Q2 2020 Manning & Napier Inc Earnings Call
At this time I would like to welcome everyone to maybe Andrew Peters Vicki quarter 2020, <unk> earnings Conference call.
Our hosts for today's call articles easily brother, Chief Marketing Officer, Mark Mayor, Chairman, and Chief Executive Officer, and Paul Battaglia, Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at seven P.M. eastern today.
The dial in number is 4045, 37, 340 steaks and enter pen.
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It is now my pleasure to turn the floor over to Mr. coking fleet brother.
Thank you Angela and thank you everyone for joining us today to discuss meeting in appeared second quarter 2020 result.
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 are important factors that could cause actual results could differ materially from those expressed or implied by these forward looking statements.
Manning and appear assumes no obligation for responsibility to update any forward looking statements.
During this call. Some comments may include references to non-GAAP financial measures full GAAP reconciliations can be found on our earnings release and related SEC filings.
With that I will turn call over short chairman and Chief Executive Officer, Mr., Mark Mer Mark.
Thank you Nicole.
As always I'll begin with you about performance for Quanta.
After which we'll assess our second quarter progress on the strategic initiatives, we discussed in detail during our last call.
The past six months I've been the ultimate test roster managers, the first half of Twentytwenty investors experience, both historic sharp bare market.
I know historically strong market rebound.
I want to me ability of managers to adapt to changing market conditions.
Thus far in 2020, we have done exactly what we committed to clients protection on the downside and participating in the we're confident.
Our ability to adjust to rapidly changing market conditions has driven outstanding results a conservative positioning significantly mitigated the first quarter drawdown.
No Rockwood reallocation as equity markets bottoms enabled our clients that have the full benefit of the recovery in the second quarter.
Our year to date performance husband broadly excellent.
Clear demonstration of the power of our time tested disciplined active investment processes at auction.
Well performance figures are available on page five of the earnings supplement.
Starting with our traditional multi asset class solutions, which represent 70% to total you well.
Performed well in the second quarter with significant outperformance coming from our most we've had these strategies a sector and security selection continued to be strong.
For the year on across the entire risks bathroom quite performance. It on multi asset class solutions is ahead of benchmarks by between 200 650 basis points.
Mutual fund equivalence of our multi asset class solutions all rank in the top just styles of their competitive groups with year to date and all are well into the first quintile over one and three years.
Your one that is not hard for clients to be facing losses. Despite the strong bounce in equities in the second quarter.
All of our multi asset class and target date funds or Oh this year in absolute terms.
We have over 600 million Dollarss and our targeted collective investment trust, which are used in retirement plans.
Built on the same multi asset class strategies from just referenced all 11 targeted vintages ranking the top 4% of their competitive set your to gauge and over the trailing here.
Continuing with our fundamental bottom up strategies.
Core U.S. equity core non U.S. equity, a core equity unrestricted portfolios or beat their respective benchmarks in the second poor.
Extending their already robust liens on the year to 500, 4700, and too and 591 basis points respectively.
Also notable is that each strategy strong performance extended its relative performance edge to over 100 basis points for both the trailing three.
Your time periods as well.
For our core non U.S. equity strategy in particular, the tone around over the past few years that's been remarkable.
In the second quarter, the portfolio delivered 634 basis points about performance, adding to already strong recent results.
Years past, our unique research disciplines and crosses scenes, coupled with strong performance, but our core non U.S. equity strategy toward recognition and category leading status.
Well a typical stretch last decade, so once the store.
The strategy has fully restored it's lost.
Good luck to recognize the ability of our core equity research team, which operates globally in support of U.S. International global portfolios to rigorously ports pursue our time tested disciplines and recover all underperformance and then some for our clients we are committed to delivering food.
Market cycles and for 50 years, we have been doing just that.
Our discipline values, we performed well on a relative basis in the second quarter.
Well the value style continues to underperform Grove.
Disciplined value unrestricted and U.S. outperformed their respective benchmarks last war and the performance over 135, and 10 years remain style.
The strong relative results position the district disciplined value sweet well for future growth.
As maintaining exposure to the value style remains prudent and.
Oh Rainier International small cap team produced another quarter of remarkable return.
With that range your international discovery on delivering 603 basis points relative outperformance in the second quarter.
On the snow ahead of its international small cap benchmark by 1605 basis points year to date.
At a time when its asset class down double digits. The Rainier team has generated materially positive absolute returns.
