Q2 2020 SEI Investments Co Earnings Call
[noise], ladies and gentlemen, thank you for standing by and welcome to the Sci second quarter 2020 earnings call. At this time, all participants arent able listen only mode. Later, we will conduct a question answer session.
Ian instructions will be given at that time, if we should require assistance during the call. Please press Star then zero as a reminder, this conference is being recorded.
I would now let's turn the conference over to our host Chairman and CEO Al West. Please go ahead.
[laughter] welcome everyone.
And.
Good afternoon.
All of our segment leaders are on the call as well as Denis Mcgonigle, S.G. I see us, though you Kathy Heilig Sci simple.
I will start by recapping, our situation and second quarter 2020.
I'll, then turn it over to Dennis to cover LSB and the investment in new business segment.
After that each business segment leader will comment on the result, so their segments.
And finally, Kathy Heilig will provide you with some important companywide statistics.
As usual, we will feel questions at the end the Beach report.
Before we cover the results so the second quarter I will speak to the set of circumstances, we face today.
Well around the globe were dealing with the Cove at night team pandemic.
Defeat this blow it up doorstep, we were all in ball.
And from the beginning of this health crisis.
Our priorities been on safety and health.
Always and their families long with the seamless delivery of service to our clients.
We've closed transition 99% of our workforce ended their homes working remotely without compromising the robustness, although our operations or the integrity of our services.
Lately, we have begun just show.
We have begun to slow transition of certain employees back to the office.
So far we have returned approximately 200 and poised to the workplace.
I am an incredibly grateful to our workforce, we're transitioning both workplace to home on the workplace and all the while supporting our clients each other in our communities.
The strength of Sci Shine best when the challenges are extremely.
That's the high we take immense pride and investing for the long term.
We have proven to their business models have been shaped over the past 50 years of experience.
The bedrock of our ability to weather the uncertainties up today and emerged from the current crisis stronger and better position to take advantage of tomorrow's opportunities.
Our secret to success is straightforward.
Remain focused on keeping our workforce healthy and productive.
Invest in our best in class technology.
No they continuously.
And deliver a world class service and solutions to clients.
We'll also be relentless.
And executing on our strategic vision.
And the launch in the gross generating initiatives, we believe we'll be at the hard about future successes.
We look forward to share in our progress with you.
While our accomplishments during the war with the Golden Nike or impressive and we're proud of them. The really Roes are those folks on the front lines.
Caring for others and saving lives.
We honor and thank those who are making the true sacrifices.
So, let's turn our attention to the said the financial results over the second quarter 2020.
Second quarter earnings decreased by 20% from a year ago.
Diluted earnings per share for the second quarter 68 cents is a decrease of 17% from the 82 cents reported for the second quarter 200 2019.
We also reported at 2% decrease in revenue second quarter, Twoq 2019 kit second quarter 2020.
The first and second quarter earnings results were affected by their rival of that go with 19 ban.
With the arrival of go that came a major downs journal in capital markets.
This caused our non cash asset balances to fall by $27.8 billion and the first quarter and rebound partially in the second but $14.8 billion for a net decrease of $13 billion by the end to the second quarter.
Well lets me their balances during the first quarter dropped by $36.6 billion and rebound in the second quarter by $10.3 billion square net decrease of 25.3.
In dollars.
Also during the second quarter, we repurchased approximately 1.6 million shares vest T.I. stock at an average price.
$54.48 per share.
That translates to $89.5 million of stock repurchases during the quarter.
And the second quarter, we also continue to our investment in the gross generating platforms.
The newest effort is one Sci, which is a large part of our gross.
As you recall.
One Sci.
Leverages existing and new Sci platforms, I'm, making them accessible to all types of.
Clients, all adjacent markets and all other.
Platform.
As a byproduct of investments we make in the second quarter, we capitalize approximately $6.1 million golf.
Unamortized approximately.
Well point $2 million previously capitalized development.
To date, we have not capitalize any of the one Sci work.
Turning to revenue production second quarter sales events net of client losses totaled approximately $22.1 million and are expected to generate net annualized recurring revenues of approximately $16.6 million.
Clearly we are encouraged with this years sales results. They reflect the fact that throughout the company, we have successful and entrepreneurial sales teams driving RASM.
Are you in a heads will speak to their specific sales results.
In addition.
A key objectives, our business, particularly in these times of uncertainty and volatility is to deliver smoothed operations.
This transition about works like ours.
Centralized operations to remote interconnected knows went seamlessly.
Which again is a credit to the work ethic and customer commitment of our employees.
We know that things will never be the same and we will need to adapt to new mental models and realities.
We look forward to catching.
The opportunities in here and so no significant change.
This concludes my formal remarks, so I'll turn it over to Dennis you give you an update on LSB and the investment a new business segment. After that all segment heads will update results in their segments.
Yes.
Thanks Al Good afternoon, everyone I.
I will cover the second quarter results for the investment some new business segment.
And discuss the results of that was the asset management.
During the second quarter Twentytwenty the investments in new business segment continued its focus on the ultra high net worth investors segment.
