approximately $1 billion in market appreciation being partially offset by $385 million of net client outflows. When compared to September 30, 2019, AUM has decreased by $1.2 billion or 6%. The $385 million of net client outflows represents continued improvement in the rate of net outflow. Gross client inflows of nearly $600 million is consistent with the level of production we've reported in prior quarters, despite the continued impacts of the COVID-19 environment. We reported approximately $250 million of inflows through our Wealth Management channel, up from $200 million last quarter and approximately $350 million of inflows through our intermediary and institutional team, generally in line with last quarter. Gross client outflows for the quarter were $980 million, an improvement from our trailing 4-quarter average gross outflows of over $1.5 billion and the lowest level of outflows we've reported in the last several years. Our separate account retention rate during the quarter was approximately 97%. All together, we reported net client outflows from our Wealth Management business of approximately $54 million during the quarter and net outflows of $331 million from the institutional intermediary team. Before turning to our financials, I'll add a few closing remarks regarding our outlook on AUM inflows. As Mark mentioned, we continue to see sales productivity and momentum building across channels, albeit slowly. However, we still have vulnerability in certain segments of our business, most notably with institutional relationships where a third-party consultant is involved and those that use our blended investment strategies. As an illustration of this, we received redemption notices from 2 large relationships, one institutional client and one platform relationship, with total outflows of approximately $500 million during the fourth quarter expected from these. In both cases, the client was satisfied with our performance, but redeemed because they represented a larger proportion of the strategy they were invested in than their investment policy allowed. Our institutional and Taft-Hartley teams are focused on retaining these types of relationships to continue the AUM stabilization that we have demonstrated so far this year. Turning to our third quarter P&L, we reported revenue of $32.1 million for the quarter, with overall revenue margins of 66 basis points compared to revenue of $30.3 million reported last quarter. Operating expenses were $27.8 million in the quarter, an increase of approximately $520,000 compared to the prior quarter, but a $3 million decrease from the third quarter of 2019. Compensation and related costs increased by $1.2 million or 7% since last quarter. The increase is primarily driven by our analyst bonus accruals that are reflective of strong 1- and 3-year absolute and relative investment performance. This increase in variable compensation is offsetting some of the fixed compensation savings that have been achieved. Quarterly compensation costs are down by $900,000 or 5% from the third quarter of last year. Compensation and other related costs were 58% of third quarter revenue, consistent with what we have reported in the last several quarters. Distribution, servicing and custody expenses increased by $170,000 or 7% in the quarter, generally in line with the increase to average fund and collective trust assets and represent approximately 18 basis points of average fund and collective assets. Other operating expenses were $6.6 million in the quarter, a decrease of approximately $880,000 from last quarter and $1.7 million from the third quarter of 2019. Similar to Q2, third quarter other operating expenses are lower than prior quarters as a result of the COVID environment with limited travel and facility usage. However, the reduction observed this quarter is also driven by a $1.2 million gain that offset other operating expenses. The gain is stemming from reimbursements we received during the quarter from our affiliated mutual fund and collective trusts. The reimbursements were related to expenses we originally paid in pursuit of claims against a third-party with the reimbursement received upon settlement of those claims. When adjusting for various one-time items like the gain described above, other operating expenses continue to be approximately 23% to 25% of revenue, and it is our expectation that they will remain in that range as we move forward. The increase in revenue and decrease in other operating expenses contribute to improvement in operating income from $3.1 million in Q2 to $4.3 million in the third quarter, with an operating income margin of 13.3%. In nonoperating income, we saw some normalization compared to prior quarters, with $550,000 of income reported for the quarter. As you'll recall, during both Q1 and Q2 of 2020, we had significant nonoperating income and losses stemming from changes to our TRA liability resulting from the CARES Act as well as investment gains and losses caused by the market volatility earlier in the year. The reduced level of nonoperating income in the quarter reflects the quieter nature of this quarter compared to the first half of 2020. As a result, on a GAAP basis, we reported pretax income for the quarter of $4.8 million compared to $5.7 million last quarter. After accounting for approximately $400,000 of strategic restructuring costs, we reported economic income of $5.2 million. Our effective tax rate for the quarter was 39%, resulting in economic net income of $3.2 million. The increased effective tax rate during the quarter is indicative of the volatility we experienced earlier in the year and the impact it had on our full year earnings projections and estimated taxes. It is our expectation that our estimated effective tax rate will be in the low-to-mid 30% range in future quarters, barring any tax changes. Economic net income per adjusted share was $0.14, a $0.06 improvement from last quarter. The increase is attributable to the updated weighted average adjusted share count, now approximately 22 million adjusted shares outstanding. This is the first quarter in