Q4 2019 Earnings Call

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Good evening My name is Catherine and I'll be your conference operator today.

This time I would like to welcome everyone to the Manning and Napier fourth quarter in fiscal year 2019 earnings Conference call.

Our host for today's call Art, Nicole Kingsley Brennan, Chief Marketing Officer, Mark Mayer, Chief Executive Officer, and top attack Leah Chief Financial Officer.

Today's call is being recorded it'll be available for replay beginning at seven P.M. Eastern standard time today.

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It's now my pleasure to turn the floor ever to Miss Nicole Kingsley brother.

Thank you Catherine and thank you everyone for joining us today to discuss meeting it appears fourth quarter and full year 2019 result.

Before we begin I would like to remind everyone that certain statements made during this call not based on historical facts.

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 are important factors that could cause actual results could differ materially from those expressed or implied by these forward looking statement.

Manning and Napier assumes no obligation or responsibilities upbeat any forward looking statements.

During this call. Some comments may include references to non-GAAP financial measure both GAAP reconciliations can be found in our earnings release unrelated I see filings with that allow me to introduce our Chief Executive Officer Mr. Mark there Mark.

Thank you Nicole.

I'm going to begin as we always do with a review of our performance for clients collectively summarizing the quarter and the full year, followed by a review of the strategic initiatives, we've put in place during 2019.

We're pleased to report good 2019 results across almost the entirety of our suite of investment strategies.

Last year was a very strong year for both equities and debt around the world, particularly for U.S. equities, and we delivered outstanding absolute results for clients.

Starting with our multi asset class portfolios, which represent the majority of our assets our balance solutions posted strong absolute returns during the quarter as well as for the full year.

On a relative basis, we experienced modest underperformance during the quarter, but participated well in the strong market for both equity and debt for the full year.

Strong risk management disciplines are ingrained in our DNA.

These disciplines typically lead us to provide substantial downside protection and sustain bear markets, while allowing us to capture most of the upside in bull markets.

Our clients have come to expect this type of performance pattern and our broad outperformance during a difficult year for equities in 2018, which preceded robust participation in a very strong 2019 for both stocks and bonds.

Illustrates the effectiveness of our research process.

Particularly for wealth management clients, who generally aren't best in our multi asset class solution. Our goal remains to deliver investment results that meet or exceed expectations over full market cycles.

By way of example.

Flagship long term growth strategy has a track record stretching back to January 1973.

Over 47 years this globally diversified portfolio of stocks bonds in real estate has compounded at 9.4%, 9.46% Parana after piece.

$100000 invested in January 1973 is worth six and a half million dollars today.

That is a hugely differentiated proof statement of our capabilities to deliver results in wealth management.

In our fundamental all equity portfolios, we generated strong outperformance in 2019, driven by excellent security selection each of our fundamental bottom up equity portfolios outperformed its respective domestic international and global equity benchmarks for the year.

And in some cases, the outperformance was dramatic.

Most notable where the excellent results in our international accounts overseas series outperformed its benchmark by an outstanding 599 basis points in 2019 significantly improving the intermediate term track record of the strategy.

Now on prior calls we have mentioned that several of our most successful long term strategies experienced a difficult performance stretch several years ago.

Those challenging quarters are continuing to roll off our intermediate term track record and at the same time, we're very pleased to have added on excellent relative performance. This year.

Collectively these factors have led to very impressive improvements in relative results and we believe we have made huge strides in repairing our three and five year performance numbers.

For example, our global equity separately managed account strategy improved its rolling three and five year annualized relative returns by 252, and 71 basis points, respectively versus its benchmark in the fourth quarter alone.

The restoration of the intermediate term track record for our global equity strategy is a fair representation of our simultaneous improvement across almost all of our fundamental equity strategies, both domestically and abroad.

Although our quantitatively based disciplined value strategies underperformed benchmarks in 2019, they generated strong absolute returns strategies bias towards out a favorite more defensive oriented securities weighed on relative results.

This performance pattern is inline with our expectations and over the intermediate to long term disciplined value continues to exhibit exhibit a very strong track record versus its Morningstar peer group the disciplined value series ranks in the top [laughter] percentile on both the three and five year basis.

Our Rainier team delivered strong absolute and relative results in 2019 with the Rainier International Discovery series outperforming its benchmark by over 250 basis points.

Formats remains impressive over longer time periods as well over the trailing three and five years. The Rainier International Discovery series is ahead of its benchmark by an annualized 366, and 248 basis points respectively.

