Q3 2021 Manning & Napier Inc Earnings Call
Okay.
Good evening My name is Britney and I will be your conference operator today at this time I would like to welcome everyone to the Manning <unk> Napier third quarter 2021 earnings conference call. Our hosts for today's call are Nicole Kingsley Brunner.
<unk> marketing and strategy Officer, Mark Meyer, Chairman, and Chief Executive Officer, and pop Takla Chief Financial Officer, today's call is being recorded and will be available for replay beginning at eight P. M. Eastern time today. The dial in number is 808 3956 to nine no pass code is required.
At this time all participants have been placed in a listen only mode. If you should require operator assistance. Please press star zero. It is now my pleasure to turn the floor over to Mr. Cole Kingsley Bruner.
Thank you Britney and thank you everyone for joining us today to discuss Manning <unk> Napier third quarter 2021 results.
Before we begin I would like to remind everyone.
Certain statements made during this call not based on historical facts.
Any statements relating to financial guidance may be deemed forward looking statements within the meaning.
The private Securities Litigation Reform Act of 1995.
Because these forward looking statements involve known and unknown risks and uncertainties. There are important factors that could cause.
Actual results to differ materially from those expressed or implied by these forward looking statements.
Manning <unk> Napier assumes no obligation or responsibility to update any forward looking statements.
During this call. Some comments may include reference to non-GAAP financial measure.
Full GAAP reconciliations can be found in our earnings release and related SEC filings.
With that I will turn the call over to our Chief Executive Officer, Mark There Mark.
Thank you Nicole.
We continue to execute on our investment disciplines this quarter, helping clients stay on track towards meeting their objectives, while we made further progress on our strategic initiatives.
Oh four months for clients was muted for the quarter.
So flattish to negative absolute returns across much of the equity universe and flat returns in fixed income.
While the S&P 500 was slightly for the quarter less than 1% the border U S equity market was roughly flat.
What is outside the U S declined.
Relative performance was mixed as a somewhat higher percentage of our strategies underperformed, though generally by very small amounts been outperformance.
Most of the figures we will discuss are available on pages six and seven of the earnings supplement.
And our multi asset class strategies, which represent two thirds of our U. We delivered slightly negative absolute results over the period across all of our risk profiles and all cases broadly consistent with the very slightly as in tens of basis points behind the subdued returns in global capital markets.
During the quarter.
All of our multi asset portfolios are ahead of their benchmarks for the year to date and three and five year relative returns remain compelling.
This was the first quarter since the pandemic began where broad financial market performance as well as our own multi asset class results were subpar from.
From the market bottom in late March of last year Global equities had been on a steady consistent run as the economies have recovered and persistently low bond yields have provided some justification for multiple expansion.
This equity strength has more than made up for weak bond market performance over that stretch and all the best.
Teams have capitalized on this environment.
In the third quarter, however, both equity and debt markets stalled out.
To state the obvious we are living through a remarkable economic events U S recovery from last spring steps has been so rapid and so strong that we believe the domestic economy is rapidly moving through its economic cycle and is already in a mid cycle phase with some signs even pointing.
Towards the later cycle stage.
Although there are economic indicators, suggesting that there remain some residual slack in the system.
Labor force participation Fortunately volt.
Numerous other indicators, including healthy consumer demand supply chain constraints everywhere rising commodity prices and the unmistakable uptick inflation are quite extraordinary to see only one and a half years removed from the sharpest economic contraction in American history.
To be clear economic and company fundamentals remain robust at this time, but financial market valuations are elevated and the rapidly accelerating U S. Economic cycle suggests that's just systematic risks have begun to build.
Our long term outlook for economic growth is still characterized by certain structural headwinds such as deteriorating demographics and rapidly rising debt levels actually.
Results of our revolving views, we began to reduce risk in our multi asset class portfolios during the third quarter.
As we saw last year, our bottom up research team is agile and can move quickly when they see opportunities emerge and there are certainly compelling investments around the world.
However, at our current positioning.
Equity markets to go on a chair it is unlikely we will deliver better performance than our multi asset class benchmarks.
As noted fixed income returns were muted in the quarter aggregate fixed income composite performed in line with its benchmark.
