Janus Henderson Group plc (NYSE:JHG) Q4 2023 Earnings Call Transcript
Janus Henderson Group plc (NYSE:JHG) Q4 2023 Earnings Call Transcript February 1, 2024
Janus Henderson Group plc beats earnings expectations. Reported EPS is $0.82, expectations were $0.56. Janus Henderson Group plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Jordan and I'll be your conference facilitator today. Thank you for standing by and welcome to the Janus Henderson Group Fourth Quarter and Full Year 2023 Results Briefing. All lines have been placed on mute to prevent any background noise. After the speakers' 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 risks factors' sections of the company's most recent Form 10-K and other more recent filings made with the SEC.
Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you. Now it's my pleasure to introduce Ali Dibadj, Chief Executive Officer of Janus Henderson. Mr. Dibadj, you may begin your conference.
Ali Dibadj: Welcome everyone and thank you for joining us today on Janus Henderson's fourth quarter and full year 2023 earnings call. I'm Ali Dibadj and I'm joined by our CFO, Roger Thompson. In today's call, I'll start with some comments on the year. Roger will then go through the results and after that I'll provide an update on the strategic progress we made in 2023. After those prepared remarks, we'll take your questions. Turn to Slide 2. After one of the most challenging market backdrops in 2022, most global markets rebounded and experienced growth in 2023 as concerns about inflation, progressive monetary policy, recession fears, and shocks to the banking system in early 2023 were overshadowed by inflation coming off peak levels, resilient economies, particularly in the U.S., the expectation of the end of rate hikes.
Even with positive market returns for the year, headwinds remain as global markets look set to remain conflicted with the consequences of historic rate hikes finally manifesting themselves. Amidst this volatility, we ended the year strongly with fourth quarter results that delivered underlying net flows, revenue, operating expenses, margin and EPS that were all ahead of or in line with external expectations. And on top of that, our teams delivered better than anticipated performance fees and tax rate. As I reflect upon the year, there were several signs of clear progress at Janus Henderson. This progress was the result of the collaboration, hard work, and perseverance of colleagues across the firm and as a squarely on the path to achieving our ambitions of organic growth and delivering superior outcomes for our clients, their clients, colleagues, shareholders and other stakeholders.
We're executing our strategic vision, which consists of three pillars: protect and grow our core businesses, amplify our strengths not fully leveraged, and diversify where clients give us the right to win. Later on in the presentation, I'll provide detail on the progress made for some of our strategic initiatives. 2023 net outflows of $700 million improved markedly from 2022 net outflows of $31 billion. The improvement was driven by lower redemptions and large wins in global institutional and a turnaround in the North American intermediary business, both of which are strategic initiatives that we've emphasized at Janus Henderson and previously discussed here. In early 2023, we re-energized our culture by introducing our mission, values, and purpose company-wide, and we continue to embed this critical mindset across the firm.
Cost efficiencies or fuel for growth, which allow for reinvestment in Janus Henderson's strategic initiatives on behalf of our clients were realized at a faster pace than expected and at a higher dollar amount. We achieved run rate cost efficiencies of more than $50 million by the end of 2023 compared to the original $40 million to $45 million by the end of 2024. All of these cost savings have been or will be reinvested in the business. We simplified our operating model with the go-live of a significantly upgraded order management system, which transformed a crucial platform, and we delisted from the ASX allowing us to focus on a sole more active exchange and reduce costs. Our improved financial results and cash flow generation, along with a strong and stable balance sheet, enabled the board to authorize a shared buyback program.
This buyback program, coupled with our quarterly dividend, enabled Janus Henderson to return $321 million of cash to shareholders in 2023. Importantly, this return of cash to shareholders does not impede our pursuit to diversify the business through M&A where clients give us the right to do so. The 2023 results on Slide 3 illustrate how our improvements in the business are starting to bear fruit. Long-term investment performance remains solid with the majority of assets ahead of benchmark on a three, five and ten year basis. Total AUM increased 17% in 2023, mostly reflecting strong fourth quarter markets and currency translations. Ending AUM of $334.9 billion is 7% higher than the 2023 average AUM. As discussed on the previous slide, net flows showed tremendous progress during 2023, resulting in an organic growth rate of less than negative 1%, compared to negative 8% in 2022.
