Q3 2019 Earnings Call

And I'll be your conference operator today.

At this time I would like to welcome everyone to the Manning and the parent third quarter 2019 earnings Conference call.

Our host for today's call on a coal Tingley printer, Chief Marketing Officer, Mark Mayer, Chief Executive Officer, and public <unk> Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 11 am eastern today.

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And it's now my pleasure to turn the floor over to Mr. coal can see Brenner.

Thank you Maria and thank you everyone for joining us today to discuss many in appears third quarter 2019 for adult.

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.

Maybe 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, they're important factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements.

Manning <unk> Napier assumes no obligation or responsibility to update any forward looking statement.

During this call. Some comments may include reference to non-GAAP financial measure all GAAP reconciliations can be found in our earnings release related FCC filings with that allow me to introduce our chief Executive Officer Centermark Mer Mark.

Thank you Nicole.

I'm going to begin as we always do with a review of our performance for clients and we're pleased to report excellent results across almost the entirety of our suite of investment strategies in a very strong year for both equities and fixed income we have deliberate outstanding absolute results were clients are broadly outperformed so.

Beginning with our multi asset class portfolios or bone solutions posted positive absolute results and outperformed their respective benchmarks across all risk tolerances during the third quarter.

The strong performance builds on what has been a good your as we focus our efforts on delivering the results clients need.

We believe our strategies our performance thus far in 2019 deserves attention.

Embedded in our core investment strategy since their inception, almost five decades ago is a robust risk management framework.

Designed to help us manage downside risk adverse markets and avoid the excesses of speculative bull markets.

Given the unprecedented post financial crisis market wrong, as well was considering where we believe we argue economic cycle, we've chosen to holding more cautious view on risk throughout 2018, and 19, particularly for clients within our polymer solutions.

Despite this more defensive posture evidenced in underway to equities and multi asset class portfolios, we've been able to generate relative outperformance for the vast majority of our clients, reflecting superior equity security selection.

These results are a testament to the inherent flexibility of our research processes and the excellent execution of our research team as it seeks to add value when all equity markets, while maintaining its risk management disciplines.

The results in 2019, or particularly noteworthy in the context of the broad outperformance, we delivered for clients in the difficult fourth quarter of 2018.

Each of our fundamental all equity portfolios outperformed interest bets with benchmarks.

For the quarter within the U.S., our equity series delivered positive results for the period on an absolute basis and for the full year. The fund has moved ahead of its benchmark by over 250 basis points. It was up 23% that's at the end of September .

Internationally equity markets were down for the quarter, but are up significantly for the full year.

We're pleased with our relative results and on a year to date basis or overseas series ended the quarter ahead of its benchmark by over 450 basis points.

After a challenging start to 2019, our disciplined value strategy has returned to paper in the third quarter, both our disciplined value unrestricted at U.S. composite outperformed their respective benchmarks for the period modestly closing their relative performance gaps here to date. These strategies continue to demonstrate a stellar intermediate to longer.

Or term track record.

Performance for the disciplined value series ranks in the top decile of its Morningstar peer group on both the three and five year basis.

Our Rainier international small cap team experienced a more difficult third quarter trailing its benchmark by 346 basis points and we're turning negative absolute results. Despite the challenging quarter. The fund has delivered robust absolute results year to date and remains well ahead of its benchmark in 2019.

Outperforming by a strong 319 basis points.

Performance remains equally impressive over longer time periods and over the trailing three in five years. The Rainier International Discovery series is ahead of its benchmark by an annualized 160, and 325 basis points respectively.

Turning to fixed income.

Our team continues to generate strong absolute results in what has been a remarkably strong year for fixed income certainly relative to brought expectations at the beginning of the year.

Interest rates fall long term performance becomes an increasing challenge for bondholders, which is why we believe our flexible to based approach remains appealing to a wide array of investors.

That's an example, our high yield series has delivered strong absolute results and ranks the top quintile of its Morningstar peer group on both the three and five year basis.

It is always challenging to forecast market environments in the future.