As a result, the fund is now ahead of its benchmark by an outstanding 768, and 440 basis points annualized over the trailing three and five years respectively.
Since inception in 2012 to fund this outperforming its benchmark by 662 basis points annualized underperformance by Henrik Strobl when the team is extraordinary.
Lastly, we continue experienced strong performance throughout most of our specialized investment strategies a real estate series remains ahead of benchmark by nearly 400 basis points year to date in fixed income a core bond series deliberate over 100 basis points of relative output.
Formats in the second quarter and in our municipal bond strategies, both our diversified tax exempt series and New York tax exempt series remain in the Fiftyth percentile year to date as well.
Before I hand, Numerate are continuing progress against our strategic objectives I'd like to comment on our commitment to upholding our goals as citizens of our great country.
Oh from like our country as much work to do to ensure that we embraced diversity what do you an inclusion.
Right and eliminate bias and racism.
We have reconstituted our diversity and inclusion committee hope shared by Stacy Green, our head of human resources and share were Turner, our general counsel.
You're taking strong tangible steps to drive bison racism from our workplace.
We are working to ensure compensation equity and we're taking steps to further our already strong efforts to build a more diverse workforce leadership group and board.
Finally, we are building on a culture strong employee engagement and community involvement to be even more active at the corporate level in the communities in which we operate.
Most particularly near our headquarters in Rochester, New York area, where the needs are great.
Let me speak briefly about governance.
Good afternoon, we announced that Ed Pet Noah has been elected as our lead independent director.
Having a lead independent director ensures that we will be following best practices and corporate governance.
Ed has been a highly valued share of our audit committee and I'm excited about the opportunity to partner with Ed and the full board as he worked together with Manning and now appears in Tiger team to realize our strategic objectives.
So let me now turn to review will progress against our strategic initiatives as discussed during our last earnings call.
And as a reminder, our strategic initiatives are too.
One best an expanding a differentiated wealth management business to capitalize on our long history of investment excellence to grow our intermediary and institutional asset management businesses. Three further our investment excellence for instance by more explicitly incorporating U.S.G. considerations for pursue it.
Digital transformation that radically upgrades every elements of our technology, enabling substantial efficiencies fight simplify and enhance the efficiency of our operations improving profitability and six an increase employee ownership of the fraud.
Let me begin with wealth management.
We reported last quarter that we had added three new financial consultants in wealth management and their training has been progressing well in fact, they began generating new business.
No not yet material accelerating addition of new clients. It's one of the key green shoots that we monitor for progress.
One of our goals in wealth management is to augment the already well Resourced advisory services, we provide.
This quarter, we signed a memorandum of understanding to partner with Paramax Corporation.
Boutique investment bank based in Buffalo, New York.
Oh, that's has been providing advice in the lower mid market for 27 years targeting small businesses with $1 million to $20 million that EBITDA, although they have advised on transactions up to valuations of $500 million.
Our financial consultants will be able to partner with an investment bank that specializes in the sweet spot of appliance and prospect universe, enabling us to bring greater value to our relationships. We expect to collaborate with Paramax Corporation on events into a for clients to each other.
Regarding the intermediary in institutional segments of our business strong investment performance outlined earlier in the call. It's driving increased engagement and early signs of new business activity.
We were notified of to institutional and or platform mandate wins this quarter.
Which we expect to fund in the second half of the year wanting disciplined value when the other ingredients or national small cap.
Well now represents a material increment.
These mandates are coming after a multiyear drought such wins and or important green shoots to monitor.
We believe we are building strong momentum and we look forward to continuing to capitalize on opportunities afforded by our strong investment results and simplified ownership and governance structure.
The increased investment in strategic focus of our sales channels, along with our marketing capabilities technology upgrades in existing high touch client services are allowing us. It's continued to deliver the kind of clients experience that is so critical to retaining business and winning referrals for new business.
For example, the pandemic has driven a sharp uptick in the utilization of a broad range of our digital when content marketing efforts, we offer differentiated investment in financial insights for existing clients and potential new ones and engagement metrics across all of these tactics are up substantially with webinars attendance two to three times prior.
Bridges.
Pacific business initiatives have been developed integrating our digital marketing and feel cellular field sales efforts for example of focusing our intermediary channel I'm working with retirement focused advisors on cash balance plans and area of expertise for us.