Also worthy of comment even though the assets are not large is our real estate series. This respond outperformed by almost 500 basis points in a strong real estate market in 2019 and has outperformed by about 200 basis points per around them for three five and 10 years.

Looking ahead to our investment outlook for this year, our investment disciplines have led us to take a more defensive stance on risk and client portfolios.

We believe we are facing a more challenging financial market backdrop today than in several years. So for our multi asset class clients. This means we are modestly underweight equities versus our neutral allocations, while remaining flexible enough to capitalize on bottom up stock buyback stock opportunities as we find them.

This nuanced investment outlook is a reflection of our active approach.

But our emphasis on active solutions extends beyond portfolio management.

The recent passage of the secure act is the most significant overhaul to retirement regulation since the pension Protection Act in 2006.

For many high net worth clients. The Bill has real financial planning consequences that should be proactively address on a case by case basis.

We believe our ability to pair dynamic custom tailored advisory advice alongside our investment strategies is a key driver of our wealth management value proposition.

I will now address the progress made on our strategic initiatives during the quarter.

These initiatives include our digital transformation, a new partnership within best cloud.

The promotion of one of our top employees the role of director of human resources.

And the rebuilding and expansion of our client facing efforts under new sales leadership.

Let me now discuss those in more detail starting within best cloud.

Recently, we announced the new partnership between Manning <unk>, Napier and Los Angeles based Fintech leader invest cloud. This partnership is a crucial step in our technological transformation and we're excited by the possibilities that will enable.

And that's club will provide front and middle office solutions, encompassing digital engagement with clients portfolio accounting and reporting.

As we complete our implementation of the Charles River Order management system and trade processing in 2020.

We will make huge strides towards fully modernizing our front back in middle offices with respect to investment management and client engagement as Paul will discuss in some more detail in 2020 will also begin to implement workday to replace legacy financed technology Workday is widely recognized as the best of breed solution for this import.

And function.

There are two main ways, we expect and best clouds expertise to elevate our competitiveness.

First and most importantly invest call its world class capabilities will allow us to deliver a client experience that is vastly improved.

This includes a state of the art client portal, allowing for seamless digital engagement and document processing.

We will upgrade our well respected financial planning capabilities with advanced tools, allowing us to more effectively provide clients with holistic planning advice and investment solutions, while also improving our ability to attract prospective clients.

We believe this partnership with the best cloud has the potential to drive meaningful rental revenue synergies by attracting new business and retaining existing business.

Additionally, by leveraging invest clouds expertise, we expect to generate significant productivity and operational efficiencies.

We will be re engineering business processes, improving cost controls and introducing productivity enhancing collaboration tools that will better position our enterprise for continued profitable long term success.

However, as critical as technology is ours is a professional services business and our people are without a doubt our most valuable asset.

We're excited that Stacy Green a seasons Manning and Napier manager has been named our new director of Human resources Stacy will help ensure that we set the highest standards for ourselves in terms of the quality and diversity of our team the training and development they receive and in our efforts to operate with true managerial.

And leadership excellence.

During the fourth quarter, we made further strides in evolving our wealth and asset management businesses.

In wealth management, we continue to focus on investing in our people we added two and rounded out a number about financial consultant teams and we have read dedicated ourselves to developing and delivering excellent sales training in order to ensure we are the best equipped we can be to handle client needs and to substantially.

Grow our new business.

Eating in those efforts have been two notable initiatives undertaken during the quarter.

We launched a client survey intended to both generate feedback from our clients.

As well as to ensure a culture that actively solicits and axon that feedback.

We are completing the survey as we speak and we'll report on results in the future, but early reads are quite encouraging.

We also put on our annual fall clients seminar series, focusing on our high net worth individuals within wealth management, our seminars where attended by about 500 clients a meaningful portion of our client base client engagement remains excellent and we are always excited to have the opportunity to share insights with so many of our law.

Longstanding clients.

Now before turning the call over to Paul to cover our financials I want to be clear that while we are making progress and positioning the business for sustainable future success, our financial turnaround will not be immediate.

In 2020, we continue to expect net outflows across our businesses, albeit a gradually improving rate.

As well as for year over year reductions in revenues and potentially in earnings.

Although improved investment performance numbers are critical.

Efforts to revitalize the business development functions of our organization are an increasing focus.

We are in the process of fundamentally rebuilding our business development disciplines processes and technologies.

This rebuild it includes a significant expansion of the capacity and quality of our teams in order to improve our service for existing clients as well as to accelerate our new business development efforts.