Our tax exempt portfolio has declined and underperforms very slightly.
The bright spot and fixed income markets remains high yields up about 1% for the quarter and our high yield fund continue to outperform as it has all year and over the longer term.
This Morningstar five Star fund ranks in the top decile of its peer group over 135 and 10 years.
Its inclusion in our multi asset class portfolios has been additives and we are seeing interest from third party advisors.
In an environment of such high risk and fixed income characterized by sharply negative real rates and tight credit spreads how has our credit team been able to add value and high yields.
Well because of a lesser size, we can identify smaller often unrated bonds that larger investors simply ignore.
These credits require substantial research and have contributed to our strong results.
Our unconstrained bond series is similarly, capitalizing on our flexible school reactive approach. This strategy goal is to deliver maximum maximum absolute returns with the least amount of risk and we believe the team is selling.
<unk> provided total returns of 492, and 356 basis points annualized over the past three and five years respectively.
Results were mixed for our fundamental bottom up equity portfolios, our U S core equity composite underperformed slightly but remains about 100 basis points ahead for the year to date, our core equity unrestricted and global equity strategies, both outperformed for the quarter.
Mobile equity is 287 basis points ahead for the year.
<unk> again was the core non U S equity strategy, our international equity composite provided 192 basis points of outperformance in a negative return environment. This quarter bolstering the year to date outperformance to nearly 700 basis points on a three and five year rolling basis, the composite as output.
Forming by 713, and 309 basis points annualized respectively, and it remains well ahead of benchmark over the past 10 and 20 years.
Our real estate series bounce back with a strong quarter outperforming its MSCI U S. REIT benchmark by over 200 basis points. It isn't now ahead of its benchmark for the year and is well ahead over three five and 10 years, which had been a bright spot among equities all year consistent with economic recovery.
We believe our strategy is particularly compelling for its consistent emphasis on quality.
Our Rainier international small cap strategy underperformed slightly versus a flat benchmark and remains behind for the year outperformance over three and five years remains outstanding Bahraini Air and 557, and 485 basis points respectively are.
Our disciplined value series modestly underperformed as the strategy is biased to quality within the value style was again a headwind.
While investment results overall more muted. So this quarter, we are proud of what our investment team has delivered for clients, both recently and over the longer term we.
We were named Barrons Best actively managed fund families for 2020 for a reason and we look forward to delivering excellent excellent investment results and well Architected solutions to clients in the years ahead.
I'd like to now turn to progress on our key strategic initiatives.
Net flows remained slightly negative.
While we are seeing continued reductions in the rate of outflows improving gross and net flows in our intermediary business are more than offset by small declines in our institutional and wealth management businesses.
As noted last quarter, we made important management changes to accelerate the progress in our sales organizations and we are just beginning to see the fruits of those management changes the results of our actions and investments lead us to target modestly positive net flows in 2022.
In prior quarters, we said that our most performance sensitive business. The intermediary channel was the one most likely to see acceleration in the short term, reflecting our strong investment results. This has occurred.
We are investing in this channel hiring new advisor consultants, who come to us with significant experience and strong relationships with third party advisors. We are leveraging our positive press such as Lipper Awards and we are seeing good sales momentum across our strategies multi asset class strategies right here.
The national small cap high yields and international equity in particular.
Our intermediary channel has had positive net flows each quarter this year and we target flows to be positive in 2022.
The rate of client retention in our wealth management business continues at a very high level. However, sales productivity has remained static for the past few quarters. Despite our increased hiring in this channel.
We have added six new financial consultants this year on top of the four we added in 2020.
Why then has new business growth remained muted our staffing model in wealth management is distinct from the adviser acquisition strategies prevalent in our industry.
Unlike most competitors, we are not acquiring advisory practices with associated books of business and revenues, we are hiring experienced financial consultants had financial planners.
But they come without associated books.
They have to do two things.
One they are critical in the transition of some large client books, where we have long tenured financial consultants, who are retiring or moving into new roles.
And two they need to develop a pipeline of new business with relationships they had as well as new relationships.
Develop this takes time and the results are just beginning to play out it's common knowledge that advisory practices are being acquired at unprecedented valuations.
The advantage of our approach is that it doesn't increase the capital intensity of our business.
