Janus Henderson Group plc (NYSE:JHG) Q4 2022 Earnings Call Transcript

Janus Henderson Group plc (NYSE:JHG) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good morning. My name is Emily, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Fourth Quarter and Full Year 2022 Results Briefing. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. In today conference call, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors, including, but not limited to, those described in the forward-looking statements and Risk Factors section of the company’s most recent Form 10-K and other more recent filings made with the SEC.

Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you. Now it is my pleasure to introduce Ali Dibadj, Chief Executive Officer of Janus Henderson. Mr. Dibadj, you may begin your conference.

Ali Dibadj: Welcome, everyone, and thank you for joining us today on Janus Henderson’s fourth quarter and full year 2022 earnings call. I’m Ali Dibadj, I’m joined by our CFO, Roger Thompson. In today’s call, I’ll start with some comments on the year. Roger will then go through the results. And after that, I’ll provide a strategic update. Then we’ll take your questions following those prepared remarks. Turning to Slide 2. 2022 provided one of the most challenging market backdrops in history. As you undoubtedly know, since 1928, 2022 is 1 of only 4 years where stocks and bonds had combined negative returns. U.S. treasuries suffered their worst losses since 1988 and had back-to-back annual losses for the first time in over 60 years.

This market backdrop translated into a difficult flow environment. For example, in the U.S. 2022 was the first time mutual funds and exchange traded funds experienced combined net outflows. Janus Henderson certainly wasn’t immune to the tough market conditions, which our results suggest. As I reflect upon the year though, despite the industry headwinds, there are several tangible signs of progress at Janus Henderson. There was a tremendous amount of work done, and we have the foundation to achieve our ambitions over time on behalf of our clients, their clients, shareholders, employees and all our stakeholders. Over the summer, we brought together people in the firm representing different backgrounds, parts of the business and regions to create the Strategic Leadership Team, or SLT, as we call it internally.

This group is responsible for establishing the strategic direction of Janus Henderson and members of the SLT will be leaders and partners in the implementation and execution of our strategy. We’ve also been successful elevating and adding to our talent across the organization in areas such as investments, distribution, operations and ESG, including seeing exceptional former employees return to the firm. To highlight a few of the additions in distribution, we hired Michael Schweitzer, who has extensive leadership experience in the global asset management industry as our Head of the North American Client Group. Michael will also be responsible for leading our strategic initiative in the U.S. Intermediary space. In investments, we brought in an emerging market debt team in September.

Remember on our last quarterly earnings call, we said that we expected to have $500 million in EMD AUM by year-end. I’m pleased to share as of today, we have now crossed the $1 billion in committed capital in less than 6 months mark. $0 billion to $1 billion in such a short period of time is a testament to what Janus Henderson can do with renewed energy, focus and process. Additionally, we launched an EMD hard currency CCAP cab in December, making the EMD team even more accessible to a broader range of investors. There are many other examples on Slide 2 that demonstrate we are not standing still when it comes to building top talent and creating opportunities for existing and new employees. Our Board also experienced a significant refresh with 6 new members, including our Chair.

That means 6 of 11 or 55% of Board members were appointed in 2022, bringing new energy and world-class and varied expertise. The new members provide backgrounds in client experience, strategic execution, ESG and culture change. We are also proud of the gains we’ve made improving diversity on our Board as 45% of members are women and 30% are from racially and ethnically diverse backgrounds. We spent a good deal of 2022 reviewing the business seeking ways to drive efficiencies and identified $40 million to $45 million in savings so that we can use those savings to provide the Fuel for Growth to reinvest strategically in the business. We announced that last quarter and that execution is on track. Finally, we simplified our operating model, which included the sale of Intech in the first quarter of 2022.

We also made great progress in upgrading our order management system, which we expect to go live during the first half of 2023. With that, I’ll now turn the call over to Roger to run you through the details of our financial results.

Roger Thompson: Thank you, Ali, and thank you again to everyone for joining us on the call today. Starting on Slide 3, and I look at our fourth quarter results. Volatility in global markets continue to impact our flows. However, investment performance, ending AUM and revenue, all improved over the third quarter. Our long-term investment performance remains solid, with 67% of our assets beating their respective benchmarks over 3 years. December ending assets under management were $287 billion, up 5% from September due to better markets and U.S. dollar depreciation against other currencies, which is partially offset by net outflows. Net outflows were $11 billion, which includes $7 billion of previously communicated institutional redemptions.

