Janus Henderson Group plc (NYSE:JHG) Q3 2023 Earnings Call Transcript

Janus Henderson Group plc (NYSE:JHG) Q3 2023 Earnings Call Transcript November 1, 2023

Janus Henderson Group plc beats earnings expectations. Reported EPS is $0.64, expectations were $0.54.

Operator: Good morning. My name is Lauren and I'll be your conference facilitator today. Thank you for standing by and welcome to the Janus Henderson Group Third Quarter 2023 Results Briefing. All lines have been placed on mute to prevent any background noise. After the speakers' 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 risks factors' sections of the company's most recent Form 10-K and other more recent filings made with the SEC.

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Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you. Now it is 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 third quarter 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 thoughts on the quarter before handing it over to Roger to run through more details. After those prepared remarks, we'll take your questions. Turning to Slide 2, global markets were volatile during the third quarter as headwinds including rising global bond yields due to a higher-for-longer interest rate environment and certain economic outlook, geopolitical unrest, and stubborn inflationary pressures are contributing to challenging market conditions. Even with the market downturn in the quarter, Janus Henderson delivered good quarterly results.

Investment performance remained solid with the majority of assets ahead of benchmark on a one, three, five, and 10-year basis. Assets under management decreased 4% to $308.3 billion. However, it remained up 7% since the beginning of the year. Third quarter flows were negative $2.6 billion, a better result compared to the range we communicated on last quarter's earnings call. As I said on the previous earnings call, our institutional pipeline needed time to mature and our retail flows continue to be negative. We saw both of those factors play out in net flows in the third quarter, but a little better than we expected as we gained share. The other item I spoke about was a few pockets of internal transition that will make us a stronger firm for the long-term but could negatively impact our flows in the short-term.

Transitions such as these can create uncertainty with flows and how clients react. I am pleased that given the trust clients have placed in us, along with the efforts and dedication of our investment and distribution teams, we did not experience significant outflows related to these internal transitions during the third quarter. Looking at the broader flow picture, our 2023 year-to-date flows are still positive at $2.4 billion, a marked improvement from the almost $20 billion of outflows during the same period of 2022. We continue to be on pace to show great improvement for last year's total annual net flows of negative $31 billion. Our financial results remained solid, better top-line, lower expenses, and non-operating benefits delivered adjusted diluted EPS of $0.64, better than both last quarter and the third quarter of 2022.

Our financial performance and strong balance sheet continue to provide us the flexibility to invest in the business both organically and inorganically and return cash to shareholders, which I'll talk more about in a moment. Turning to Slide 3. I wanted to touch briefly on progress being made in the business. We continue to be in the execution phase of our strategic vision, which consists of three pillars, protect and grow our core businesses, amplify our strengths not fully leveraged, and diversify where clients gives us the right to win. In Protect & Grow, we've talked previously about the importance of protecting and growing our U.S. intermediary business and have been investing in and supporting this channel. As you know, we've recruited a new Head of the North American Client Group, launched a national brand campaign, selectively upgraded talent, aligned compensation with our growth strategy, and 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 showing up in results. In aggregate, third quarter flows in North America intermediary were positive for the first time in over three years. Net flows into the Advisor Group have been positive in each quarter of 2023, which up until now had been offset by negative flows in the retirement channel, reflecting changing demographics in a softening economy. Very importantly, we are capturing market share in this important market. Under Amplify, we've previously talked about our institutional and diversified alternatives businesses and our product development and expansion efforts. Our product expansion efforts include the launch of the successful Global Life Sciences strategy and [indiscernible] during the third quarter.

In product development, a successful example is our suite of active ETFs that has grown by over 50% annually since 2018 and had nearly $9 billion in AUM at the end of the third quarter. With this growth, Janus Henderson is now the fifth-largest provider of active fixed-income ETFs in the U.S. with more to come from us. In the institutional business, which is over $8 billion of positive flows year-to-date, we've restructured coverage to be more aligned to different client types, helping us to serve their needs better through greater specialization. We completed the majority of appointments and we're seeing a number of consultant advised wins, which is vital to the future growth of the institutional business over time. Under our Diversify pillar, we continue to look actively to buy, build, or partner to diversify where clients gives us the right to win.