It does emphasize our priorities for half a century, we have been providing clients with consistently and thoughtfully architected solutions that have many decades of superior audited publicly available returns, we price our distinctive culture and want to carefully integrate our new hires.
To ensure that they fully embraced our culture and and Richard.
We are patients and are confident that results in wealth management will accelerate over time.
And we are targeting positive net flows in wealth management in 2022.
Our institutional channel, which is dominated by our sizable franchise with Taft Hartley local plans is making progress as well.
We're engaging productively with consultants and gradually building towards advocacy our dialogues with the professional staff and trustees at our Taft Hartley clients are good.
They are broadly experienced strong investment results with <unk>.
Establishing us as a growing presence in the institutional market will take time.
And we project continued outflows in this channel in 2022.
We continue to make progress on our extensive exhaustive digital transformation, we completed the installation of workday for human capital management in the quarter on time on budget and this was a massive effort.
We migrated to workday for finance previously.
And we are now finally able to integrate talent management performance reporting payroll benefits management billing and payables General Ledger and financial planning and analysis. The benefits of this integration will become visible in both greater efficiency and increased effectiveness beginning next year.
We are far along in our implementation of Charles River for trade processing and order management and are now fully executing about a quarter of our portfolios in Charles River we.
We anticipate completing the transition of Charles River around the end of the first quarter of 2022.
Our migration to a best cloud for front and Middle office functions is coming along.
We are simultaneously implementing a new CRM adviser portal, a new financial planning system portfolio accounting system and client reporting module.
This is needless to say daunting and we are working through many complexities.
Further there are substantial interdependencies with Charles River.
So we now anticipate completing the front office CRM and adviser portal by the early part of next year.
The portfolio accounting and client reporting which are entirely dependent on the completion of Charles River are slated to go live.
In mid 2022.
In sum, we continue to move forward aggressively on numerous fronts striving as always to deliver excellence investment outcomes superior advice and outstanding service to our clients.
Ensuring that the firm and choice profitable growth.
Focus can enable us to deliver superior total returns to shareholders.
And with that I'll turn the call over to Paul for more details on our financials Paul.
Yes.
Thank you Mark and good afternoon, everyone and thanks for joining us today.
Starting with net client flows and assets under management.
AUM at the end of September was $22 billion.
From $22 3 billion as of June 30th.
Increase in AUM consisted of 157 million of net client outflows in the quarter and $128 million of market depreciation stemming from volatility that affected markets. During the second half of September.
Average AUM was actually up 2% for the quarter.
When compared to September 30th 2020, AUM has increased by $2 $7 billion or 14%.
Gross client inflows were $613 million for the quarter and our approximately $2 billion for the year to date.
And the wealth management side, we reported gross inflows of approximately $210 million for the third quarter.
Which is consistent with the level of production that we reported during the first two quarters of 2021.
Through September 30th our wealth management team has produced $652 million of gross inflows.
We reported the intermediary and institutional channel inflows of approximately $400 million for the quarter, which is down from $570 million reported in Q2 and more in line with our quarterly results from Q1, 2021 and throughout 2020.
Year to date, we have reported $1.4 billion of gross inflows from our intermediary and institutional team.
Gross client outflows were again excellent and a testament to our outstanding client service and investment results.
Q3 outflows of $770 million represent a 9% improvement when compared to last quarter and a 21% improvement from 980 million of outflows. This time last year.
Our turnover rate for the quarter declined 14%.
Year to date gross outflows of $2 4 billion are well below outflows of $3 3 billion. This time last year and our separate account retention rate during the quarter remained high approximately 98%.
By sales team the wealth management team had $26 million of net outflows during the quarter and the institutional intermediary team had 131 million net outflows.
For the second quarter in a row net flows for our mutual funds and collective trusts were positive with approximately $6 million of net inflows compared to 163 million of net outflows from our separate accounts.
Through September 30th we've had net inflows of approximately $18 million into our funding collective trust offset by 370 million net out from our separate account.
We remain optimistic that the strength of our track records against peers and benchmarks across one three and five year periods will continue to drive interest in our funding collective strategies and across our entire product set.