Adjusted financial results are flat to the prior quarter. And finally, the Board declared a $0.39 per share quarterly dividend. Turning to Slide 4 and investment performance. Longer-term investment performance results versus benchmark improved compared to the prior quarter with 67%, 70% and 75% of assets beating their respective benchmarks over the 3-, 5- and 10-year time periods. The 1-year number is being impacted primarily by the fixed income and multi-asset capabilities. In multi-asset, the balanced strategy, which is the vast majority of these assets, switched to underperforming the benchmark on a 1-year basis. This is due to short-term underperformance during the first half of 2022, especially Q1. The balance composite outperformed its benchmark during the second half of 2022 and as we sit here today, it’s back above its benchmark on a 1-year basis.

Absolute and relative fixed income performance was impacted by the historically tough year for bonds. The longer-term time periods remain very strong. For a few of our larger strategies such as Core+ and absolute return income, the level of underperformance to benchmark was minimal. Shorter-term periods of underperformance will happen. Our investment to teams remain professional, they stick to their knitting and they’re disciplined in their approach and process with a focus on delivering positive long-term outcomes for our clients, which you can see delivered in our long-term track records. Longer-term investment performance compared to peers continues to be competitively strong with at least 60% of AUM in the top 2 Morningstar quartiles over the 3-, 5- and 10-year time periods.

Slide 5 shows company flows. For the quarter, net outflows were $11 billion compared to $5.8 billion last quarter. This included the previously announced $7 billion of institutional redemptions and the impact of market uncertainty on the retail business for Janus Henderson and the industry as a whole. Turning to Slide 6 for a breakdown of flows by client type. Net outflows for the Intermediary channel were $3.4 billion compared to $2.5 billion in the third quarter. The decline is attributed to higher net outflows in the U.S., while SMA improved compared to the prior quarter. The U.S. outflows were roughly in line with the industry. According to Fund data, Janus Henderson’s fourth quarter annualized growth rate for U.S. mutual funds was minus 11.

6% compared to minus 11.1% for the industry as a whole, which speaks to a difficult flow environment that we saw last quarter. We did see some pockets of early wins with our AAA CLO ETF gathering $1.5 billion in flows in 2022, putting in the top 2% of over 1,000 active ETFs. Additionally, global equity income and the overseas strategies accumulated significant inflows during the year. Institutional outflows were $6.6 billion, which were primarily driven by the EMEA region and include the 2 previously announced low fee redemptions of $3 billion in the Sterling buyer maintained credit strategy and approximately $4 billion of equity AUM. Institutional flows were flat outside of these 2 large redemptions. We did have good gross sales this quarter from several mandate fundings.

In fact, 2 of the last 3 quarters have been amongst the highest institutional gross sales results over the past 5 years. We are winning new business in institutional, and Ali will talk about our growth plans for institutional later in the presentation. Whilst last quarter, I had to inform you about $7 billion of known losses, I have no new large redemptions to tell you about today. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, was $1 billion. Similar to the intermediary channel, gross sales has slowed as retail clients remain on the sidelines. Slide 7 is flows in the quarter by capability. Equity net outflows for the fourth quarter was $7.5 billion compared to $4.1 billion in the third quarter.

As I mentioned on the prior slide, the results include $4 billion from the previously announced institutional redemption. The remaining outflows were primarily driven by U.S. mid and SMID cap growth strategies and U.S. concentrated growth. Pleasingly, U.S. mid and SMID cap growth have both seen very strong performance in 2022. Fourth quarter net outflows for fixed income were $1.9 billion, reflecting the $3 billion sterling buyer maintained institutional redemption that I just mentioned. We’re pleased that despite the challenging environment for bonds, our fixed income capability had positive flows elsewhere. Several strategies contributed to these positive flows, including Australian fixed income, U.S. buy and maintain credit, multi-asset credit and JAAA.

And finally, emerging market debt, which Ali mentioned as of our early wins in diversifying the business. Total net outflows for multi-asset were $1 billion, driven by the balanced strategy within the retail channels. Whilst the net outflow is in part due to short-term performance, the medium- and long-term performance remained very strong. And as I said, the 1-year metric is now back above benchmark. Finally, net outflows in the alternatives capability was $600 million. Moving on to the financials. Slide 8 is the U.S. GAAP statement of income. Before moving on to the adjusted financial results, I do want to call out a few items impacting the GAAP results in the fourth quarter. First, during the quarter, we recognized a $36 million noncash nonrecurring impairment on certain intangible assets.