Financial results remain solid. Our financial performance and strong balance sheet continue to provide us the flexibility to invest in the business organically and inorganically and return cash to shareholders. I'll now turn the call over to Roger to run into the detail of the quarterly financial results.
Roger Thompson: Thank you, Ali, and thanks again to everyone for joining us on today's call. Starting on Slide 4, I'll look at the quarterly results. As Ali has already discussed our solid investment performance, I'll touch briefly on AUM, flows, and EPS. Net outflows were $3.1 billion in the quarter, however, ending AUM was up 9% from Q3 and adjusted financial results improved compared to the third quarter. Adjusted earnings per share increased 28% to $0.82, compared to the prior quarter as fourth quarter, EPS benefited from the stable management fee rate, strong annual performance fees and a lower tax rate. Even without the upside from the better-than-expected performance fees and a lower tax rate, our core fundamentals, including flows, net management fee rate, revenues, expenses, operating income and EPS were either ahead of or in line with Street expectations.
Finally, on this slide, the board declared a $0.39 per share quarterly dividend and we purchased $62 million of our shares outstanding as part of the buyback program announced last quarter. On Slide 5, we'll look at the investment performance in more detail. Long-term investment performance versus benchmark remains solid, with at least 60% of AUM beating their respective benchmarks over the three-, five- and ten-year time periods. The lower one year number is driven by our equity and multi-asset capabilities. In Equities, the one year performance is impacted by the narrow leadership driving market gains in the U.S. and the low quality rally for small and midcap growth stocks, which weighed on relative returns to benchmarks in the fourth quarter.
In the Multi-asset capability, the balance strategy, which is the vast majority of assets in this bucket, is marginally underperforming the benchmark on a one year basis. Balance remains ahead of its benchmark over the three-year and longer time periods, and the performance is strong against peers being in the second Morningstar quartile over one and three years and in the first quartile over both five and ten years. The balanced composite performance has had a strong start to 2024 and as we sit here today, is back above its benchmark on a one year basis. Short-term fixed income performance versus benchmark has steadily improved during 2023. Pleasingly 79% of AUM is now ahead of benchmark on a one year basis. The longer term periods remain very strong.
We believe our fixed income performance and differentiated breadth of products across different vehicles and regions positions us well for the anticipated movement into fixed income as interest rates stabilize and bonds provide diversification benefits to clients. Overall investment performance compared to peers continues to be competitively strong with 63%, 68%, 80% and 89% of AUM in the top two Morningstar quartiles over the one-, three-, five- and ten-year time periods. Slide 6 shows total company flows by quarter. For the quarter, net outflows were $3.1 billion. And we show flows by client type on Slide 7. Net outflows for the intermediary channel will break even compared to $1.3 billion of outflows in the third quarter. This is the best quarterly result for intermediary in over two years.
The quarterly result was a tale of two regions as outflows in EMEA and LATAM were offset by net inflows in U.S. intermediary region. Outflows in EMEA were not unique to Janus Henderson in 2023 as EMEA in general has faced meaningful flow headwinds. U.S. intermediary had its best quarter of flows in four years, supported by strong gross sales and positive flows in several strategies, including the AAA CLO ETF, mortgage-backed security ETF, multi-sector income and our Short Duration Income ETF. Pleasingly, we captured market share during the quarter and for the full year 2023. As we've spoken about previously, U.S. Intermediary is a key initiative under our Protect & Grow strategic pillar. We're encouraged by the results for the quarter and for the year.