While I financial turnaround is not yet imminent our execution has began in earnest an early signs of improvement are expected to emerge soon in terms of a pickup in new account acquisition.

Despite our expectations for substantial future cost savings from initiatives taken in 2019 as well as from those which will occur. This year, we are ramping up our spending on I T and adding to our sales teams to position us for future growth.

Consequently, we expect margins to remain under pressure.

Looking back on the last year, we put in place a new management team.

Established plans and put in motion a wide range of initial initiatives against the backdrop of a third consecutive year of good results for clients.

We enhanced our distribution strategies under the direction of our new sales leadership teams, we formed our governance and operating committees.

Substantially increased the opportunities for employees to own stock through the expansion of our long term incentive plan launched a new technology strategy led by a new Chief Technology Officer, consolidated subscale offerings eliminated tangential distractions, including the sale of prospective partners and dial and much.

She really reduce costs and headcount.

I believe we have made progress in reestablishing our firm on solid ground and I look forward to the strides we will make this year.

With that I'll turn the call over to Paul for more detail on our financials Paul.

Thanks, Mark good afternoon, everyone and thanks for joining us today.

That's good color to Mark's comments, especially especially with regard to our outlook for 2020, but I'll first begin with addressing our fourth quarter and full year 2019 results.

As a reminder, my remarks will make reference to the non-GAAP financial measure economic income as defined in our press release.

Economic income excludes from pre tax income restructuring and transaction costs related to our strategic changes. These expenses may include severance related costs certain consulting and other professional service fees related to our key initiatives costs related to the termination of existing contracts in any gain or loss associated with the sale.

On the business.

Full GAAP reconciliations are included in our press release.

Turning to our fourth quarter results and starting with assets under management.

AUM decreased from $20.5 billion as of September Thirtyth to $19.5 billion on December 30, Onest 2019.

The primary driver of the reduction in the U.M. was the $1 billion sub advisory relationship outflow that took place in October and was addressed during our last call.

This outflow represented approximately a third of the total outflows during the quarter.

Gross inflows of approximately $850 million represented a modest improvement compared to the prior quarters of 2019, but remained below historical levels.

The $2 billion of net client outflows was partially offset by $1 billion of market appreciation. Thanks to the strong work of our investment team.

As of December 30, Onest, our wealth management business of approximately $8.7 billion is being serviced by our 10 teams the financial consultants and represents approximately 45% of our total assets.

The remaining $10.8 billion of a U.M. includes our institutional in intermediary business, including Taft Hartley.

Looking back in 2019, it was a Europe significant change for our sales teams is we repositioned ourselves to better capitalize on our strength.

The pace of Infosys inflows slowed in part due to the transition that took place.

For the year inflows were about evenly split between our wealth management team and our institutional and intermediary line of business.

Over half of our gross inflows for the year came into our balance portfolios. Another indicator that our investment disciplines and in particular, our active asset allocation strategies remain attractive to clients.

Our gross client outflows numbers for the quarter end the year are somewhat skewed by the large sub advisory outflow as.

As reported our separate account retention rate, which we calculate based on dollars and not relationships with 60% for the quarter and 83% for the year.

However, when excluding the 1 billion dollar outlier those rates would have been 87% for the quarter and 90% for the year, which is more representative of our longer term trends, particularly right, particularly for our wealth management relationships.

We think the steps that we have taken during 2019 and we'll continue to take during 2020, along with our strong investment results will provide us the opportunity to see further stabilization of our client retention rates.

While we believe that the overall at risk profile for our client population has improved in particular on the wealth management side those relationships that involve third party intermediaries and in particular investment consultants will continue to be an area of focus.

Turning to our fourth quarter PML, we reported revenue of $32.7 million for the quarter down from revenue of $34.2 million reported last quarter with overall revenue margins of 66 basis points up slightly from 65 basis points last quarter.

Modest increase in average fees was expected given that the sub advisory outflow mentioned earlier was a low fee relationship.

After seeing some average fee volatility in prior years as a result of business mix changes and our fund the restructuring efforts is our expectation the fees will remain in the mid 60 basis point range during 2020.

Operating expenses were $37.2 million in the quarter, an increase of $6.5 million compared to the prior quarter and a 5.1 million dollar increase compared to the fourth quarter of 2018.

The increase is being driven by approximately $6.8 million of strategic restructuring and transaction costs related to our technology initiatives that are being reflected in our other operating expenses, including $6.3 million of impairment charges as disclosed in a December 8-K filing.