Our research processes are highly flexible dynamic non style specific very focused on risk management and most importantly time tested over many cycles during almost 50 years.

We're confident that our research will continue to deliver the required long term outcomes for all types of clients over the range of potential markets in the future by way of example, our flagship long term growth portfolio has a track record that goes back to January 1973.

Over the past 46 years this globally diversified dynamically allocated multi asset class portfolio has compounded at 9.4% per annum after fees.

Good thousand dollars invested in January 1973, it's worth $6.6 million today.

[noise] I'd like to put some context around our strong recent performance.

As mentioned last quarter, we are in the midst of rolling off some difficult periods during the fourth quarter, specifically, our three year track Records, we'll be rolling off one of our most challenging quarters and our five year track records are continuing to work through a difficult multi quarter stretch a number of years ago.

Of course, our track record will be influenced by upcoming performance as well.

As Paul will discuss in more detail, we're closing a number of sub scale or underperforming investment strategy and vehicles.

We'll have a de minimis impact on revenues, we're making associated reductions in our research staff.

Well the M prove the investment results we've achieved for clients have been good we recognize the need to improve results for shareholders.

We continue to see net outflows in all our businesses in spite of our investment results.

Including the previously disclosed termination of our largest sub advisory relationship during October .

Although our operating margin is up from the second quarter 2019 at 10% it is simply too low.

We have been taking action on costs and we'll continue to do so.

But it is important to note as we have in the past that's substantial spending to completely overhaul. Our IP infrastructure will continue to pressure margins through 2020, despite reductions in headcount and compensation expense.

Our balance sheet is a strength with over $150 million in cash and short term investments and no debt.

It affords us the opportunity to complete these necessary enhancements.

We are confident that on the other side of the technology spend we will have a modernized future proof infrastructure, enabling a nimbler leaner less complicated enterprise a meaningful advance from the current state.

As I've done on our past few calls I'd like to provide an update on our firm wide strategic initiatives over the last quarter, we made significant strides to approve our organizational readiness.

We believe these efforts will help us realize efficiencies, while positioning us better for future growth.

As stated last quarter, we will build on our historic strength as a wealth manager.

In August we established our wealth management leadership team comprised of Greg what are managing director of wealth management, who is leading our team of advisors Megan Henry President of the exit or Trust company, Mark Macpherson, managing director of wealth management strategy and data Vosburg, managing director of Advisory services.

This is a formidable team of seasons Manning and Napier colleagues and I am excited for the direction, they're bringing to this important initiative.

Our wealth management business has always been at the heart of who Manning and Napier is as a firm and we fully intend to revitalize our growth efforts in this area. We believe that the wealth management businesses, both attractive given its good growth dynamics and less be sensitive characteristics.

And closely aligned with how we intend to evolve as a farm.

The needs of future generations are different from those that came before and we must expand our capabilities and improve our client experience in order to meet those changing demands.

As we enhanced our wealth management offering to build a sustainable business for the future we expect to leverage Keith historical strengths. Our investment track record is excellent compelling and a key differentiator peers.

Our advisory services provide financial planning and trust in a state services to individuals and families as well as sophisticated strategies for endowments foundations and retirement plans.

Our lasting relationships with clients are a testament to the ongoing value we provide.

We're in the midst of holding points seminars in our major markets for many hundreds of clients.

A large number have been clients for decades, and the relationships often span generations as well as both business and personal interest for many families.

Our intermediary and institutional businesses with the majority of the latter being with Taft Hartley clients are making important strides in refining their focus under the leadership of Aaron Mcgreevey.

We have a long history of providing third party financial advisors with comprehensive investment solutions with our multi asset class strategies.

Okay, very large install base of multi asset class and single asset class portfolios with external advisors, and we will refocus to grow this cohort while working to develop new advisor relationships any tightly focused manner.

Further we are now leveraging the differentiated efforts of our advisory services group to help third party advisors with our insights.

We also have a large number of Taft Hartley relationships.

Many of very long duration.