Through our private wealth management group.
An additional business research initiatives, including those related to our I T services business opportunity the modularization of larger technology platforms into Standalone components for the wealth management and investment processing space.
To deliver on our one SCR strategy.
During the quarter the investments in new business segment incurred a loss of 10.1.
In dollars, which compared to a loss of $7.5 billion during the second quarter 29 team.
This increase loss reflects an increase in investments specifically related to our one Sci strategy.
We accelerated our efforts on this initiative during the second quarter, making significant progress.
Of our expenses in this segment approximately $8 billion is tied to that effort.
The one Sci strategy as Al mentioned as a companywide initiative to open business opportunity across our entire company.
As well as creating new business lines.
We expect losses in this range for the remainder of the year in this segment.
Regarding LSB our earnings from LSB represent our approximate 39% ownership ventures during the second quarter.
Now, let's be contributed $28.3 million, an income to Sci during the quarter.
This compares to a contribution of $37.8 billion an income during the second quarter of 2019.
Assets during the second quarter cool approximately $10.2 billion.
Now, let's be experienced net negative cash flow during the quarter of approximately $1.9 billion.
Offsetting market appreciation.
Revenue was approximately $94.6 million for the quarter with no performance fees.
During the quarter, our effective tax rate was 23.3%.
Before I turn it over to Steve I'll be happy to take any questions.
[noise].
Operator are there any questions.
Ladies and gentlemen, if you wish to ask your question. Please press one and then zero on your telephone keypad you may wait draw. Your question at any time by repeating the one zero demand. If you are using a speakerphone. Please pick up the handset before precedent numbers. Once again, you May press, one and then zero at this time.
And what a line of Chris start out with Piper Sandler. Please go ahead.
Hi, Chris.
Chris Your line is open.
Over the next line of Chris Shutler with William Blair. Please go ahead.
Hey, Dan how are you.
Good question by yourself.
Good.
Just on the investments in new business segment, you mentioned the expenses should remain around like the Q2 levels for the remainder of the year any any thoughts on timing or magnitude of when they will fall off.
2020.
Yeah, we are they were.
We did take an opportunity to accelerate things this quarter.
So there is an expectation that though the they'll start to fall.
Beginning of next year, they won't go away completely but.
Our goal and.
No other folks on the call also could address this.
Goal is.
It's really have this behind it.
All the work behind us by.
Yeah in the first half of next year.
Are we starting to should see.
A decline entering next year.
So I guess is there any way to alike.
Hi, guys are a high level with well 2021 expenses look a lot like more like fiscal 19.
Yeah, I would say more like a.
More like fourth quarter.
Morley fourth quarter, Okay yeah.
And then anything on a.
Now, let's see on the pipeline, obviously I think that some of the investment performance. There has been been difficult, but anything that you're you're hearing on the pipeline should we look forward.
Yeah, Yeah, similar story to some of the prior quarters, even though they had net.
And that negative cash flows.
It was really blended of they did sign new business some significant size accounts during the quarter.
They lost.
One large account in the global product.
That was really the the <unk> what carried really their net negative.
You bet.
For what we hear from the leadership at.
LSV they are active in the market at all.
We all know value is not.
The.
Segment of the market you know that people are in love with right now and that being said deep value was even less.
Well you know people are lesson love, even with deep value.
But it's interesting that when you when we.
We talked LSB and here get really.
Her perspective on one they've gone through these tougher cycles in the past.
A lot of firms.
That may have been in <unk> and their space would could they affirm itself what could potentially.
Whereas ella's these very discipline, they they know what they're good that.
They believe in what you're doing.
Whether they have strong conviction that.
The Sun will shine again.
They are gonna do really well one goes.
Alright, Thanks, a lot show up.
Thank you next watchful eye enough Robert Lee with KBW. Please go ahead.
Thanks, Dan So you're doing well.
Questions or just.
Hi, Thanks, Robbie we're doing well as well on your and your family.
Thank you.
Yes.
Thank you and next over to the line of Michael Webber with what for Advisory services. Please go ahead.
Good afternoon.
Do you.
More information on <unk>.
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This.
Quarter.
Evidence.
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Got it.
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No.
Oh.
Uh huh.
Yeah.
Mm Hmm.
Yeah, right I guess I would comment on things that are kind of post quarter.
It's safe to say that it.
The value segment of the market.
That begins outperformed that will.
It will definitely participate in that.
And no now they're segment of value be more deep value.
Wouldn't be on an equal equal footing as though.
Yeah, the broad values space, but clearly they.
You know they're important they would participate in a.
Group performance of value.
And.
As we we remind ourselves that we've had these moments.
Over the past couple of years, because over the past year value habit.
Strong very short period of.
Recovery and the only to the overwhelmed by the.
Texas Tech sector again.
Thank you.
You're welcome Michael.
Thank you and I forgot to line up can help with Rosenblatt. Please go ahead.
Hey, good afternoon, everyone, if you're doing well.