As an example, last quarter, we announced a joint venture, Privacore, to look to take advantage of the democratization of private alternatives into the retail channel. We remain on track with building out the Privacore business with the target of being fully operational by year-end and in the market in early 2024. We're enhancing our culture with our new mission, values, and purpose. Those are critically important as we augment our culture of performance, collaboration, and accountability, built upon our stable and client-focused processes at Janus Henderson. Fuel for Growth, which allows for reinvestment in Janus Henderson's strategic initiatives on behalf of our clients, has been realized at a faster pace than expected and at a higher dollar amount.

We expect run-rate cost efficiencies of $50 million by the end of 2023 compared to the original $40 million to $45 million by the end of 2024. All of this cost savings has been or will be reinvested in the business. As part of Fuel for Growth, we announced earlier today our intent to delist from the ASX. With 95% of shares and a significant portion of the trading volume on the New York Stock Exchange, this move will allow Janus Henderson to focus on a sole exchange, reduce costs, and simplify the structure as we continue to invest in Australia and the APAC region as a key growth market for us. Our improving financial results and cash flow generation, along with a strong and stable balance sheet have enabled the Board to authorize a share buyback program of up to $150 million to be completed by April 2024.

I want to stress that this new buyback does not change our desire and pursuit to diversify our business through M&A and where clients want us to do so. At this stage, our liquidity profile allows us to do both. Wrapping up, 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're still seeing the opportunity for improvement. Our financial results are solid, we're generating good cash flow. We have a strong and stable balance sheet. I'll now turn the call over to Roger to run you through the financial results.

Roger Thompson: Thank you, Ali, and thank you again to everyone for joining us on today's call. Turning to Slide 4 on investment performance. Investment performance versus benchmark remained solid, with the majority of assets beating their respective benchmarks over all time periods. In equities, the one and five-year performance versus benchmark improved compared to a year ago. Most notably on the one-year basis, where 83% of AUM is now beating benchmark compared to only 42% a year ago. Short-term fixed-income performance versus benchmark continues to improve and is now at 56% of AUM ahead of benchmark on a one-year basis. The longer-term periods remained very strong. Our improving fixed-income performance and differentiated breadth of products across different vehicles and regions, an example being our active fixed-income ETF strength that I just mentioned, that positions us really well for the anticipated movements into fixed income as interest rates stabilize and bonds provide diversification benefits to clients.

In the multi-asset capability, the balanced strategy, which is the vast majority of assets in this bucket, switched to underperforming the benchmark on a one-year basis, but only by 1 basis point. Balance remains ahead of its benchmark over three-year and longer time periods and is in the top Morningstar quartile over the five and 10-year time periods. Investment performance compared to peers continues to be competitively strong, with 75%, 60%, 79% and 87% of AUM in the top two Morningstar quartiles over the one, three, five, and 10-year time periods. Looking further into performance, equities have 64% of AUM in the top quartile on a one-year basis, a great result and a testament to the ability of our world-class investment team to deliver differentiated insights and investment discipline in these extremely challenging market conditions.

Slide 5 shows company flows. As I mentioned, net outflows were $2.6 billion in the quarter, which is consistent with our messaging last quarter and reflects the continuation of net outflows in retail and less institutional gross sales as we continue to mature the pipeline following the funding of several large mandates in the first half of the year. Year-to-date net inflows of $2.4 billion demonstrate a significantly improving trend compared to 2022. Turning to Slide 6 for a look at flows by client type. Net outflows and for the intermediary channel improved to $1.3 billion compared to $1.6 billion in the second quarter. The quarterly outflows from the EMEA and LATAM regions, as higher interest rates, inflation, and recessionary fears are weighing on flows.

Janus Henderson is not unique and the EMEA industry in general has experienced a challenging flow environment with meaningful year-to-date net outflows across most regions. U.S. intermediary flows were slightly positive, supported by strong positive flows from several strategies, including the AAA CLO ETF, our mortgage-backed security ETF, and U.S. mid-cap growth. As Ali discussed and we've spoken about previously, U.S. intermediary is a key initiative under our Protect & Grow strategic pillar, and we're pleased that we had positive flows this quarter. Our year-to-date flow results have improved by over $5 billion compared to the same period a year ago, and that we are capturing market share. Institutional net outflows were $400 million in the third quarter, in line with our comments from last quarter's call.