And second, there was a $19 million in nonrecurring charges related to the implementation of the Fuel for Growth cost efficiencies that were part of the $30 million to $35 million that we told you about last quarter. These 2 items represent the main difference between our U.S. GAAP and adjusted financial results. Now turning to Slide 9 and to talk about those adjusted financial results. Adjusted revenue increased 3% compared to the prior quarter, primarily due to higher performance fees offset by lower average AUM. Net management fee margin for the fourth quarter was 50.7 basis points, which is higher compared to both the prior quarter and the same period a year ago and makes Janus Henderson stand out from its competitors. Fourth quarter performance fees of $14 million includes $31 million of annual performance fees generated primarily from the biotech hedge fund and a U.K. small-cap equity segregated mandate.

Significant outperformance in the fourth quarter generated these annual fees. Partially offsetting this revenue was negative $17 million in U.S. mutual fund fees. Continuing on to expenses. Adjusted operating expenses in the fourth quarter were $282 million, up 5% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was flat compared to the prior quarter as higher profit-based variable costs were offset by lower fixed compensation as Fuel for Growth cost efficiencies were running ahead of the investment in our new strategic initiatives. Adjusted LTI was up 17% compared to the prior quarter due to mark-to-market. In the appendix, we’ve provided the usual table on the expected future amortization of existing grants along with an estimated range for the 2023 grants due to use in models.

The fourth quarter adjusted comp to revenue ratio was 46.4%, up slightly compared to the third quarter, primarily due to the mark-to-market on LTI. Adjusted noncomp operating expenses increased 7% compared to the prior quarter, primarily due to higher seasonal marketing and G&A expenses compared to the fourth quarter of last year, noncomp expenses decreased 12%. On a year-over-year basis, adjusted noncomp expenses declined 1% compared to our original guidance at the beginning of 2022 of a percentage growth in the low teens. The quarter and the year-over-year comparisons show our commitment to strong cost management. Adjusted operating income in the fourth quarter of $123 million, was down 2% over the prior quarter. Fourth quarter adjusted operating margin was 30.

4%. And finally, adjusted diluted EPS was $0.61, flat to the third quarter. Skipping through Slide 10 to Slide 11 for an update on cost efficiencies and our outlook for 2023. Recall from our last earnings call, our philosophy has always been to maintain strong financial discipline and invest in the business where it strategically makes sense whilst looking to operate more efficiently to provide the Fuel for Growth. Last quarter, our Executive Committee reviewed the business and has line of sight to $40 million to $45 million in gross run rate cost efficiencies, which will be equally split between compensation and noncompensation expenses. We’re on track to deliver those saves. Our intent is to reinvest all of these savings back into the business to fuel growth.

Regarding expectations for 2023. Ending AUM for 2022 was 13% lower than the average for the year. All things equal, you should therefore expect management fees will be lower by this amount in 2023. We anticipate a compensation ratio in the mid-40s range, which reflects lower revenue, the denominator in this calculation. For noncompensation, we expect to increase our marketing and advertising where we have an opportunity to capitalize on good investment performance, especially in our U.S. Intermediary business that we want to not only protect but to grow. We also want to make investments supporting our other strategic initiatives. We anticipate noncompensation percentage expense growth will be in the mid- to high single digits. Of course, as we reinvest for growth, we’ll continue to be mindful of our discretionary cost base.

In addition to this effort to capitalize on areas where we feel there is a real opportunity, it’s important to note that roughly 40% of the year-over-year increase in noncomp expense will be noncash. This primarily relates to the order management system transformation project that is anticipated to go live in early 2023, at which point we will begin amortizing previously capitalized costs of the project through our P&L. Finally, we expect the firm statutory tax rate to be in the range of 24% to 26%. The increase from the previous range is related to the U.K. corporation tax rate increasing to 25% from 19%, effective the 1st of April ’23. Moving to Slide 12 and look at liquidity. Our balance sheet remains very strong during this period of earnings volatility.

Cash and cash equivalents were $1.2 billion as of the 31st of December, which is roughly flat to the end of last year, as excess cash flow generation has been used to fund dividends and buy back shares. Given current market volatility and to maintain that balance sheet flexibility, we’ve been conservative and purposeful in our approach to capital management and elected not to buy back stock in the fourth quarter. We have a strong liquidity position and continue to balance the capital needs and the investment opportunities of the business with returning capital to shareholders. Finally, the Board has declared a $0.39 per share dividend to be paid on the 28th of February to shareholders of record as of the 13th of February. With that, I’d like to turn it back over to Ali to give an update on our strategic progress.