which our weighted average adjusted share count is fully reflective of the redemption transaction that closed earlier this year. With that, I'll summarize our year-to-date results. We reported revenue of $93.5 million, down 9% from $103.3 million this time last year, with overall revenue margins of 66 basis points in both periods. Operating expenses were $84.3 million, a decrease of nearly $12 million or 12% from last year. Compensation and related costs of $55.2 million have decreased by approximately $5.9 million since last year and were 59% of revenue. The majority of the decrease is due to the reduced size of our workforce, down from 318 employees at this time last year to 281 as of September 30. Distribution, servicing and custody expenses decreased by 20% when compared to last year as a result of both reductions in funding collective assets as well as our mutual fund fee restructure project that was completed in March of 2019. Other operating expenses have decreased by $4 million compared to last year. The decrease is attributable to a number of factors, including the reduction of the overall size of our workforce, the operational changes resulting from COVID and the operating expense reduction recognized this quarter that I mentioned earlier. As a result, on a GAAP basis, we reported pretax income for the first 9 months of the year of $8.2 million. When adding back our strategic restructuring costs, we reported economic income of $10.2 million and economic net income of $8.7 million. Economic net income per share using our weighted-average adjusted share count through September 30 approximately 50 million adjusted shares outstanding is $0.17. And on a pro forma basis, that would be $0.39 per share, based on our current share count. Turning to the balance sheet, we reported approximately $76 million of cash and investments with no debt as of September 30. The increase since June 30 is driven by cash from operations, including earnings during the quarter adjusted for noncash items and changes in operating assets and liabilities. There were no significant changes to the adjusted share count during the quarter. As a reminder, following the redemption completed in May, we are reporting adjusted shares outstanding of approximately 22 million shares, which includes about 16.4 million Class A shares outstanding, 2 million private units held by legacy shareholders and unvested stock awards issued under our long-term incentive plan. As of September 30, our employees and directors own approximately 30% of the adjusted shares outstanding. I'll conclude with some thoughts on 2021, but before doing so, I'd like to reflect on what has been accomplished throughout 2020. First and foremost, we have achieved outstanding returns for our clients over the first 10 months of the year. The volatility resulting from COVID-19 created a market environment that allowed us to demonstrate the value that active management can provide to investors. These results, along with improved sales and service processes, has helped us to again reduce the rate of net client outflows while gaining traction with prospects across channels. Meanwhile, we've made significant enhancements to our technology infrastructure and overall business workflow and we took a significant step in improving our corporate structure through the accretive redemption that took place in May. The fact that these accomplishments have taken place in the midst of a global pandemic is a testament to our team, and we thank all of our employees for their efforts this year. As most everyone on the call can probably attest, 2021's potential is at least somewhat tied to what happens with COVID-19 and the outcome of the election. Further stabilization of our AUM, which is obviously related to the performance of equities around the world and continued improvement in gross client inflows and overall net flows, are critical to improving financial results. We anticipate further margin improvement in 2021, albeit short of the stated longer-term target of $20 million of operating income. We expect to have further headcount reductions even as we continue to add to our sales team. Fixed compensation costs and overall operating expenses should continue to decrease, though those decreases will be at least partially offset by noncash expenses such as stock-based compensation as well as depreciation and amortization related to prior year expenditures from our digital transformation. Our cash position, which obviously is not impacted by these noncash charges, should continue to increase throughout the year. In conclusion, our strategic priorities for 2021 are largely centered around continuing or finishing the work that's already underway. We will continue to prioritize results for clients, which means prioritizing our people. Our investment team, under Ebrahim Busheri's direction, has done a tremendous job for our clients, and ensuring that our firm attracts and retains top talent is central to this. We will drive increased sales productivity through the traction we have gained this year. Gross client inflows are on track to be in line with last year despite the fact that COVID-19 travel restrictions have hampered sales efforts through the first 3 quarters of this year. Our performance, our advisory service offerings and our pricing allows us to create differentiation within the channels that we distribute. And we'll finish the job of tearing out our outdated technology and partnering with best-in-class technology partners to improve the experience for both our clients and our employees. Our new technology will provide a foundation for achieving additional operational efficiencies and improvement in our operating margins. That concludes today's call. If you have any questions on the topics addressed today, please contact us using the inquiries portal on the Investor Relations website, and we will promptly address your questions. Thank you for listening and for your interest in Manning & Napier, and I'll now turn the call back over to the operator. Operator? -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.