Building on our investment streams within research, we have undertaken a comprehensive study of asset allocation.
Investigating with fresh eyes, both strategic and economic considerations.
Such a study is warranted because the role of bonds must now be examines.
For a century bonds have provided both diversification and solid returns in 60 40 portfolios.
For 35 years been the backbone of risk parity and alternate strategic allocation paradigm.
We are now into our 13th year financial refresh.
And while the future is never perfectly knowable isn't likely that investors will be able to get much in the way of returns from low risk diversifying bond portfolios.
Allocation study has been led by Chris Petrosino leader of our quantitative strategies group, which manages our disciplined value strategies same insights I already have thought that of underpinned. The models that have delivered excellent results in a d. These strategies over 135 and 10 years.
Our being brought to bear by Christian is group on the foundational investment questions of asset allocations.
Findings in the study or discussed and debated our investment policy.
Comprised of our most senior investment leaders Ebrahim, Busheri Christian and reach Mark from shallow Chris Petrosino marked Kumasi and Jay Wells.
I've been invited non voting member at these I TG meetings.
That's a former chief investment officer of asset allocation strategies at a prior from I can attest to the quality of the research and the depth and usefulness of the discussions we have reaffirmed the underlying principles and strengths of many of our dynamic asset allocation process seems which have served investors in our most.
The asset class portfolios, so well this year.
Over many decades.
We have also made substantial strides towards integrating sustainable investing principles or yes gene into both our fundamental and quantitative investment processes. We have always considered these elements as risk factors.
We are moving further and we'll have more to report by the end of year.
Final note on research.
We employed six research in turns this summer all working remotely. It is the largest intern class we've ever had the most diverse and an outstanding group put made substantial contributions.
We will be making offers shortly and are optimistic that they will be accepted.
Tending those results coupled with the yield from last summer's internship program.
Which was also strong in both quality and diversity, we are building a potential pipeline a great research talent, while meaningfully advancing our goal of building a more diverse organization.
Our digital transformation.
The important technology investments made in 2019 in early 2020 continue to enable us.
The overwhelming majority of our workforce to remain remote and fully productive.
Our major systems initiatives continue to move forward consistent with the budgets and schedules we set at the beginning of the year.
The large complex and best cloud implementation is going very well, we expect to launch a client portal in the fall developments of be spoke financial planning tools, a powerful data warehouse, enabling superior client reporting and advisor portal sophisticated tax planning tools hybrid robo advice and numerous.
Other capabilities are anticipated over the next 18 months.
By the end to 2021, we will have replaced substantially all our legacy systems in every area of the from investments distribution operations I T Finance HR with state of the art cloud based SaaS technology.
A significant expense in huge effort will enable better client experiences greater efficiency lower costs and substantially better business intelligence.
In terms of simplification and profitability improvement Paul will speak at length about our financial results. So I will only speak briefly about our ongoing and a central efforts to rightsize our firm.
First I will note the commitment that we'd like many companies made to our employees and the cobot crisis began in March we said that that safety health and security, including job security of our employees of our employees was our priority.
This remains the case today.
However, I've also indicated to our employees that offer must become leaner more efficient and more profitable.
We made some progress on that score in the second quarter as our operating margin improved to 10% from 7% a year ago and 6% in the first quarter.
These levels are still below acceptable standards.
Last quarter, we committed to getting to $20 million or more in operating profit.
Investable timeframe.
In order to do so we will need both improved sales productivity and greater cost discipline.
It is our expectation that our compensation and benefits ratio will continue to declined to 50% or below.
In order to drive $20 million or more of operating profit.
And finally, increasing employee ownership.
Exchange the closed in may whereby the from bought back approximately 60 million private units held by Bill Manning and other selling unit holders for approximately $90 million in cash was accretive to all shareholders, including employees employees in the board now own approximately 30% of the adjusted.
Shares outstanding when we include their Unvested shares awards, which do represent the majority of these shares.
Fully on board ownership, excluding Bill Manny stood at approximately 5% be adjusted shares a year ago.
A combination of long term incentive awards made in February of this year with the subsequent highly accretive exchange has rapidly moved us towards a much more desirable proportion of employee ownership, ensuring that employees thing and act like owners at all times.
Finally, and speaking of the foundation of our firm we had many in the pure celebrated our fiftyth anniversary in April.
I'll now is for many reasons a challenging time for celebration.