Oh, you to Ken had a quick good had a quick one on the code that 19 kind of work from home. It seems like you guys move pretty pretty quickly to that digital type of environment I'm wondering as far as how that relates to the one sci spend if theres anything that's maybe precluding you from moving further down some of those caps or things you would accelerate.
Right or things to get markedly better from here or kind of Conversely, if things got markedly worse does that increase the spend or decrease in the spend at all as far as you see one Sci type strategy there.
I think we're it's generally that we were able to.
That's more assets on on this project.
From some of the firms we work with one this type of work [laughter].
I don't I don't see that change one where do you all there.
And the work on one Sci.
Really isn't affected by.
Whether we're working from home or not.
And the work will continue apace.
Okay fair enough. Thanks.
All right Ken.
Thank you and next regrettable enough Chris started out with Piper Sandmeyer. Please go ahead.
Hey, Dan its let me try this without being muted this time I'm going to say you're off mute Chris your.
[laughter].
Yeah, I know Youre yourself.
<unk>.
With a better question the first time.
[laughter].
I did want to ask just about the the geography the income statement.
You referenced in the release that there were some higher.
<unk>.
Yeah travel or sorry, lower traveling promotional expenses.
Just help us understand where those.
Up here in the income statement line.
Yeah travel would be.
In the.
Yeah.
I would show kind of a facility supplies and other costs.
Okay got it goes away thinking about that going forward, that's gonna be dependent on.
How much travel goes on.
Promotion in <unk>.
Whatever broader economy Yep yep okay.
When you can come visit us again.
Exactly right right.
And I have no further questions in queue at this time.
Thank you so with that I'll turn it over to Steve will give you an update on private banking and especially master services.
Thank you Dennis.
For the second quarter 2020 revenues for the segment for private banking totaled $107.7 million, which was down 7.2% from the second quarter of 2019, which was due primarily to previously announced client losses and a decrease in our asset management revenues.
The second quarter 2020 quarterly problem for the segment was down $8.3 million industry breakeven as compared to the second quarter 2019.
Decrease was primarily driven by the previously announced client losses.
I'm in our asset management revenues.
And turning to sales activity. This quarter, we closed $26 million of gross recurring sales events and re contracted 11 client for another $17.6 million and recurring revenue, which so which in total solidified $43.6 million of recurring.
The new during the quarter and resulted in $5.1 million in net new recurring sales event.
The average term for our rig contracts this quarter was 3.3 year.
We had no client losses during the quarter.
In addition to our recurring event, we closed $3.6 million and onetime sales for the quarter.
We're pleased to announce that we recently have expanded and extended our relationship with our long time client first horizon back first horizon has been it actually I find since 2003 July 2021st Horizon merge with Iberia Bank, which is currently running on a competitor platform, but will migrate her business to Sci and 2021.
On.
This deal allows us to continue providing our current scope of technology and services to the new larger organization.
Additionally, as we mentioned last quarter, we're pleased to announce that we recently have expanded and extended our relationship with our longtime quiet Suntrust Bank, which last year merged with BBSI degree true it.
The six largest bank in the U.S.
The only allows us to continue providing our current scope of technology and services the new larger organization.
Another event in Q2 was a large migration of Schroeder personal wealth account that continue as part of Fcr relationship with fusion.
And turning to implementation activity in the second quarter, we successfully converted three clients to the FBI wealth platform built back in Thrace endorsing Whitney Trust company, both existing trust 3000 clients and copper broadly I knew you paid client all brought live on that's WPP and.
100% remote environment.
In late Q1, those actually iron ore client partner keeps immediately adjusted to remove environment and that all milestones in live date to avoid any disruption to our clients businesses.
The teams have enhanced our remote training and implementation capabilities and the success of these conversions will ensure continued ability to bring client lives under unforeseen circumstances.
This capability to finalize these implementations during these disruptive time is a testament to our clients, our workforce and bodes well for the future.
As an update on our backlog, our total signed but not installed backlog of approximately $76.3 million in net new recurring revenue.
From an asset management standpoint, total assets under management ended the period at $22.9 billion, representing a 2% increase from second quarter 2019.
Our eight who I'm increase was due to a market appreciation.
End of period after being up our average actions during the quarter were down which caused our revenues to be down for the quarter.
Our cash flow for the second quarter 2020 was a negative $483.5 million.
Turning to the business in general despite the ongoing pandemic and challenges that have brought we continue to operate business as usual and our workforce continues to rise the occasion and across our company have executed extremely well.
On the prior quarters call I outlined our focus for the year. These priorities remain true and as we enter the second half of the year. We continue to send to our efforts on growth. This includes continuing to manage through the downward pressure of lost business. We have previously discussed continue to push our one Sci strategy and continue the expansion of.
Our markets and solutions.
We will also continue to expand our capabilities in the market across our platform implementations that solution.
While this will result in our expenses up ticking in the next few quarter I view this as an investment in our business and to support the implementation of our strong backlog of revenue.
That concludes my prepared remarks, and I'll now turn it over to any questions you may have.