Ali will provide further details on the progress we've made in U.S. intermediary later in the presentation. Institutional net outflows were $2 billion for the fourth quarter compared to $400 million in the third quarter. In line with our previous comments, after large mandate fundings in the first half of the year, we were not anticipating large fundings during the quarter. We are pleased, though, with the work our distribution team is doing to build a sustainable pipeline, but as we've said, it will take time. Net outflows for the self-directed channel, which includes direct and supermarket investors, were $1.1 billion compared to $900 million in the prior quarter. The increase in net outflows is primarily due to seasonal, year-end tax planning in the U.S. Slide 8 is flows in the quarter by capability.
Equity flows were negative $3.2 billion in the fourth quarter, compared to negative $2.3 billion in the third quarter and negative $7.5 billion a year ago. The environment for active equities remains challenging across all regions. Net inflows of fixed income were $1.7 billion, bringing total net flows to a positive $7.2 billion for 2023. We're encouraged by the improvements in short-term investment performance to go along with our solid longer-term investment performance in fixed income, and we believe we are well positioned to capture flows if an industry rotation into fixed income occurs in 2024. Several strategies contributed to positive fixed income flows, including our fixed-income ETFs, which had positive flows of $3.2 billion in the quarter.
Other strategies contributing to positive flows for the quarter were multi-sector credits, U.S. buy and maintain credits, and global multi-sector fixed income. Total net outflows for the multi-asset and alternatives capability were $1.4 billion and $200 million, respectively. Moving on to the financials, Slide 9 is our U.S. GAAP statement of income, and on Slide 10 we explain the adjusted financial results. Adjusted revenue increased 12% compared to the prior quarter due to higher performance fees partially offset by lower average AUM. Average AUM in Q4 was $315 billion but period end AUM was $335 billion, giving a tailwind into Q1. Fourth quarter performance fees of $42 million include annual performance fees of $58 million generated primarily from a number of funds and capabilities with December 31 crystallization dates, the largest of which is our healthcare franchise, partially offsetting this revenue was negative $17 million from the U.S. mutual fund performance fees.
Net management fee margin was 48.7 basis points, consistent with the prior quarter. Our full year net management fee margin of 48.9 basis points was down by less than 1 basis point compared to 49.6 basis points in 2022. The slight decline was primarily due to large lower fee institutional fundings in the first half of the year. Continuing on to expenses, adjusted operating expenses in the fourth quarter were $299 million, an increase of 7% compared to the prior quarter. Adjusted employee compensation, which includes fixed and variable costs was up 4% compared to the prior quarter, as higher incentive costs on higher revenues was partially offset by lower fixed compensation. Adjusted LTI was up 18% compared to the third quarter, largely due to mark-to-market on mutual fund awards.
And in the appendix, we’ve provided the usual table on the expected future amortization of existing grants, along with an estimated range for the 2024 grants for you to use in your models. The fourth quarter adjusted comp to revenue ratio was 42.9% and our full year comp ratio was 45.8% in line with expectations which we previously provided. Adjusted non-comp operating expenses increased 8% compared to the prior quarter, primarily due to higher G&A expenses. On a year-over-year basis adjusted non-comp expenses increased 2.5% compared to our revised expectation of percentage growth in the mid-single digits, reflecting our commitments to strong cost management. Adjusted operating income increased 25% over the prior quarter to $156 million in the fourth quarter, and our fourth quarter adjusted operating margin improved over 300 basis points to 34%.
Adjusted diluted EPS was $0.82 up 28% from the prior quarter and up 34% from the same quarter a year ago. Fourth quarter adjusted diluted EPS primarily reflects higher operating income coupled with a lower tax rate. With respect to 2024 expense expectations, having fully delivered on our fuel for growth targets, we’ve identified further fixed compensation and non-compensation operational efficiencies, and as a result, we anticipate a compensation ratio in the range of 43% to 45%, down from almost 46% in 2023. For non-compensation, we anticipate percentage growth of mid to high-single digits as a result of investments supporting our strategic initiatives, as well as inflation and advertisation. To offset where we can, we’ll continue to be mindful of our discretionary cost base and be disciplined in our cost management.