It is an opportune time to reflect with pride on all that we have accomplished over our first five decades as always we believe that by doing right for clients. We will do right for the business as well and with that I'll turn the call over to poll for more details on our financials Paul.
Thanks Mark.
Good afternoon, everyone and thanks for joining us today.
I hope everyone on the call with us is healthy and well.
I'll begin my remarks on our second quarter 2020 financials results, starting with assets under management.
We finished June with AUM of $18.6 billion up from 17.1 billion as of March 30 Onest.
9% increase came on the heels of the market rebound the mark outlined earlier with $2 billion in market appreciation offset by approximately 660 million of net client outflows.
Analysis of our net client cash flows must consider that the second quarter of 2020 took place exclusively during a period of coded related travel restrictions.
Gross client inflows were approximately $550 million down from 670 million in Q1 of 2020 and from our trailing four quarter average, which has also 670 million.
However, second quarter inflows are comparable to what we brought in during the second quarter of 29 team. Despite coated an indicator that our sales strategy is gaining traction in a challenging environment.
We reported approximately $200 million of inflows through our wealth management channel generally inline with last quarter with approximately 360 million of inflows through our intermediary in institutional team where travel restrictions limited wholesaling efforts.
Reducing client outflows has been a priority for us and we've been encouraged that our competitive investment results in service driven model have allowed us to achieve some traction toward that goal.
Gross client outflows for the quarter $1.2 billion, an improvement from our trailing four quarter average outflows of 1.7 billion and our separate account retention rate for the quarter was approximately 93%.
By sales team the wealth management team had net client outflows of $167 million during the quarter in the institutional intermediary team had $491 million in net outflows.
Also notable here there was a single Taft Hartley relationship that rebalanced, a portion of their portfolio away from us they caused approximately $200 million of an intermediary institutional outflows aside from that single relationship outflows for that channel would've been in line with last quarter.
We're pleased that we've reduced the rate of net client outflows compared to prior period, despite the impacts of Cowen.
We continue to see indicators that our strategy is gaining momentum in the form of improved activity with our wealth management prospects in the quality of our conversations with third party intermediaries and in Taft Hartley opportunity.
However, uncertainty continues to be the theme in this market in economic environment and as such we continue to have a conservative outlook regarding net client flows in the near term.
Turning to our second quarter piano, we reported revenue of $30.3 million for the quarter down by 2% from 31.1 million reported in Q1, driven by the change in average at U.M. during the quarter.
Overall revenue margins were 67 basis points.
Operating expenses were $27.3 million in the quarter.
Decrease of 1.9 million or 6% compared to last quarter, and a 4.5 million dollar decline compared to Q2 2019.
The majority of the sequential decrease is explained by a 10% drop in compensation related costs.
This reduction is attributable to charges included in the first quarter, including severance costs.
Stock compensation paid to our directors as well as the seasonality of our payroll benefits like our form 10-K match.
We're also seeing the impact of the overall reduction in the size of our workforce, which is down to 288 employees as of June Thirtyth.
Compensation related costs as a percentage of revenue was 57% down from 62% in the first quarter.
Distribution servicing in custody expenses were $2.4 million for the quarter were 18 basis points of average funding collective trust assets and the nearly 400000 dollar decrease from last quarter is driven by changes in a U M.
Other operating expenses increased sequentially by $400000 to 7.5 million for the quarter.
The current quarter includes a noncash impairment charge of approximately $600000 attributable to a portion of our lease space in fair for which we vacated as part of our workforce downsizing.
Looking ahead, we expect that other operating expenses will increase beginning in the fourth quarter and into 2021 as the new technologies that Mark mentioned earlier come on line and the associated fees begin hitting our PNM.
The outsized reduction in operating expenses resulted in improvement in operating income with $3.1 million of operating income compared to 1.9 million last quarter.
Non operating income also improved as we recognized a $2.7 million gain in the quarter compared to a 4.3 million dollar loss in Q1.
About half of the 7 million dollar improvement was attributable to gains on our marketable securities for the quarter.
We are reporting $1.4 million in gains on our investments compared to a new nearly $2 million in losses last quarter.
The remainder of the improvement is attributable to the accounting for the tax receivable agreement as last quarter, we reported a nearly $3 million non operating loss, resulting from changes under the cares act compared to income of $900000 in Q2.