Thank you as a reminder, if you wish to ask a question. Please press one and then zero at this time.
First of all parts of the line of Robert Lee with KBW. Please go ahead.
Great. Thanks, Hi, Steve.
I hope you're doing well thanks, Rob how are you I hope you're doing wells well.
Pretty good thank you.
Thanks Peter.
Couple of quick questions first one is no.
That's what makes on kind of thinking about the the movement with all the sales we are pretty high Roes sales on track being a relative to that the net recurring revenue seem I guess.
Low solution.
That kind of factor in that on maybe some of the contracting.
Sure.
Yes for lack of midway.
Concessions or something that kind of loss that.
And then kind of backed into that.
No I know it grew a lot of numbers that Rob. So let me explain so in the rig contracts we did in Q2.
Our across the board, our our fees pretty much stay this Dan I think in total the net down was less than 1% of total fees that re contracted I think the delta that you're looking for their of the 26 million dollar gross that includes a couple of clients I mentioned that literally went out for large had large merck.
Two years and put their business out basically into the market. So we had to go read even though their clients we sell those clients and we obviously were successful.
And while if we had unfortunately lost the business, which we did and I would have announced the netted the loss of the current revenue I'm not going to take credit for the current revenue even though it was an active sales agenda. That's in the door. The only met them going now fits in that five one is the net new up revenue.
Okay I understand that makes sense. Thank you.
And I'm just curious me the.
Very sizable backlog.
No given the environment and you all are no what is the thinking about kind of the.
Versus original expectation ace.
[music].
In the backlog.
To work and then so our are similar to banks are pretty focused on other things at the moment.
You mean.
Good morning efficiently.
Work from home, but you are you expecting that's going to fund over a longer period of time.
January birds.
Yes, so thats a great pressure Rob. So there is what I'd say is yeah, we've seen some delays in it and obviously this pandemic has had no impact to that but I think you know pointing out to the three conversions we had during the quarter I think we've proven we can do this in a remote environment and I think that we've certainly related that communication to our client base.
And I think they're very eager to continue with that said you know I'd say right now as I'm looking at that backlog I would say about 50% of it.
As of right now we're hopeful that will fund within the next 18 months, 50% over your extended out past 18 month, well that changed a little bit you have probably do I think it will drastically change now I'm hopeful not I'm hopeful that's why I called out the the fact that we did these.
Conversions and implementations and remote environment. So while some of the larger clients do have other things to focus on we still do move all of our implementations and conversions and our backlog. We are active I just think give the longer. This goes yeah could there be some delays, but I don't think there'll be at least we're not expecting right now significant.
Delays.
And maybe.
Just one more in no.
With the strong kind of re contracting.
Line.
Good.
No I'm, assuming a fair amount of that kind of work in process.
Or b.
And more or less so.
In terms of new.
Sales activity.
Are you starting out feedback on this branch out more just like the.
Yeah, I'd station, yeah, so as far as the new activity.
What I'd say is it's very engaged in active so yeah in the U.S. alone we have over 22 active agendas that we're pursuing right now and I'd say they are all still moving my prediction and I've said this early on the prior protocol I think it will delay a little bit I, just think especially for new business.
I just think doing the.
Due diligence and going through everything you have to do is a little bit harder and remote process Theres a lot. We can continue to do when we are doing through virtual presentation, but I just think the end decision, making and contract signing might be delayed a little bit, but it's not like things were put on hold or pause things are moving in that are very positive.
From my standpoint, and while I do believe things might push a quarter or too I think we're seeing I filled I'm hopeful that a number of his agenda is we'll come to fruition this year.
Hey, Thanks for taking my question there were no problem.
Thank you and exports from the liner Chris Shutler with William Blair. Please go ahead.
Hey, Steve Good afternoon, Hi, Chris how are you.
Good.
So I just want to go back to that the last.
The first question previously.
Just to be just to be clear the only number that we should really be looking at as far as sales is that the 5 million right and the 21 million Delta is business that you already had it just is remaining it Sci is that correct, yes that figure a way to look at it. However, what I'd say I don't think 5.1 going number you want to be concerned about.
Obviously, our business, we're driving two things right now to achieve growth retention of our current revenue and expansion and growth of our current revenue and I think the number that I would focus on while I understand the 5.1 is one that drives new revenue and new growth, we basically secure at $43.6 million, which is a step.
Wrong, a number in the quarter, so I think that.
I think thats not a number two to Passover.
Okay that that will make sense.
And then secondly, just could you give us an update on the competitive environment and meal to the extent possible bifurcate, what you're seeing it larger.
Hi, guys versus competition in the smaller F.I. segment, and then lastly on any thoughts on.
Yes, somebody the announcements out there I'm thinking like state Street, FNC any any impacts competitively that.
Could have on Sci longer term.
Yeah. So too I think you have a really at the heart two questions. Eric So the first one I'd say, Chris the competitive environment remains the same we're still staying the same competitors that you know well competing with us.
I think everyone's dealing with this new normal and the pandemic, but yes, we're staying in our lane and do we do best and I think thats still resonating very well the power of our platform. Our people our technology is still resonating and I think.