To wrap up AUM and flows third quarter net outflows of 157 million when combined with our half year results brings us the 351 million of net outflows for the first nine months of 2021 where.
We recognize the urgency to turn flows positive to achieve sustainable growth, but we think it's equally important to recognize where we've come from is the level of net outflows. We are reporting through September 30th represents a significant improvement from the $1 5 billion of net outflows. We reported for the first nine months of 2020 and from the levels of net outflows we've experience.
It's in the years prior.
Lastly, I want to report that we received notice about $300 million institutional redemption that will occur in January 2022.
It is worthwhile to note that the clients decision to terminate was originally made during 2019 and due to various complications on the client side further exacerbated by the pandemic. The official redemption notice has now just been provided.
Given these unique circumstances, we do not consider this to be indicative of weakness in our offerings.
Our firm has undergone an enormous transformation. Since this decision was originally made in mid 2019, and we believe that this decision is a reflection of where we were then not where we are today.
Despite this news I will reiterate the point that Mark stated earlier.
Our goal remains to be net cash flow positive in 2022.
Turning to our third quarter P&L, we reported revenue of $37 $5 million for the quarter with overall revenue margins of 67 basis points compared to revenue of $36 1 million reported last quarter with average fees of 66 basis points.
Operating expenses were $28 $2 million in the quarter.
No change from last quarter, and a $400000 increased compared to the third quarter of 2020.
When comparing operating expenses against last quarter. Other operating costs are down, 7%, partially offset by a compensation increase of 2%.
Compensation and related costs increased by approximately $400000 since last quarter.
The increase is primarily attributable to increased variable compensation accruals driven by our revenues along with severance costs that were incurred during the quarter and an increase in payroll costs stemming from additional sales hiring that took place.
Compensation related costs as a percentage of revenue were 50% in Q3, and our overall head count rose slightly to 280.
Distribution servicing and custody expenses increased slightly during the quarter in line with the growth in revenue.
And other operating expenses decreased by 7% sequentially or $500000 to $7 million.
As a result of decreases in consulting fees related to our invest cloud implementation.
Other operating costs as a percentage of revenue have been steady over the last several quarters at 20% and.
And that was again the case in the third quarter with opera other operating expenses, representing 19% of revenue.
With revenue increasing in operating expenses effectively being effectively unchanged for the quarter, we reported a 20% sequential increase in operating income for the third quarter to $9 $3 million with an operating margin of nearly 25%.
We reported a modest non operating loss of $73000 stemming from losses on marketable securities and seeded products and our balance sheet.
<unk> pretax income of $9 $2 million.
Looking at our non-GAAP financial metrics with $560000 of strategic restructuring costs during the quarter, we reported economic income of $9 $8 million.
Our non-GAAP effective tax rate return to the normalized rate of approximately 30% in the third quarter compared to rates in the mid teens during the first half of 2021.
After accounting for our adjusted income taxes, we reported economic net income of $6 $9 million or 30 cents of economic net income per adjusted share, which is generally in line with 29 cents and 31 cents per adjusted share as reported in Q1 and Q2, respectively.
I'll now summarize our results for the year through September 30th.
We've reported revenue of $108 million up 15% from $94 million. This time last year with overall revenue margins of 67 basis points.
Our ongoing efforts to control costs and expand profit margins are evidenced by the fact that operating expenses have increased by less than 1%. This year to $84 $5 million with an increase of approximately $700000 in compensation related costs than it has been mostly offset by decreases in distribution expenses.
Other operating costs.
When taking a closer look at compensation and we see the compensation related costs of $56 million represent 52% of revenue.
While we have increased our variable compensation accruals to reflect the 15% year over year revenue increase that it's been mostly offset by the implementation of our deferred compensation program and the one time savings that have been achieved during this initial year of adoption.
The size of our workforce is generally unchanged from this time last year, though the makeup of the workforce has changed as reductions in our middle and back office staff have been offset by six net additions to our sales and client service teams.
Distribution expenses have decreased by $470000 as a result of business mix changes since last year.
With changes in the mutual fund share classes that do not have distribution fees attached.
Other operating expenses of $21 million were generally in line with this time last year and represent 20% of revenue down from 23% of revenue for the nine months ended September 32020.