We are focused on the key Taft Hartley consultants with whom we have clients in common working to advance opportunities, where we can while defending the base of business.

During the quarter, we realigned certain stewardship functions to improve the nimbleness of our organization and reallocate resources towards our digital technology transformation.

Scott Moore Beto has been named managing director of operations. He is a crucial change agent and the evolution of our infrastructure.

Together with our Chief Technology Officer, Chris Brilique, we continue to work closely with an industry, leading consultant on overhauling our technology approach.

The review portion of this initiative has been completed and we're in the process of formulating detailed next steps with specific business partners nor to put this plan into action.

Overtime, we expect our technology transformation to realize significant cost efficiencies as well as create a substantially better client experience.

Before turning the call over to Paul I'd like to reinforce that continued pressure on our financials should be expected through 2020, as we reinvest in critical areas of need.

Three key areas of focus our research processes sales initiatives and technology and operations transformation are vital to rebuilding the long term health and strength of our business.

With that I will turn the call over to Paul for more details on our financials Paul.

Thanks Mark.

Morning, everyone and thank you for joining us today.

Before addressing our third quarter results I want to address a few items of note.

As part of our review of Subscale in underperforming products, we made the following changes during the quarter.

In August we completed the sale of prospective partners to Bill Manning, recognizing a gain of approximately $3 million in our non operating results as previously disclosed.

Separately, we provided notice to mutual fund share holders of our intention to close three of our mutual fund offerings International series equity income and income series.

The majority of the assets in these funds represent allocations from our separately managed accounts and therefore, we do not expect immaterial impact you EMEA revenue, resulting from these fund closures.

When combined these changes provide approximately $6.5 million of run rate expense relief without any material impact to revenue starting in 2020.

And with regard to the sub advisory relationship termination that Mark mentioned earlier. This was a $1 billion relationship. The represented approximately $3.3 million of annualized revenue and was the only such relationship added size within our book.

Finally, our press release makes reference to our non-GAAP measure economic income for period, starting January one 2019 economic income will now exclude from pre tax income certain items related to advancing our strategy. These may include severance related costs certain consulting and other professional.

Service fees related to our key strategic initiatives cost related to the potential termination of existing contracts in any gain or loss associated with the sale of a business.

For the third quarter economic income will exclude the aforementioned gain on the sale of prospective partners as well as certain severance and consulting charges.

With that in mind on our Dressel, our third quarter 2019 financial results, starting with assets under management.

The U.M. decreased from $21.3 billion as of June Thirtyth 2019 to 20.5 billion on September Thirtyth.

It's 4% decrease was the result of $1 billion, a net client outflows, partially offset by $300 million in market appreciation.

When compared to September Thirtyth, 2018 units decreased by $2.6 billion or 11%.

While we are pleased by the competitive performance across most of our strategies year to date, we remain at a net outflow position.

Inflows remains lower than we like is we continue to implement our updated distribution strategies.

The majority of the of the net outflows came from our blended asset strategies and specifically from our retirement target in pro blend funding collectives.

Our annualized separate account retention rate through September Thirtyth is approximately 90%. However, as I just discussed the retention rate will decrease in the fourth quarter. When the 1 billion dollar cancellation is completed.

As of September Thirtyth, our overall business mix remains generally unchanged from prior periods with just under half of our AUM being serviced by our wealth management team approximately 22% from Taft Hartley clients and the remainder represented by our other intermediated in institutional relationships.

Turning to our third quarter P. and now we reported revenue of $34.2 million for the quarter down slightly from last quarter with overall revenue margins holding steady at 65 basis points.

After a few quarters of reductions in revenue margins, resulting from our mutual fund fee restructuring. We now believe that we have settled into our expected go forward run rate in the mid 60 basis point range.

However, as I've mentioned in the past our revenue margin is largely influenced by our overall business mix and I expect that we may see a slight uptick in our revenue margin next year once the lower fee sub advisory account redemption that I mentioned earlier is completed.