We have a very strong value proposition so from a competitor standpoint, we look at them focus more on what we're doing and sticking to our our playbook.
As far as announcements here Theres always announcements there's been consolidation in this industry specific one you brought up on FNC. So it was announced the made public this year state Street's wealth management business services business, which is part is a bit of client of ours for long time, they sold off that business.
Two FNC, which is a competitor overseas.
So that business is still quite of ours and still under contract and we have talked to the folks and state Street and we're in discussions with them what that means long term for us, but really no update on that what it means from a competitive standpoint.
It's another competitor.
Really from outside the U.S. entering the U.S. market.
Okay. Thanks, a lot Steve sure.
I have no further questions in queue at this time.
Okay. Thank you so theres no questions I'll turn to investment managers.
So turning to the investment manager segment for the second quarter 2020 revenues for the segment totaled $119.3 million, which was $10.1 million were 9.3% higher as compared to our revenue in the second quarter of 2019. This year over year revenue increase was due primarily to net new client funding and existing client.
Expansion.
Our quarterly profit for the segment of $44.7 million was $3.8 million were 9.4% higher as compared to the second quarter 2019 higher profits year over year were primarily driven by an increase in revenue offset by a smaller increase in personnel expense and investments.
Third party asset balances at the end of the second quarter 2020 were $668.6 billion approximately $57.8 billion higher.
Then the asset balances at the end of the first quarter 2020.
This increase was due to net new client fundings of $19 billion.
The market appreciation of $38.8 billion.
Turning to market activity during the second quarter 2020, we had a strong sales quarter with net new business events totaling $15.2 million and recurring revenue as well as we contracts of $9.9 million and recurring revenues.
Our backlog of sold but not yet implemented event stands at $34.6 million at June Thirtyth 2020.
Or events for the quarter included falling highlights nor alternative market unit sales to existing clients were robust as many of our larger sophisticated managers seized market opportunities and launch new products were deployed additional capital.
In addition, we were selected by $60 billion diverse manager to automate their fund subscription process and a startup venture capital firm for full administration.
And our traditional market unit. In addition to continue on our momentum with collective investment Trust and all product lines for new and existing clients. We also had success expanding middle office servicing relationships with three existing clients.
In Europe, private credit and private equity continued to be main drivers of new names as well as cross sells with existing clients and then the family Office services unit, we signed seven new single family office clients to the Arts way platform and continue to see strong demand from this segment.
From an overall standpoint on the market and our business the wording guede come to mind.
We see our clients and prospects highly engaged with us as we continue to navigate through the pandemic and new business model work from home across Sci from our sales team to our frontline operations. Our workforce has continued to be nothing less than impressive and the resiliency an execution in this new norm.
It is noticed and appreciated by our clients.
While we see some slowing in the process of new sales. We see this is a delay and not a stoppage and we will remain highly engaged in the market with clients and prospects.
The value of our platform technology and services shines, well and disruptive times like these and we feel well positioned to execute on our growth strategy.
That concludes my prepared remarks, and I'll now turn it over for any questions you may have.
Thank you as a reminder, if you wish to ask a question. Please press one and then zero at this time.
And we'll get a line of Robert Lee with KBW. Please go ahead.
Great. Thanks, Thanks again, Steve.
Question on.
Margins immune margin.
Yes.
Okay.
Really well.
And my numbers right you May you hide your highest margin at least over the last few years, maybe ever so I.
I mean do you think.
I think that maybe.
Getting scale and this maybe.
Level.
That would be.
A couple hundred basis points higher than where it may be had brought this or the.
35 ish percent range now.
Well I was 36 37 in change fairly think ultimately.
Yeah. So.
Yeah, I I get your Rob So what I'd say is what I always say I'm comfortable at this business, meaning in the mid Thirtys.
That means over some of the quarters that might bump up 36, 37 might bump down 33 34.
I do think the business has been at scale I think with the larger clients base, we've had and really grown over the past five years.
Obviously that adds a good bit of scale for the business and listen we're getting better and we're adding more automation and more tools and investing in our business. So at that help.
We think the way to look at though is not really quarter over quarter its year over year and how that trend goes.
I'd say this quarter, we had a lot going on we were we were doing a lot. There was a lot of client movement, but there are still things that I'm looking at that I continue to want to invest in and build out for sustainable growth and that's the most important to me for the future. So to the business picked up a little bit over 35 sure it could but I do think.
It's going to be within that range for a while because I do think there will be continued investment will make.
Right and so thanks.
Sure.
Thank you and I have no further questions in queue at this time.
Okay, Great Theres no questions, then I'm going to turn it over to Wayne Withrow to discuss the advisor segment way.
Thanks, Steve.
During the second quarter of 2020, we started to settle into an operating model, reflecting the cobot 19 crisis.
Both the migration to this model and improvements to it our focus for us.
Second quarter revenues totaled $94 million.
These revenues were down 6% from the second quarter of last year.