Net-net, we’re comfortable with external expectations of our 2024 total operating expense dollar costs. Finally, we expect the firm’s tax rate on adjusted net income attributable to JHG to be in the range of 23% to 25%. Skipping over Slide 11 and moving to Slide 12 and a look at our liquidity profile. Our capital position remains strong. Cash and cash equivalents were $1.1 billion as at the December 31, which is roughly flat to the end of last year, as excess cash flow generation was used to fund our quarterly dividend and to repurchase 2.3 million shares for $62 million in the fourth quarter. This return of excess cash is consistent with our capital allocation framework. We’ll look to return capital to shareholders where there isn’t an immediately more compelling investments, either organically or inorganically in the business.
The Board has declared a $0.39 per share dividend to be paid on February 28 to shareholders of record as at the February 12. In summary, 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. Finally, Slide 13 looks at our annual return of capital to shareholders. We’ve been disciplined in consistently returning excess capital to shareholders as this historical data reflects. Since 2018, we’ve returned over 70% of our cash flow from operations, or $2.5 billion to shareholders in the form of our quarterly dividends and accretive share buybacks. Our dividend has increased 11% and we’ve reduced shares outstanding by 18.5% since our first accretive buyback program commenced in the third quarter of 2018.
In 2023, we returned 73% of our cash flow from operations to shareholders, including $259 million in dividends and $62 million in buybacks. Our capital allocation philosophy has not changed. We reserve cash for our regulatory capital requirements and liquidity needs and then set aside capital for contractual obligations. We then look to utilize cash flow organic and inorganic reinvestment in the business and then consider returning excess cash via dividends and share repurchases. Our return of capital reflects our positive financial outlook, our cash flow generation and a strong and stable balance sheet. Our buybacks and stable dividends do not impair our ability to execute M&A should the opportunity arise, and we continue to actively look to buy, build or partner to diversify where clients give us the right to win.
With that, I'd like to turn it back over to Ali to give an update on our strategic progress.
Ali Dibadj: Thanks, Roger. Turning to Slide 14 and a reminder of our three strategic pillars of Protect & Grow our core businesses, Amplify our strengths not fully leveraged, and diversify where clients give us the right to win. We are in the execution phase and we believe this strategic vision will lead to consistent organic revenue growth over time. Over the next few slides, I'll highlight the progress being made across the three pillars. Moving to Slide 15, which describes the investment and efforts in the U.S. intermediary channel, which are leading to improve business trends. In Protect & Grow, we've talked previously about the importance of protecting and growing our U.S. intermediary business, which is Janus Henderson's largest client segment.
In 2023, we set the foundation for this channel, made several investments, including launching an award winning national brand campaign, selectively upgrading talent and aligning compensation with our growth strategy. We also increased the pace and quality of client engagements. These changes are allowing us to be on the front foot with our intermediary clients and their clients. The progress in U.S. intermediary is tangible. Net flows were positive for this channel for the first time in seven years, resulting in a 1% organic growth rate, a tremendous result given industry headwinds. Very importantly, we're capturing market share in both gross sales and net flows, reversing a trend of losing market share for many years. While there's always much work to do, the U.S. intermediary business is a great example of our ability to create and execute on a strategic plan in a specific area to drive culture change and improve results.
As we move into 2024, we'll expand our strategic efforts to the EMEA and Latin American intermediary segments. Slide 16 details the meaningful progress made under the strategic pillar of Amplify. Within Amplify, we've previously discussed our institutional and diversified alternatives businesses and our product development and expansion efforts. In the institutional business, flows are positive for the first time since 2018 at $7 billion of net inflows compared to $14 billion of net outflows in 2022. This improvement was driven by increased gross sales and reduced gross redemptions. We've restructured coverage to be more aligned to different client types, helping us to serve their needs better through greater specialization and we're seeing a number of consultant advised wins, which is critical to the future growth of the institutional business over time.