As we reported at that time will be writing off certain existing contracts as we pivot to our partnership with invest cloud is part of our digital transformation.

The 6.3 million dollar impairment includes approximately $3.2 million of anticipated exit costs for existing vendor contracts that we will not be utilizing as we move forward.

We have not formally terminated these contracts as of December 30, Onest and expect future cash reductions when exiting these contracts in the future.

Compensation related costs increased by $350000 your 2% in the quarter.

During the quarter, we reported we recorded approximately $1.6 million of severance costs, which contributed to an elevated compensation ratio as a percentage of revenue approximately 61%.

We expect compensation will continue will decline on a run rate basis is we reduced the size of our workforce.

Distribution servicing and custody expenses decreased by 4% during the quarter generally in line with the 6% decrease in average funding collective trust assets.

These distribution expenses continue to represent approximately 19 basis points of average mutual fund and collective trust assets.

As stated previously the significant expense increase in the quarter came through other operating costs, which were $14.5 million in the quarter due to the aforementioned charges related to our technology platform upgrade.

We reported non operating income of $1.3 million during the quarter, a $2 million decrease from last quarter. When we recognize the onetime gain on the sale of prospective partners.

On a GAAP basis, we are reporting a pretax net loss of approximately $3.1 million. However, when excluding $8.4 million of strategic restructuring costs, including $1.6 million of severance and 6.8 million of digital transformation costs during the quarter, We report economic income.

A $5.3 million.

Economic net income for the quarter was $3.8 million or five cents per adjusted share.

With that I'll summarize our full year results.

We reported revenue for the year of $136 million down 16% from $161 million in 2018 with overall revenue margins of 66 basis points.

Operating expenses were $133 million, a decrease of $4.7 million your 3% from last year is decreases in distribution expenses in compensation were offset slightly by increases in other operating costs.

Compensation and related costs of $81 million for the year, including approximately $3 million of employee separation costs decreased by approximately $6.4 million since last year, but represented 60% of revenue.

The majority of the decrease was due to the reduce size of our workforce down from 366 employees. At this time last year to 307 as of December 30 Onest.

Distribution servicing in custody expenses decreased by 31% in 2019 as result of both reductions and funding collective assets as well as the restructuring of our mutual fund fees during 2018 in 2019.

Other operating expenses increased by a little more than $7 million in 2019, mostly due to the expenses related to our digital transformation.

As a result, our pretax income for 2019 was $10.3 million with economic income of $18.5 million in economic net income of $13.2 million or 17 cents per adjusted share.

The adjusted share count decreased slightly from 79 million shares outstanding at December Thirtyth at September Thirtyth 278.8 million shares on December 30 Onest.

Additionally, during the quarter, we declared a two cents per share dividend to our class a shareholders.

And with regard to the adjusted share Count we will see an increase in the adjusted shares outstanding during the first quarter of 2020 in conjunction with award delivery under our long term incentive plan.

Specifically.

We delivered approximately 2.5 million restricted stock units to key employees in future leaders throughout the firm that will vest over the next five years.

Looking at the balance sheet, we continued to maintain a debt free capital structure with cash and investments of approximately $158 million.

The increase compared to the last quarter. It primarily stems from the seasonality of our incentive yearend incentive payments, which will be paid during the first quarter of this year based on our 2019 results.

Once those are accounted for we estimate that our cash and investments will continue to be in $140 million to $150 million range prior to considering future spending on strategic initiatives.

Before opening up the call for any questions I want to provide a bit more color on some of Mark's earlier comments.

Regarding our 2020 financial outlook, we are expecting that both revenues and potentially earnings will be down on a year over year basis compared to 2019.

We believe that we will see improvements in both the rate of client inflows and outflows, though it is it is our expectation that we will remain in a net client outflows position for the year of 2020.

Thus prior to considering the impact of markets. We expect that when we'll continue to decrease, albeit at a slower rate than we've seen in prior years.

These factors along with the AUM declined that took place during 2019 in form our belief that revenues will decrease during 2020.

Similarly, we expect to see further decreases in both compensation and ongoing expenses as we continue to simplify and improve our existing business processes in an effort to manage operating expenses.

However, these savings will be at least partially offset by the impact of our spending on new initiatives.

We will be strategic in expanding our team of financial consultants. During January we added another financial consultant to our Columbus, Ohio Territory, and we look to continue to build out our existing territories throughout the year.