The impact of cobot, 19, or market valuation and a corresponding de risking of portfolios with a dominant factor is reflected in these results.
Expenses were down 1% compared to the second quarter of last year.
Dennis predicted on the first quarter conference call, we had significant savings and the travel and client event area.
These were mostly offset by increases in personnel costs.
Some technology increases and increases in sub advisor fees, mostly attributable to growth in our estimate program.
Our profits decreased 12% from last years second quarter, following our revenue decline and reflecting our leveraged operating model.
Our assets under management at the ended the second quarter was 66.6 billion.
This is down roughly 1% from June Thirtyth 2019.
Well reflected recovery of much of the steep market declines in March.
Following some recovery in our cash flow during the first quarter second quarter net cash so lost ground and was a negative $642 million.
We recruited 60 through 63, new advisors during the quarter in line with that first quarter recruitment rate.
Moving past the numbers.
There were changes in our product line operational model and client engagement model during the quarter.
As to our operations model.
We hit the ground running when our operations transitioned to a work from home environment.
Quite frankly.
This will influence our operations thinking going forward.
Our client engagement model, however was not so easy as FDI, our advisors and our advisors clients are all changing at the same time.
The good news is that client and prospect engagement at our virtual activity has been strong.
And we are investing in our digital marketing and sales activity.
With a goal to convert that virtual activity to actual cash flow.
Moving on to product line changes, we announced a partnership with the American funds and have launched the Sci American fund models.
These models are designed constructed and maintained by the Sci investment management unit.
And our implemented with American funds managed by the capital group.
Bringing together the power of both organizations should result in an attractive all three for advisors.
Early indications support this thesis.
In summary.
The cobot 19 crisis and its fallout dominated the second quarter.
And we'll have a prominent role in what we do going forward.
Our scale strong financial position and resilient infrastructure will allow us to make the best of this challenge.
At its core.
Restoring our growth rate remains our primary objective.
I now welcome any questions you may have.
Thank you as a reminder, if you wish to ask a question. Please press one and then zero at this time.
And we'll go to the line of Chris start out with Piper Sandler. Please go ahead.
Hi, Wayne how are you doing.
Good afternoon, Chris Great.
Wanted to ask about your comment about.
De risking of portfolios.
Is that something that was more prevalent early on in the quarter and then we have we seen any re risking since then.
Asking because I'm curious, what we might see a recovery in.
The revenue yield in in coming quarters, with maybe a higher mix of Ah or with less cash probably.
Well I guess, Chris the latter part of your question would you real question yes.
Lastly, what happened and when you look at the yield.
He'll reflects if you look to point to point in the change in.
No money market and in other less risky assets to point to point increases not kind of reflect as much as the average basis of the average was really what drove the revenue. So yes. It has started recovering and the de risking occurred during the quarter, but it could go the other way I would expect it to go the other way going forward.
Okay. Thanks very much.
Thank you and next well go to Ken Hill with Rosenblatt. Please go ahead.
Okay.
Just a quick question on client engagement as you're thinking about it here moving forward I mean, what types of tools are you looking at our.
From processing, the thinking about bringing in thats kind of can engage clients in a little bit more of a digital way for the current environment, just kind of hoping that can learn a little bit how you're thinking through that.
Yeah, I think a a lot of the engagement is.
Historically, you a lot of engagement has been face to face now we're doing you know traditional what I would call traditional digital engagement.
Webex assume kind of digital meetings, but then with supplementing that with you. If you will kind of on demand videos around certain components of the offering certain components in the sales cycle. So you see a little bit of a shift from you know a push kind of sales process to a pull kinda sales process.
We're making catalogs of digital engagement available to advise the so they can if you will shop at their own pace I would say that major changes.
Got it and then from a advisor perspective, I think you mentioned 63 coming in that's kind of on par with prior quarter. What's the pipeline there look like and any color you can provide kind of looking a little bit further out.
Yeah, I I think I think our pipeline of new advisors.
Remains very strong and.
We're very the amount of digital engagement is is really strong so we feel pretty good about it.
Okay, any particular areas those are coming from or is it just more broadly.
I think it's pretty broad it's across the board.
Got it okay. Thanks for taking the questions.
Thank you and next well go to line of Robert Lee with KBW. Please go ahead.
Great. Thanks, Hi window for doing okay.
I'm doing great you too.
Thanks.
Couple of question. So first just make sorry, Andrew.
Numbers right. The net cash flows in the quarter was.
Minus.
And then.
No.
A number but also I think you would start this quarter kind of breaking that down.
Kind of cash flows from your conditional is cash flows.
Due to the.
We're on that money you ate side.
Defenses.
You may begin to separate.
Yeah, what I gave you with cash flow into the the managed programs.
I didn't mention but I would tell you that cash flow into what I would call. The age away, we had 600 million in positive cash flow in the way level.
That wasn't in my comments, but the number.
And then the traditional.
One.
I would imagine items.
Succeeds.
Sorry.
Yes, you have right it was six and yes.
Right right and then.
The jury is no that's supposed to the American.
Initiative.