Following onto the large inflows that we had in the first half of the year, we were not anticipating large fundings in the third quarter. Our distribution team is working to build a sustainable pipeline and it will take time. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors were $900 million. Slide 7 is flows in the quarter by capability. Equity flows were negative $2.3 billion in the third quarter compared to breakeven in the prior quarter. The environment for active equities remained challenging across all regions. Despite the outflows, we're encouraged that U.S. equities captured market share during the quarter. Net inflows for fixed income were $900 million, taking net positive flows to $5.5 billion year-to-date.

We are encouraged by the steady improvement in the short-term investment performance to go along with our solid longer-term investment performance in fixed income. Several strategies contributed to positive fixed-income flows, including our fixed-income ETFs which had positive flows of $1.4 billion in the quarter. Other strategies contributing to the positive flows for the quarter were the U.S. buy and maintain credit, multi-sector credit, and Australian fixed-income strategies. Total net outflows for the multi-asset and alternatives capabilities were $700 million and $500 million respectively. Moving on to the financials, Slide 8 is our U.S. GAAP statement of income, and on Slide 9, we explain the adjusted financial results. Adjusted revenue increased 1% compared to the prior quarter, as increased management fees on higher average AUM were partially offset by lower performance fees.

Net management fee margin for the third quarter was 48.7 basis points compared to the prior quarter of 48.5 basis points. The increase is primarily due to mix shift. Last quarter we told you that we expected the fee rate to be relatively flat in the third quarter, after a decrease in the second quarter due to the large low-fee institutional fundings in the first half of the year. Third quarter performance fees were negative $16 million driven by U.S. mutual fund performance fees of negative $17.5 million. As we sit here today, based on current investment performance, our estimates of aggregate performance fees for the full year remains unchanged towards the negative end of negative $35 million to $45 million. This includes roughly negative $65 million from U.S. mutual fund performance fees.

Clearly, the results will be dependent on future performance. Continuing on to expenses, adjusted operating expenses in the third quarter were $280 million, flat compared to the prior quarter. Adjusted LTI was down 5% compared to the prior quarter, largely due to mark-to-market on mutual fund awards. In the appendix, we've provided the usual table on the expected future amortization of existing grants for you to use in your models. The third quarter adjusted comp-to-revenue ratio was 45.3%, in line with expectations. Adjusted non-comp operating expenses declined 1% compared to the prior quarter, primarily due to lower G&A expenses. Adjusted operating income increased 3% over the prior quarter to $125.4 million in the third quarter. Third quarter adjusted operating margin improved to 31%.

And finally, adjusted diluted EPS was $0.64, up from both the prior quarter and the same quarter a year ago. Updating on our expectations for full-year '23 operating expenses, as Ali mentioned, we now expect to deliver $50 million in Fuel for Growth cost savings to strategically reinvest back into the business. We're pleased with this result, but we will continue to maintain our cost discipline and seek ways to operate our business more efficiently going forward. As we're approaching the end of '23, we are refining our previous guidance. The expected and adjusted compensation ratio remains unchanged in the mid-40s. We've lowered the range of our adjusted non-compensation expense percentage growth compared to the prior year and now expect it to be mid-single-digits.

We've also updated our expected statutory tax rate to approximately 24% from the previous range of 24% to 26%. Skipping over Slide 10 and moving to Slide 11 and a look at our liquidity profile, our balance sheet remains very strong. Cash and cash equivalents increased to $1.1 billion as at the 30th of September, an increase of approximately $150 million, resulting primarily from good operating cash flow generation. 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. Along these lines, as Ali's mentioned earlier, the Board has approved a new share repurchase authorization of up to $150 million to be completed by April 2024.

Our capital allocation philosophy has not changed. The buyback authorization reflects our improved financial outlook compared to where we started the year, better cash flow generation, and a strong and stable balance sheet. I want to reiterate Ali's comments that this buyback authorization does not impair our ability to execute M&A should the opportunity arise. We continue to look actively to buy, build, or partner to diversify where clients give us the right to win. We'll also continue to return cash to shareholders through our quarterly dividend, and the Board has declared a $0.39 per share dividend to be paid on 30th of November to shareholders of record as at 13th of November. With that, I'd like to turn it back over to the operator to open it up for questions.

Operator?

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