Q3 2019 Earnings Call

Good morning, welcome to opposing <unk> investment management announces third quarter <unk> earnings Conference call.

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Please note. This is Dan record I will now, let's turn the conference over to Jessica Doran. Please go ahead.

Thank you operator, good morning, and thank you for joining us on that the xenon investment management third quarter 2019 earnings call I'm, Jessica Doran Chief Financial Officer with me today is our Chief Executive Officer, and co Chief investment officer, Rich because either.

Our earnings press release contains the financial tables to the periods. They will be discussing if you did not have a copy it can be obtained in the investor Relations section on our website at www dot because they know dot com.

Replays of this call will be available for the next two weeks on our website.

Before we start we need to remind you that today's call may contain forward looking statements and projections. We ask that you refer to our most recent filings with the FCC for important factors that could cause actual results to differ materially from today's comments.

Please note that we do not undertake to update such information to reflect the impact of circumstances or events going forward.

In addition, please be advised that due to prohibitions on selective disclosure, we do not as a matter of policy just closed material that is not public information on our conference calls.

Now, let me turn the call over to rich will discuss our currently with the investing environment.

Thanks Jessica.

For classic value investment approach remains unchanged by recent of that.

Recall that our strategy is to buy businesses that are selling at low prices relative to their long term sustainable earnings fell.

They'll ability of a business had a low price is nearly always due to uncertainty about future earnings prospects.

We believe that through intensive research and patients we can earn superior returns over the long term.

Today's uncertainty surrounds the outlook for global economic activity and stocks exposed to that uncertainty has become extremely cheap.

Unfortunately, our portfolio has not been exposed to the small subset of the largest cap stocks, which should help appreciate it strongly as a result of their presumed isolation from global economic risk.

Results, it's that the opportunity set open to us has increased dramatically.

We wrote these words in July of 1998.

Well the cycle did not turn immediately after we wrote these words to turn that came with extraordinary for true value investors.

These words.

A reminder of the frustrating reality that at times must be borne by value investors.

While the frustration how has now lasted longer than in any other value cycle and measured history.

The opportunity embedded in our portfolio's appears to us to be equally extraordinary.

Consider a couple of our large holdings as examples.

First is you'd be yes.

You'll be accessed hard with the moniker bank and yet they really are not a bank.

There are a leading global wealth manager with a deep and stable client base growing business in high net worth an ultra high net worth clients that is growing faster than global GDP.

Further 15% of their businesses in Asia, the fastest growing region of the world growing it over 10% per year.

Our capital position is five times, what it was prior to the financial crisis.

Over the past five years you'd be asses earnings have grown by 32%.

They have generated a shareholder return from dividends of 21%.

Got their valuation has collapsed driving the total return negative over the five year period.

Compare these facts with market Darling Nestle over the same past five years, that's leaves earnings have shrunk by 1.5%.

Their shareholders have only earned 16% from dividends and yet the total return to shareholder is it's over 70% over that five year period.

How can that make sense.

Even more startled thing is the free cash flow free yield for you'd be asked in a negative environment.

We apply the same loan loss conditions to you'd be asked today that existed at the worst point of the great recession, and the global financial crisis.

Yes, still would have a free cash flow yield of 8%.

Compare that to a German 10 year bond of negative 40 basis points.

To understand.

We also own Volkswagen stock in our portfolio's VW is the largest automaker in the world with brands expanding the consumer demand spectrum.

Enjoy leading market share in China, and Europe , and their cash position gives them a margin of safety that belies the current recession fears.

Oh around what it says that VW strong market can be summed up in just three words leaner cleaner and greener.

Leaner.

They've cut back on unproductive R&D spending they're planning to use common parts across platforms onto the VW family of brands.

Leaner.

The paid for their passed since paying out $25 billion for their dieselgate fiasco, they're improving their competitive position their competitive reputation and expect to be at breakeven in the Americas in 2020 up from down <unk> billion, and a half dollars and greener, they're already offering electric vehicle versions.