Which seems like a pretty.
It was pretty large archer.
Or.
Hi.
Architecture.
Picking the right manager or.
Your products.
European reorganization, but.
You just sticking with one manager I guess bar.
Just trying to get a sense of.
How you think you're.
Value added that was really wave American funds reach your advisors and play I mean, just trying to.
What's unique about that.
From the advisor perspective versus something.
Today.
Well I think I think there's a couple of different aspects to it.
Number one it is this level that the models are constructed.
No maintained by the Sci investment management, taking air all of our experience in our history and sort of portfolio construction management. So.
We're co managing them, if you will with the American funds and the components.
If you will the implementation components or what the America funds provide.
In addition, all of these assets on the FC I operating platform. So is the strength of our technology platform, which is only available to us so in many ways.
It is offering if you will not a brand that asset manager product employee.
Our portfolio.
At the portfolio structured level on our platform. That's what makes it different now it's still adheres to our goal based investment management strategy, it's still out overall investment structure.
It's just some of that it's it when you think about it it's no different than what we do when we offered F.
Products in our portfolios, where we have Esa we don't 90 feet you have to third party, yes, what we structured and we manage them we do the tax loss harvesting we run them when our platform. It's all those components.
Right.
Maybe.
Curious.
There's any sense given some kind of a.
Business trended through the quarter because.
Market.
Straight up since in the March but you have you as you kind of maybe way through the order or.
Yeah.
Rebound.
Notwithstanding.
Okay economic there is there anything.
On an advisor and client engagements.
Was changing or leaving over the course in the quarter Wars.
Yeah pretty spotty.
Any color you.
[laughter] I guess I would say.
When you look early in the quarter.
Everyone, we just reacting.
You know to the crisis and you know I don't say was panic, but.
Volumes were astronomical and people were just react in de risking portfolios stabilizing the client.
I think as we progressed through the quarter.
We're not entirely there but was slowly when I say AOS entered buyers of slowly returning to well it maybe a little bit of a new operating environment. In this cobot 19 world, but we got to get back to business again, so that I think that.
I would describe the change testing during the quarter.
Great. Thanks, taking my question.
Thank you in next well go to the line of Chris Shutler with William Blair. Please go ahead.
Hey, good afternoon.
Good afternoon, Chris.
So on the outflows in the corner, where those due to I guess tougher new sales or or greater attrition or both.
[laughter].
I would say it was more outflows from from the existing business and not.
New advisors Sonys I think the new advisor activities, new but I think what you're seeing is.
People moving out of managed products into safer, maybe guaranteed type products and you're just seeing an overall slowdown in just.
Oh receipts you mean, it's entirely consistent with what we've seen in other periods of financial market stress.
Okay.
And then I guess secondly, just you know there's.
Lot of consolidation activity happening in the Tam space I think.
Some other.
Firms out there are growing at you know frankly.
A better clips and then then your businesses today. So I guess the questions are are you contemplating making anymore or feel there's a need to make any more material changes to the business or the structure of the business to see a real pickup and growth.
I don't know exactly how to answer that I mean, you were constantly making changes I think that.
We need to continue change our product line and continue to change our.
Our technology platforms going forward.
In terms of anything more specific I'm not really prepared to talk about it in this type of public Forum.
Okay. Thank you Wayne.
Thank you and I have no further questions in queue at this time.
Thank you very much at this point I like to turn it over to Paul water talk about our institutional segment.
Thanks, Wayne good afternoon, everyone.
To discuss the financial results for the second quarter of 2020.
Second quarter revenues of 76.5 million decreased 6% compared to the second quarter 2019.
Second quarter operating profits at 39.6 million decreased 5% compared to the second quarter 2019.
Operating margin for the quarter was 52%.
Both revenues and operating profits were impacted by negative coin fundings lower capital markets and currency translation.
Operating profits were positively impacted by lower travel costs and reduce costs associated with client events.
Quarter and asset balances of 85.6 billion reflect a $2.6 billion decrease compared to the second quarter of 2019.
This decrease was driven primarily by negative claim fundings.
Net sales were a positive 400 million for the quarter.
It was comprised of gross sales of 900 million and client losses of 500 million.
New signings included the U.S. Hospital.
You KDB fiduciary management.
And a U.S. not for profit relationship.
The unfunded new client backlog at quarter end was 460 million.
New sales momentum in activity has been impacted by the crisis.
Its prospects have extended their timeframe.
However, we did today see an increase in no CIO RFP.
Inbound inquiries and formal decision, making processes in the second half the quarter.
We continue to receive positive feedback from our clients, one or Proactiveness and attentiveness.
We have spent much time learning and enhancing our delivery approach in this virtual environment.
Regarding new strategic initiatives, we have made progress on our large investor platform.
Offering technology.
Non fiduciary investment services and risk management consistent with the one Sci mindset.
We are moving forward to a formal launch in the third quarter.
Thank you very much and I'm happy to end it entertain or answer any questions that you may have.
Thank you as a reminder, if you do wish to ask a question. Please press one and then zero at this time.