Our current plan assumes spending of approximately $10 million during 2020 to support our digital transformation, mainly in the form of implementation costs in software licensing for both invest cloud and workday.

Much of this spending will be capitalized over future years, but will result represent incremental expense compared to 2019.

Also worth noting the 10 million dollar spending assumption noted here is not reflective of any final exit costs associated with the contracts impaired during the fourth quarter.

Lastly, we continue to review our existing suite of product and service offerings in terms of both subscale offerings that we should eliminate as well as gaps that we want to address to improve our overall solution for clients.

As we've done in the past, we will utilize the flexibility of our strong balance sheet to address these items and improve what we deliver to clients.

In summary, we will continue to manage ongoing cost as appropriately given the projected decreases in revenue, but not at the expense of progress for our key strategic initiatives in digital transformation.

As such it is our expectation that from a financial perspective, 2020 will again be a transitional year as we take the necessary steps to accelerate the changes implemented in 2019 in position us for growth in 2021 and beyond.

Thanks for participating in today's call that concludes my formal remarks, I'll now turn the call back over to the operator, and we will take any questions Kathryn.

The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your touched downtime at any point your questions answered you may remember yourself from the Q by pressing the pankey again, we do ask that lie you pose your question that you pick up your handset to provide optimal sound quality.

Thank you.

Our first question comes from the line of Ken Worthington JP Morgan.

Good evening this is a little cuddy filling in for Ken.

First I will have open any.

I have there been any disclose redemptions in the coming quarters.

I had no no material redemptions that we've disclosed or other updates besides what we've given you on the prepared remarks here.

Okay great.

Uninvested cloud how long do you think it will take to fully implemented and what do you think invest cloud means for the mending appear expense profile over the medium term.

So we'll it's mark.

It will it will take more than one year to fully implement so this is this we will not be complete in 2020, However, we will make.

Very very material strides in.

In a number of areas.

So I think important capabilities.

We'll be in place.

Around the middle of this year with with further work extending to the ended the year and into 2021, it's honestly, it's it's difficult to precisely quantify the the magnitude of of savings.

As as indicated it's it's not just the implementation of new technology. Its reengineering of business processes that were anchored in old technology and as the new technology comes in and we can begin to to transition I think we'll we'll get a much clearer said.

Of what the efficiencies can be so we were just we're not in a position to be.

Be precise and give give guidance, but it's it is certainly in the many millions of dollars I mean, we expect this to be important in terms of of driving efficiency over the medium and longer term, but we can't be more precise and I think this is Paul I think it's also worth adding here that we.

We think this will really improve the deliverable that we provide to clients the way, we deliver financial planning and potentially open up the ability to increase wallet share with existing clients and be a differentiator for new prospects as well. So the reason why it's hard to quantify is that it's our hope that over time, we see improvement on both the top line is.

Well as on the expense line.

Got it makes sense.

Turning to your wealth management business, we're seeing the industry consolidate to benefit from economies of scale.

Further scale your business, how do you think about M&A with other wealth management providers.

And what criteria do you used to evaluate opportunities in the space.

So we'll it's mark.

We are we're we're open minded but.

But have I think I think the way you phrased. The question is wise, I think having having clear criteria and.

Hi standards and strong hurdles is very important.

So there there are critical elements of our strategy we are a distinctive.

Investment managers are in our own and proprietary investment management solutions are the heart and soul of of what we offer.

To our clients and so we that plays very very strongly in this call. It's not to say that we could not in some way combined with.

Affirmed that that has open architecture.

Or some come hybrid of Oprah open architecture, and proprietary solutions, but we have to think very very carefully about it.

Got it because it is a meaningful step away from what we have done historically, so I think I think the the as as in any of these circumstances the things that firms.

Considering any form of of combination half to think about.

First and foremost as the client experience.

Anything that is disruptive of clients and doesn't clearly drive a superior future for clients. We really have to question why we would do it.

And that's not to say that returns for shareholders aren't top of mind and critical obviously they are but in our business in a fiduciary business. The first thing we always have to think about is any initiative any strategic step we take any combination we consider what's in it for.

Our clients and will we will we benefit them. So I think that is of all the credit there were plenty of other criteria in terms of return on capital and spreads over cost of capital and and all the things that you'd assume in thinking about this but the number one the criterion that dominate.

It's our thinking is will this deliver something better for our clients.

Got it thank you for taking my questions.

Thanks.

And there are no further questions at this time.

Thank you. Thank you everyone Deborah.

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

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