As a result, we reported operating income of $23 million compared to $9 million through this time last year, our year to date non-GAAP earnings per adjusted share of <unk> 90, <unk> continues to be a notable improvement from 17 cents per adjusted share in 2020.
Okay.
Turning to the balance sheet, we reported approximately $90 million in cash and investments as of September 30th an increase of $10 million compared to what we reported on June 30th.
This change in cash is another example of our improved capital structure with only about 2% of the remaining adjusted shares outstanding held by legacy unit holders are simpler more efficient capital structure allows us to accumulate cash more rapidly even during periods like Q3, when we have midyear incentive payouts.
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We continue to maintain a debt free capital structure.
Regarding our return of capital initiatives yesterday, we announced that the board of directors approved a five cent per share class a dividend for the fourth quarter. Following the reinstatement of our dividend last quarter.
The pace of share repurchases slowed during the third quarter and through September 30th we've completed $5 $7 million out of the $10 million authorized by our board of directors at the start of the year.
Upon payout of the fourth quarter dividend next month, we will have returned $1 $9 million of cash to shareholders through the dividend and in total we hope we will have returned nearly $8 million of capital to shareholders during 2021.
Prior to considering any share any remaining share purchases that may take place.
We will provide further updates on our progress in returning capital to shareholders on our next call.
Turning to ownership, our adjusted share count decreased during the quarter by approximately 200000 shares to 23 million adjusted shares outstanding as of September 30th.
The components of our adjusted shares outstanding are provided on slide 15 in the Investor supplement as.
As of September 30th our employees and directors own approximately 36% of the adjusted share count, including Unvested Awards, and approximately 23% of the Votable class a common stock.
As we look ahead there are upcoming vesting of previously awarded restricted stock units that will take place in December 2021 and again in February 2022.
These unvested Rs use are already accounted for in the adjusted share count of 23 million. However, upon vesting they will be added to the class a share count.
We are estimating that the class a share count will increase by approximately 600000 shares when these awards vest the precise amount will not be known until the time of vesting.
In connection with divesting of equity awards and the exchange of stock options. Our historical practice has been to withhold shares of class a common stock to satisfy employee income tax withholding requirements.
These net share settlements had the effect of shares repurchased and retired by the company.
As a result, we expect the class a shares outstanding will increase as a result of the Rs <unk> vesting and.
And the adjusted shares outstanding will decline because of the way taxes are settled upon vesting.
We will provide updated share count metrics on our next call.
In closing our goals for 2022 are clear.
First and foremost we must continue to deliver exceptional investment results for our existing clients to help them achieve their financial goals, we must leverage those strong investment results along with with increased sales activity to boost gross client inflows in turn net client flow is positive.
Sustainable top line growth will be our best way to achieve margin expansion and further increase shareholder value.
Thinking more about our 2022 P&L, we remained committed to managing our overall cost structure, including headcount prudently given our current revenues.
We're equally committed to continuing to make investments in our business to support growth initiatives.
We expect to continue accumulating cash from operation that can be deployed to support strategic initiatives or to return to shareholders, especially with the majority of our spending to support the digital transformation now behind us.
That said it is also important to remember that our 2022 P&L will include an increase in noncash expenses as a result of the technology related investments that have been made over the past few years, namely depreciation and amortization.
The amount of depreciation and amortization and the timing of when those noncash expenses begin to ramp up will be contingent on the remaining costs incurred and the timing of final completion of these technology installations over the next few quarters.
It is a plausible scenario that during 2022, we will generate strong cash from operations from earnings.
With earnings that decrease compared to 2021 as a result of these noncash expenses.
Under virtually all P&L scenarios. However, our balance sheet will continue to be an area of strength and afford us the opportunity to pursue initiatives that will be in the best interest of clients, while also driving value for shareholders.
That concludes today's call. If you have any questions on the topics. We've addressed today. Please contact us using the inquiries portal on our Investor Relations website, and we'll promptly address your inquiry.
Thank you again for listening and for your interest in Manning <unk> Napier and I'll now turn the call back over to the operator to wrap up.
Operator.
Thank you. This does conclude today's conference call. Please disconnect. Your line at this time I'd have a wonderful day.
Okay.
Sure.
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