Moving to expenses operating expenses were $30.7 million in the quarter, a decrease of $1.1 million compared to last quarter in a $5.3 million decrease compared to the third quarter of 2018.

Compensation and related costs decreased by approximately $700000 or 3% in the quarter due to a decrease in head count our compensation and related costs as a percentage of revenue remains elevated at 57%, but has decreased by 2% when compared to last quarter.

Distribution servicing and custody expenses decreased by 2% during the quarter generally in line with a 3% decrease in average funding collective trust assets and continue to represent approximately 19 basis points of average funding collective assets.

Other operating expenses were $8.3 million in the quarter, a $350000 decrease from last quarter.

We reported non operating income of $3.3 million during the quarter $2.9 million of which was related to the onetime gain from the sale of prospective partners.

Pre tax income for the quarter was $6.7 million, while economic income was 5.2 million.

Economic net income for the quarter was $3.7 million or five cents per adjusted share.

With that I'll summarize our year to date results, we reported revenue of $103.3 million down 17% from $123 million last year with overall revenue margins of 66 basis points.

Operating expenses were $96.1 million.

Increase of 9.7 million or 9% from the nine months ended September Thirtyth 2018 is decreases in distribution expenses in compensation were partially offset by increases in other operating costs.

Compensation related costs of $61.1 million have decreased by $7.5 million when compared to last year.

In represent 59% of year to date revenue in 2019.

The majority of the decrease is due to a decrease in the overall sides of our workforce down from 377 at this time last year to 318 as of September Thirtyth.

Distribution servicing in custody expenses have decreased by 29%. This year is result of decreases in average fees and our mutual fund fee restructuring efforts.

In the 8% increase year over year increase and other operating costs are primarily driven by our technology enhancement initiative with over $1.5 million of incremental expense during the year, resulting from this as well as by the fact that our 2018 results included an expense reduction stemming from the sale of the Rainier U.S. funds last year.

As a result, our pre tax income through September Thirtyth, 2019 was $13.4 million with economic income up $13.2 million, an economic net income of $9.4 million or 12 cents per adjusted share.

Looking at equity ownership, the adjusted share count decreased slightly from 79.1 million shares outstanding at June Thirtyth to 79 million shares outstanding on September Thirtyth.

And as Mark mentioned earlier, our balance sheet remains strong as we maintain a debt free capital structure with cash and investments of approximately $153 million.

During the quarter, we declared a two cents per share dividend to our class a shareholders consistent with the previous quarter.

Before opening up the call for any questions I want to provide a few more updates as we look had to 2020.

As I said in my opening remarks, we've achieved approximately $6.5 million in run rate cost savings stemming from the changes during the quarter, including approximately 5.5 million of compensation expense and $1 million of other operating costs. These savings will be fully reflected in our PML starting in the first quarter of 2020 after the mutual funds I mentioned.

Really are officially closed.

Looking ahead to 2020 I expect it to expect will commit as much as $10 million to $12 million of cash to our technology infrastructure upgrade while a portion of this will be capitalized and amortized over future periods. It is fair to assume that an increase in our other operating expenses will result.

In closing I want to reinforce the comments that Mark made earlier on the call.

Our vision is to better serve and grow our wealth management business using our proprietary investment strategies that can also be sold through third party intermediaries in two institutions over the last several months, we've taken necessary steps towards executing this strategy all while striving to achieve near term expense savings.

Our commitment to our clients into our business remains strong as illustrated by the returns achieved by our investment team and by our separate account retention rate in the midst of the changes this year our employees have shown great resolve in recent years to serve our clients well in spite of the headwinds we faced and we look forward to their continued contribution.

As Mark mentioned, we are dedicated to growing our business for the future in that growth will be facilitated by investment in our people in the technology required to support them.

This effort will continue to put pressure on earnings in the in the immediate term, but we remain committed to achieving a better future state for our clients our employees and our people and our shareholders.

That concludes my formal remarks, I'll turn the call back over to the operator, and we'll take any questions.

Operator.

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And thank you. This does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.