Ali Dibadj: Thanks, Roger. Moving to Slide 13. I want to remind you of our discussions on strategy from prior earnings calls. First, we introduced our 3 strategic pillars of protecting Janus Henderson’s core businesses, amplify our strengths that are not fully leveraged yet and diversify the firm where clients give us the right to win. Second, our strategic leadership team, along with input from clients, identified a broad range of opportunities which aligned with the 3 strategic pillars. The opportunities were filtered through a process designed to capture those opportunities that provide the best possible outcomes for our clients and will lead to organic growth and attractive operating margins over time. And third, the reduced list of opportunities was then evaluated along 2 dimensions.

Janus Henderson right to win and how the opportunity measures against future client and industry importance to arrive at the final list of initiatives that we will look to execute on. I want to spend a few minutes walking through how we think about implementing and executing the strategy on Slide 14. On that slide, you can see the different steps of our strategic road map. The steps aren’t entirely linear as each will have short-and long-term elements with bearing time horizon. But having done this before, one does need to create an environment for change before one puts a change plan in place. One of the first actions I took after starting was to assemble the strategic leadership team, which I talked about earlier. It was an important step in getting the best thinking and buy-in on our strategic direction.

We’ve increased our communication, particularly to clients and employees, to provide transparency on the path forward for Janus Henderson. More accountability has been introduced at the senior levels of the firm to drive the right behaviors and measure progress. Lastly, the cost efficiency efforts have provided the Fuel for Growth so that we can strategically invest in the business. With the elements for change in place, we identified and developed the strategic plan, including initiatives that fit within the framework of our 3 pillars of Protect & Grow, Amplify and Diversify. Implementing the plan will happen over time. Our leaders are empowered to drive these initiatives and progress will be measured. On the bottom of the slide, you can see some of the metrics we will track to measure progress that are aligned with clients, employees, shareholders and other stakeholders.

Over time, financially, we want to deliver consistent annual net new revenue growth with attractive operating margins. Our clients’ results are measured with an investment performance and their experience with Janus Henderson. Organizationally, we will measure the ability to track and retain top talent and the level of engagement from employees. Delivering early wins will provide proof points that the plan is taking hold. And although we are seeing some successes like emerging market debt, JAAA, talent improvement, fuel for growth, client activity levels or a biotech hedge fund and more, it will take time to deliver consistently and results won’t be linear. For example, over the next 1 to 2 years, we’d expect to deliver intermittent quarters with neutral or positive net AUM flows, which will evolve to more consistent net inflows and then net new revenue growth over the longer term.

As we said before, we expect to see even more tangible progress during the course of 2023. Institutionalizing winning will be done by improving updating and automating systems and processes around metrics, measurements, talents and more. Now I’d like to give you an update on one of the initiatives we discussed last quarter of U.S. intermediary as well as introduce a few more initiatives that we’ll be focused on. Turning to Slide 15. On last quarter’s earnings call, we talked about the importance of protecting and growing our U.S. intermediary business and listed out 5 areas of investments to reenergize the channel, support the team further and capture market share. As I mentioned at the beginning of the call, in November, we appointed Michael Schweitzer as the new Head of our North American Client Group.

Since then, Michael and his team have already implemented several leadership changes and reorganize the U.S. intermediary business that we believe has positioned us very well for growth in our North American retail business over the long term. Lastly, we started the process of properly aligning people’s incentives with our growth strategy. On Slide 16, a business we want to amplify is the institutional business. Our institutional business represents just over 20% of our assets, and we are underpenetrated in global institutional markets, particularly in the U.S. In addition to differentiated insights and disciplined investments, there are several factors that gives Janus Henderson the right to win. We are seeing gross sales momentum in the business Unfortunately, it’s been masked by a few large client redemptions in 2022, not related to our investment performance or our client service.

Our gross sales have increased more than 35% in 2022, and we are winning mandates from sophisticated institutional clients. Consultant engagement is expanding. Meetings with consultants are up 40% and we have a great and growing consultant relations team. The institutional business is also complementary to other initiatives, including one that I will talk about in a moment, which is diversified alternatives. To capture market share in the institutional space, we’ll focus on areas, including restructuring sales teams and covered models, to meet client needs better, improving consultant support, utilizing data for business development, elevating brand awareness and developing new products and solutions. As I mentioned, another business that we want to amplify is what we describe as diversified alternatives on Slide 17.