As a result on a GAAP basis, we reported pretax income for the quarter of 5.7 million compared to a $2.4 million lost last quarter.
After accounting for nearly $1 million of strategic restructuring costs, including the $600000 noncash charge associated with our vacated facilities that I mentioned earlier, we reported economic income of $6.7 million.
Our effective tax rate for the quarter was 41%, resulting in economic net income approximately $4 million.
All told we reported second quarter economic net income per adjusted share per adjusted share of eight cents, a six cents improvement from two cents per adjusted share last quarter.
This increase is attributable to both the improvement in our operating results. In also result of the reduced share count stemming from the accretive exchange transaction that we closed during the quarter.
Our weighted average adjusted share count for the quarter was approximately 48 million adjusted shares down from 81 million in the first quarter.
I'll have more comments regarding the impact to the exchange transaction that closed in mid may shortly but before we leave the PML discussion, let me quickly summarize our year to date results.
We reported revenue of $61.5 million down 11% from 69.1 million. This time last year with overall revenue margins of 66 basis points.
Operating expenses were 56.5 million, a decrease of $8.9 million or 14% from last year.
More than half of the decrease is attributable to reductions in compensation, though expenses are down across the board from last year largely largely is the result of our smaller workforce down from 336. This time last year to to 88 as of June Thirtyth as well as reductions in a UN and expense reductions resulting from Covidien.
We reported operating income of nearly $5 million through June Thirtyth, an improvement from 3.8 million last year.
In addition, we recognized the non operating loss of $1.6 million through June Thirtyth 2020, driven by the losses reported in the first quarter stemming stemming from the Kobin related volatility.
As a result, despite the improvement in operating income pre tax earnings and economic income through June Thirtyth of 3.4 million in $5 million, respectively are down from last year. However, economic net income per adjusted share shows an improvement from this time last year as a result to the reduced share count following the <unk>.
Change transaction.
Looking at the balance sheet, we reported approximately $65 million of cash investments with no debt.
The decrease from March 31st was expected and is entirely attributable to the completion of the annual exchange transaction that we have discussed previously with approximately $90 million of cash being used to buy back and subsequently retired 60 million private units held by Bill Manning in other legacy shareholders.
The completion of the Ashish led to a reduction in the adjusted share count in meaningful accretion for non selling shareholders.
Post to change the adjusted share count of 22 million shares outstanding includes approximately 16 million class a shares.
As of June Thirtyth, our employees in directors own approximately 30% of the adjusted shares including a portion of the 16 million class a shares along with Unvested equity awards and privately held units.
In closing is we reflect back on the quarter, we're grateful to our people and everything we've achieved during the challenging circumstances.
April started with unprecedented market volatility caused by the pandemic the led to our most active trading period ever.
In May we completed the look the largest of our annual exchange transactions, achieving meaningful accretion for our shareholders.
And throughout the quarter, our team worked tirelessly to focus on strategic initiatives, including implementation of a new technology platform, all while working remotely.
We're very proud of how we executed in the results we achieved for clients and shareholders in this environment.
We are excited about our positioning for future growth and long term distribution prospects.
But there's still significant work to be done in near term during which time, we continue to expect piano pressure as we navigate this environment.
We expect the expected flows across channels will continue to be slowed by the uncertainty of the times.
While the first phase of our technology platforms will begin to come on line. During the third quarter. These are multiyear installations that we'll continue to use resources into 2021.
We continue to evaluate our product and service offerings and back office processes to identify opportunities to simplify improve our business.
However, this evaluation is complex because at the current status of our technology implementation and the overall environment.
It is our expectation that the pressure on topline growth in earnings that we have faced thus far in 2020 will remain in place for the second half of the year unlikely the first part of 2021.
It is crucial that the focus be on our clients and on executing our strategic plan. During this time. Despite the pressure on earnings. So that we can build a foundation from which we can grow and deliver returns for both clients and shareholders in the future.
That concludes my formal remarks, I'll now turn the call back over to the operator, and we'll take any questions operator.
The point is now open for question.
This time, if you have a question or comment please press star one gig Tony.
At any point your questions answered you May review so for me to by pressing the pound team again, we do Astec lumpy pose. Your question you picked up your headset to provide optimal sound quality. Thank you.
There are no questions at this time. Thank you. This does concludes today's conference call. Please disconnect your lines at this time and having one of football.
Thanks, everyone Bye.
Thank you.
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