And we'll go to the line of Robert Lee with KBW. Please go ahead.
Hi, Thanks, Hi, Paul how are you.
Good Robert.
He may be and a little bit on no.
New business initiatives.
Sure.
I understand it really.
Kind of what.
Okay.
Hello.
Maybe.
Overtime that we should think about how that maybe change.
All the economic lunch can change it.
[music].
Yeah, absolutely Robert So this was something that we introduced the content last November at the Investor Day.
This would be going to larger institutional investors typically over 2 billion doesn't have to be over 2 billion, but effectively these would be organizations, who don't want to outsource who want to have an investment team who want to have investment talent.
Looking for technology similar to the technology that Steve sales through the investment manager market segment, So technology to help with the entire administration valuation and all the alternative investments.
Non fiduciary investment services, so we would not be taking accountability for picking in overseeing managers, but we would be providing access to them and opinions to them about managers at about asset allocation studies.
And then a full risk management platform.
So in essence, it would be taking all the capabilities of the firm.
Operating them in a flexible environment.
And Robert this represents a whole new market for us because at some level.
2 billion, maybe 3 billion, maybe it's a billion depending on the segment. There are organizations. It will not outsource they are committed to their investment process and their team.
So this is a whole new incremental marker for us to be able to go into and take all the horsepower.
Offered to this market segment.
And I.
I mean, I guess, one they don't want them just characterize it almost kind of feels like going back.
Decades ago.
Anyway.
The.
Well.
No that's not a airway yeah, there was there something really.
Much more different about it.
Yeah, I would not categorize that we're trying to be in investment consultant. This at its heart is technology sale.
This is technology that these organizations need again very similar takes a technology that Steve is delivered to the investment management segment.
To help them be able to run their sophisticated investment process. Most of the time. These types of organization have a myriad of excel spreadsheets and have a global custodian and it is a very fragmented and non integrated process. So I would say, it's far more of a technology sales.
Some of the sweeteners that we can add or the non fiduciary services with regard to help getting opinions about managers and asset allocation studies, but at the heart of it would definitely be much more technology than it would be trying to sell consulting services.
Right.
It was my question. Thank you. Thank you Robert.
Thank you and I have no further questions in queue at this time.
I would now like to turn it over to Kathy Heilig as you guys controller.
Got it thanks Paul.
Good afternoon, everyone.
I have some additional corporate information out this quarter.
Second quarter 2020 cash flow from operations was 165.2 million or dollar 10 cents per share.
Year to date.
Hi June 2020 cash from operation, it's 264.1 million or dollars 75 per share.
Second quarter free cash flow 145.3 million and year to date free cash flow 217.2 million.
For the second quarter capital expenditures, excluding the capitalized software were 13.8 million, which did include five and a half million towards the new building.
Looking year to date capital expenditures, excluding capitalized software to 34.4 million and about 15.7 million relates to the new building.
We are projecting remaining capital expenditures for the year, leading capitalized software to be about 16 million, which includes about 9 million related to the facility.
We also we'd like to remind you.
That many of our comments are forward looking statements and are based upon assumptions that involve risks and that the financial information.
Is that it in our release and on this call is on audited.
In some cases, you can identify forward looking statements by terminology such a shade may well expect we continue or Pierre.
Forward looking statements include our expectations as to the long term consequences of potential opportunities, resulting from disruptions precipitated by the Covin 19 pandemic.
Degree to which will benefit from our scale resources technology and infrastructure.
The Cline offerings business segments, and client type that will drive arcturus.
Revenue that we believe will be generated by sales events that occurred during the quarter or when our unfunded backlog may find.
Our resources allocations in technology and platform, which we choose to invest including our one Sci initiative.
The strategic finish it isn't business segments that we will pursue our ability to manage our expenses scale our offerings in established sustainable and accelerating margins.
Trends of our pipeline and grace opportunities and our ability to execute on and the success of our strategic objectives.
You should not place undue reliance on our forward looking statements is they are based on the current beliefs and expectations of our management subject to significant risks and uncertainties. Many of which are beyond our control are subject to change. Although we believe the assumptions probably to base are far less seems reasonable they could be inaccurate.
Some of the risks and important factors that could cause actual results to differ from those described in our forward looking statements can be found in the risk factor section of our annual report on form 10-K for the year ended December 31st 2019.
Now please feel free asked any additional questions that you may have.
Thank you as a reminder, if you wish to ask a question. Please press one and then zero at this time.
And I have no questions in queue at this time.
So ladies and gentlemen.
[noise], we are fighting on two fronts.
First the cobot 19 disruption in second growing revenues and profits during disruptive time.
On the first front, we were very fortunate to have planned well it had been able to keep our war workforce healthy and productive.
On the second plant.
We face short term headwinds, but we believe that we will prevail, thanks to our motivated and they'll say to.
Workforce and the strategic investments, we're making in future.
Please be safe and remain happy.
And healthy.
And have a good day, thank you Christian and nickel.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using 18 T. Executive Teleconference Service you may now disconnect.
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