Some of you know about this business, but many of you and many of our clients don’t yet. This grouping of approximately $20 billion in assets includes multi-strategy hedge funds and equity and commodity enhanced index funds. Long-term investment performance has been excellent with a sharp ratio of 1.7 since obsession, and this performance has translated into growth with $2 billion of net flows in 2022 and a strong pipeline as we enter 2023. We believe that with investments in this area, we can improve our market share, which is currently less than 1%. There’s also client demand to expand upon our existing capabilities just taking a sleeve of their multi-strategy capability and launching as a single product. An example of this is our successful dynamic trend strategy.

Areas of investment that we believe will position these strategies for growth are building out the investment team to improve and diversify the investment capability. By the way, if any of you on the phone are looking, give us a call, developing more scalable infrastructure and globalizing marketing and distribution functions for our broader alternatives business. Wrapping up on Slide 18. As I look back on 2022, I’m proud of the progress we made in repositioning Janus Henderson to meet our clients and their clients’ needs and thus, for future growth. We established the strategic leadership team that created and will now implement our new strategy. We welcome new talent to the firm and open up opportunities for existing employees with new and expanded roles.

We entered 2023 with a refreshed and highly driven Board with exceptional breadth and depth of experience, which will be critical in leading Janus Henderson into its growth phase, and we’ve created Fuel for Growth to allow us to reinvest in the business and we have simplified our operating model. As I said previously, we are still in the early days and the path will be a market-dependent one, not linear, whether we like it or not. We have a strong balance sheet good free cash flow generation, and our focus will be on controlling what we can control to deliver desired outcomes for our clients, shareholders, employees and our other stakeholders. Let me turn the call back over to the operator for your questions.

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Q&A Session

Operator: Our first question today comes from from Bank of America.

Craig Siegenthaler: It’s actually Craig Siegenthaler from Bank of America. So my first question is on capital management. Just looking at what the stock did in the second half of 2022 and also how much excess cash Janus has today and how it’s grown, we’re just wondering why not buy back more stock?

Roger Thompson: Craig, let me — this is Roger. Let me take that first. I mean, I guess, first, most important thing is there’s no change in our capital management philosophy. The Board takes a very active approach to the management of cash and capital and balancing those capital needs against the investment that’s needed in the business and returning cash to shareholders. So the focus is to use that excess cash generation to reinvest in the business organically first, potentially then inorganically, we talked on that a little bit, I may talk about that a bit more in Q&A. But then where we don’t have a need to return cash to shareholders. As we did in ’22 in the first half — first half 2022 through buybacks. But given the current market volatility, the opportunities we see, we were conservative and prudent in the second half. But again, over the year, we repaid $358 million in dividends and buybacks.

Craig Siegenthaler: And just for my follow-up then, if you’re not using excess capital for buybacks and you’re building it up, I’m just wondering, can you update us on your thoughts behind M&A, both kind of larger scale deals that may possess some redundancies and also smaller strategic transactions that can potentially fill in product gaps?

Ali Dibadj: Sure, Craig. Let me take that. So look, our philosophy on M&A has not changed either and nor is the change for me for a number of years. Remember, our view is that M&A where there is a significant amount of overlap and cost savings is the vector of driving value is typically unsuccessful. The markets have said that — you have said that, others have as well, and we agree with that. That’s unlikely to be the major thrust of M&A that we do. On the flip side, M&A that brings in a new set of skills, large or small, is at a higher chance of being successful. And that’s what we’re going to look at, and there are plenty of opportunities out there, and we’ll continue to look, but we’re going to be disciplined. And the reason we’re focused on the complementary-type M&A, the puzzle piece type M&A, is that that’s client led.

We are going to be client way we bring on teams, the way we buy, build and partner with others will be driven by bringing something new and better to our clients. And that’s part of our diversified strategy prong. It’s very importantly not a strategy unto itself, but we want to buy and build partner to deliver what our clients’ needs are and that will be more complementary.

Operator: The next question comes from Patrick Davitt from Autonomous Research. Please go ahead, Patrick, your line is now open.

Patrick Davitt: First question, reading between the lines, and I think this has been confirmed by some headlines we’ve seen, there does appear to be quite a bit of portfolio management and distribution changes going on. You highlighted some of that in the deck. And I’m sure this is all an upgrade from a longer-term perspective. But historically, so much disruption in fund management and distribution has led to accelerating outflow for asset managers. So I guess, firstly, is this a fair observation from the outside? And secondly, why or why not should we be concerned about accelerating outflows as a result of all these kind of rapid changes you’re making?