Diversified Alternatives, which includes multi-strategy hedge funds and enhanced index funds, generated positive flows and over 35% AUM growth in 2023. Our suite of active ETFs experienced a very successful year. Net flows were a positive $6 billion and AUM finished the year at $12 billion, equating to an annual growth rate of 65% since 2018. With this growth, Janus Henderson is now the fourth largest provider of active fixed income ETFs in the U.S. Impressively, during 2023, roughly one out of every $5 net invested into an active fixed income ETF went to Janus Henderson. We have momentum in active ETFs and we aim to do more in the space in 2024. In 2023, we established several new products and vehicles based on what our clients are telling us.
We launched Global Life Sciences and the Global Properties Equities Fund as OX [ph], a securitized income ETF and a sustainable credit ETF, an emerging markets innovation fund and a CCAP and additional SMA strategies in the U.S. Turning to Slide 17, our third pillar of diversify. We continue to look to actively buy, build or partner to diversify where clients give us the right to win. The M&A pipeline is active with several opportunities and we're going to be very disciplined in our approach. In 2023, we began a joint venture, Privacore that looks to take advantage of the democratization of private alternatives into the retail channel. Privacore’s mission to partner with the best-in-class managers of alternative investments, paired with extensive relationships at warehouses, broker dealers and RIAs, creates value on both ends of the value chain, accelerating GP fundraising and bringing differentiated institutional quality investment opportunities to set of clients that are notably under allocated to our alternatives today.
I'm excited to say that we remain on track with building out the Privacore business and Privacore will be distributing its first product this quarter. Privacore has grown to 21 employees and has hired its regional distribution team serving the U.S. Finally, our emerging markets debt team, which was brought into Janus Henderson in September 2022, had positive flows in 2023 and AUM has grown to more than $1 billion. Another focus in 2023 was the reenergizing of our culture through our mission, values and purpose or MVP, that we rolled out companywide and is shown on Slide 18. I am a firm believer that a strong MVP is essential to the success of a company. My experience and the facts prove it. We introduce our MVP to define who we are and what we stand for as a collection of individuals and as a firm, not just for today, but for what we want to be in the future.
It gives us a clear north star and this is critically important as we augment our culture of performance, collaboration, urgency and accountability built upon our stable and client focused D&A at Janus Henderson. Our MVP, coupled with our strategy on a foundation of cost efficiencies, guides our decision making and prioritization and allows all colleagues to move together in the same direction to help us win in this competitive landscape. I've been extremely encouraged by how quickly colleagues have embedded our mission, values and purpose into the work, and by the clear signs of progress across the firm. Moving to Slide 19, which is an illustrative view of our strategy and where we believe it can take us. We are executing our strategic plan and believe our strategy will lead to organic revenue growth over time.
Success will not happen overnight and progress will not be linear. Even so, there is real progress in all three pillars of our strategic framework, as evidenced by U.S. intermediary in protecting growth, institutional diversified alternatives and product development and expansion in amplify and Privacore in diversify. The undeniable advancement of our strategy, culture and execution in 2023 has Janus Henderson squarely on the path to delivering desired results for our clients, shareholders, employees and all our other stakeholders. Now wrapping up on Slide 20. I'm proud of the progress made in 2023 and I want to thank each and every one of my colleagues at Janus Henderson for their hard work and dedication as we continue to show real progress on our strategic path to deliver consistent, organic growth.
We are not at our destination yet, but we are clearly on our way. Progress is evident across several aspects of the business. Net flows improved markedly over last year. We reinforced our culture by introducing mission, values and purpose and embedding it companywide, we achieved run rate cost savings efficiencies of over $50 million sooner and at a higher dollar amount than expected. This fuel for growth allows for reinvestment in Janus Henderson's strategic initiatives on behalf of our clients and their clients. We've simplified our operating model. We have a strong balance sheet and good free cash flow generation, which enables us to return cash to shareholders and reinvest in the business. Looking ahead, our focus continues to be helping clients define and achieve superior financial outcomes and to deliver desired results for our clients, shareholders, employees and all our stakeholders.
I'll now turn the call over to the operator for questions.
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