Their premium brands, what pricing is high enough to enable the profitable distribution of electric cars and this is giving them the opportunity to leverage their premium brands to reach scale in this important segment.

And we get this all had a price that is just over six times consensus estimates of next years earnings.

In short.

These are the environments that try asset owners soles and these are the environments that bring excitement to value investors.

With that we share the frustration that the waiting time for reward this cycle that's been extreme.

But that has led to these kinds of opportunities that we believe we'll make the weight worthwhile.

On the business side, we experienced a net outflow this quarter of approximately $800 million.

All of this outflow stemmed from our sub advisory channel, where we attribute which we attribute it to the reality of a skittish retail and client.

Our sub advisory partnerships remains strong.

I'll now turn the call over to Jessica Doran, our Chief Financial Officer, who will provide this quarter's financial update.

Thank you rich.

We reported diluted earnings that 19 cents per share for the third quarter compared to diluted earnings of 18 cents per share last quarter and 22 cents per share for the third quarter last year revenues were $37.1 million for the quarter and operating income was $17.1 million.

Our operating margin was 46.3% this quarter relatively flat from 46.4% last quarter and decreasing from 50.9% in the third quarter of last year.

Taking a closer look at our assets under management, we ended the quarter at $35.8 billion down 4% for last quarter, which ended at $37.3 billion and down 8% from the third quarter last year, which ended at $38.9 billion.

The decrease in assets under management from the second quarter up this year was driven by market depreciation of point $7 billion and by net outflows of point $8 billion.

The decrease in the third quarter of last year was driven by $2.6 billion and market depreciation and net outflows the point $5 billion.

At September Thirtyth 2019, our assets under management consisted of $13.7 billion and separately managed account $19.8 billion and sub advised accounts and $2.3 billion snark dizziness on.

Compared to last quarter assets under management and separately managed accounts and sometimes the count decreased with separately managed account assets, reflecting point $3 billion and market depreciation partially offset $5.1 billion in net inflows.

And Subadvised accounts, that's reflecting.

<unk> point $3 billion in market depreciation.

And point $8 billion and not a outflows.

Asset than to Zeena fun remained unchanged with point $1 billion, and net inflows offset $5.1 billion and market depreciation.

Average assets under management for the third quarter of 2019.

Were $36 billion down, 3% from last quarter and down 6% from the third quarter last year.

Revenues decreased 2.1% from last quarter and decreased 6.4% from the third quarter last year.

The decrease from last quarter reflects a decrease in average assets under management, partially offset by an increase in weighted average fee rate.

The decrease from the third quarter of last year, primarily reflects a decrease in average assets under management.

During the quarter, we recognized point $3 million and performance fees on or Subadvised accounts.

Our weighted average fee rate was 41.2 basis points for the quarter compared to 40.8 basis points last quarter, and 41.3 basis points for the third quarter of last year.

Asset mix continues to be the most significant factor in our overall weighted average fee rate, although swings and performance fees and fulcrum fees also contribute.

Our weighted average fee rate for separately managed account was 54.3 basis points for the quarter compared to 54.5 basis points last quarter, and 54 basis 0.7 basis points for the third quarter of last year.

The decrease from last quarter and the third quarter of last year was driven by shifting assets towards strategies that typically carry lower fee rate.

Our weighted average fee rate for sub advised accounts was 29.2 basis points for the quarter compared to 29, excuse me compared to 28.7 basis points last quarter, and 30.2 basis points for the third quarter last year.

The increase from last quarter reflects an increase in asset in strategies that typically carry higher fee rate.

The decrease in the third quarter last year reflects a decrease in performance fees recognized this quarter.

In addition, the weighted average fee rate for the quarter reflects a reduction and be sees a certain accounts related fulcrum fee arrangements of one client relationship.

These fee arrangements require a reduction in the B C. If the investment strategy underperforms its relative benchmark or allow for performance see if its strategy outperformed its benchmark.

During each of the second and third quarter for 2019, we recognized the point $5 million reduction nbcs related to one client account.

A reduction based fees was not recognized during the third quarter of last year.

These fees are calculated quarterly and compare relative performance over a three year measurement period.

Makes sense, a three year performance record of this account fluctuates relative to its relevant benchmark the amount of based fees recognized may vary.

Our weighted average fee rate for Pessina funds for 68 basis points for the quarter decreasing from 69.4 basis points last quarter and increasing from 66 basis 66.8 basis point for the third quarter last year.

The decrease from last quarter reflects a shift in assets to strategies that typically carry lower fee rate, while the increase from the third quarter of last year reflects a shift in assets towards strategies that typically carry higher theory.

Looking at our operating expenses.

Our compensation and benefits expense was $16 million for the quarter remaining flat from last quarter and decreasing from $16.1 million for the third quarter last year.

<unk> expenses were $3.9 million for the third quarter of 2019 compared to $4.3 million last quarter and $3.3 million for third quarter last year.

[noise] the decrease from last quarter reflects a decrease in professional fees, while the increase from the third quarter of last year reflects an increase in professional fees and occupancy costs.

Other income was less than point $1 million for the quarter, driven primarily by the performance of our investments.

The effective rate for unincorporated and other business taxes with negative 5.1% this quarter compared to four point I positive, 4.3% last quarter and 2.1% in the third quarter last year.

Negative effective rate reflects the benefit associated with the reversal of uncertain tax position liabilities and interest due to the expiration of the statute of limitation.

We expect the effective rate associated with the unincorporated and other business taxes of our operating company to be between three and 5% on an ongoing basis.

Our effective tax rate for our corporate income taxes X C. B T and other business taxes was 24.4% this quarter compared to 23.8% last quarter and 16.9% for the third quarter last year.

The fluctuation in these effective rate primarily reflect the benefit recognized in the third quarter of 2018 associated with a onetime adjustment to the deferred tax asset.

We expect this rate to be between 23 and 25% on ongoing basis.

The allocation to the nonpublic members of our operating company was approximately 74.5% of the operating companies net income for the third quarter of 2019.

Flat from 2070, 4.5% last quarter.

And.

And 75% excuse me for the third quarter last year.

The variance in these percentages is the result of changes in our ownership interest in the operating company.

At quarter end, our financial position remains strong with $35.7 million in cash and cash equivalent as well as $29 million in short term investments.

We declared a three cents per share quarterly dividends last night.

Thank you for joining us we'd now be happy to take any questions.

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Our first call.

Question comes from Mac Sykes Gabelli.

Please proceed.

Good morning Rich.

With that.

Actually interesting parallel from 98.

Thanks.

I just have one question.

It's a follow up kind of the comments you made the past, but I want to know maybe you could just comment on the competitive landscape for value investing mandates and at a time when allocator interest maybe shifting positively and what that means for your platform. Thanks.

Sure I mean, one of the then I'll say the good things about sticking to a discipline and having the world No that all you do is value investing.

Is when.

They think about reallocating to value, we generally tend to be on the list.

Doesn't mean that we win.

Because the list shrinks and these kinds of periods our pipeline winds up looking pretty good. So when we look at the future. There's there's some fairly large opportunities that are on the horizon that work a competing for I have to use that word.

Third because we don't know that we're going to win.

But.

It's it's pretty interesting to see how.

How significant the interest level has become and now when we go and travel to talk to existing clients and prospects really the only topic of conversation is are we about to turn the value cycle that that is true whether their process.

That's whether their existing clients. It's it's really not of a concern about what happened in the last 12 months because it hasn't been good what's happened in the last 12 months, it's our we near the end.

Of course, we don't know the answer to that question, but.

All I can say is the conversation is being had with a lot more frequency than it has over the past few years.

Great. Thank you.

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