Janus Henderson Group plc (NYSE:JHG) Q2 2023 Earnings Call Transcript August 2, 2023
Janus Henderson Group plc beats earnings expectations. Reported EPS is $0.63, expectations were $0.58.
Operator: Good morning. My name is Sam, and I will be your conference call facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Second Quarter 2023 Results Briefing. All lines have been placed on mute to present any background noise. After the speakers’ remarks, there will be a question-and-answer period. In the interest of time, questions will be limited to one initial and one follow-up question. In today’s conference call, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from the projected in the forward-looking statements due to the 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 in the SEC.
Janus Henderson assumes no obligation to update any forward-looking statements made during this call. Thank you. Now, it’s 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 Second Quarter 2023 Earnings Call. I’m Ali Dibadj, and I’m joined by our CFO, Roger Thompson. In today’s call, I’ll start with some thoughts on the quarter before handing over to Roger to run through more detail. After Roger’s comments, I’ll provide an update on our strategic initiatives, and then we’ll take your questions after those prepared remarks. Turning to slide 2. Markets remain uncertain. And while second quarter and year-to-date market returns have been positive, the rally has been extremely narrow led by few megacap stocks. Persistent headwinds, including an opaque economic outlook, higher interest rates, uneven inflationary pressures, and recession fears notably in the UK and Continental Europe, are contributing to a difficult market backdrop.
Even amidst macro challenges, we’re very pleased that Janus Henderson continues to make progress, executing our strategy and again, delivering good quarterly results. Assets under management increased 4% to $322.1 billion due to positive markets and are up 12% since the beginning of the year. The quarterly flows were negative $500 million this quarter. While just negative, the result is the second best quarter in nearly three years. Taking a step back to look at the broader picture, our results this quarter, clearly shows significant improvement from where we were a year ago. Inflows for the first half of 2023 were $5 billion, a marked improvement from the $14 billion of outflows during the first six months of 2022. Let me just say that again.
Last year in H1, we were sitting at negative $14 billion in net flows. Now, we’re at a positive $5 billion in net flows clear progress. To remind you, we’ve also said that our flow trajectory won’t be linear and we’re not yet at the point to be able to promise consistent positive flows despite the tangible improvements. As we begin the second half of the year, we need to rebuild our pipeline which takes time. Our retail flows continue to be negative, especially in EMEA and there are a few pockets of internal transition that will make us a stronger firm for the long term, but will negatively impact our flows in the near term. That being said, remember that last year’s total annual net flows were negative $31 billion and we expect to show great improvement from that and believe we are on our way to sustainable organic growth in the future.
In particular, we remain encouraged with the momentum and sales activity levels in the business and conversations we’re having with clients, given our investments in client service, greater accountability and collaboration, improved selling processes, and investment performance. Given long lead times in this industry, our expectation continues to be that we deliver one or two quarters of positive net flows over the next one to two years, as an indication that our strategic plan is taken hold. Turning to investment performance. It is solid in aggregate, with 68% of assets ahead of benchmark on a three-year basis. The ability of our world-class investment and distribution teams across all our capabilities to deliver differentiated insights, investment discipline and world-class service, positions us well to navigate these uncertain markets and deliver the best possible investment outcomes for our clients and their clients.
In summary, we are clearly showing progress on our strategic path to deliver consistent organic growth, there’s still much opportunity for improvement, our financial results are solid, we’re generating good cash flow and we have a strong and stable balance sheet. I’ll now turn the call over to Roger to run you through the financial results.
Roger Thompson: Thank you, Ali, and thank you again to everyone for joining us on today’s call. Turning to slide 3 and investment performance. Investment performance versus benchmark remained solid with over 60% of assets beating their respective benchmarks over all time periods. Short-term fixed income performance versus benchmark improved this quarter and the longer-term time periods remain very strong. Investment performance compared to peers continues to be competitively strong with 70%, 61%, 78% and 87% of AUM in the top two Morningstar quartiles over the one, three, five and 10-year time periods. Slide 4, shows company flows. As Ali mentioned, net outflows were $500 million this quarter, and while we’re pleased with year-to-date flows compared to the prior year, our goal is to deliver consistent organic growth over time and we’re not there yet.
Based on the items that Ali discussed we wanted to provide an outlook for third quarter flows. As we sit here today, we expect net outflows in the third quarter to be in the range of negative $3.5 billion to negative $5 billion. Turning to slide 5 for a look at flows by client type. Net outflows for the intermediary channel were $1.6 billion compared to $700 million in the first quarter. The quarterly decline was primarily from the EMEA and LatAm regions as higher interest rates and recessionary fears are weighing on flows. This is not unique to Janus Henderson and the industry in general has experienced a challenging flow environment in those regions. US intermediary flows were virtually flat supported by strong positive flows in several strategies including the AAA CLO ETF, our mortgage-backed security ETF and US Mid-Cap growth.
We told you before that US intermediary is a key initiative under our Protect & Grow strategic pillar and we’re pleased that we’ve showed a significant improvement in net outflows in the first half of 2023 compared to the same period a year ago and that we are capturing market share. Institutional net inflows were $1.9 billion versus $6.9 billion in the first quarter. Pleasingly, the quarter included a $3 billion enhanced index mandate from a global insurance client adding to flows in Q1 from sovereigns and other insurers. In addition in Q2, we had our largest emerging market debt mandate funds to-date. We are not anticipating any similar sized fundings in Q3 in line with our comments on last quarter’s call that our distribution team is working to replenish and build a sustainable pipeline and that this will take time.
Redemptions were normalized in Q2 after a benign Q1. Finally, net outflows for the self-directed channel which includes direct and supermarket investors were $800 million. The US Direct business is a strategically important pool of assets and to better deliver for our clients during the second quarter we started to offer an investment advisory service to our direct investors in the US. This is a service we haven’t offered previously and helps us guide our direct clients so that they are better positioned to achieve their desired financial outcomes. Slide 6 flows in the quarter by capability. Equities flows were breakeven in the second quarter compared to net inflows of $3.3 billion in the prior quarter, a good result considering the challenging environment for active equities.
Net inflows of fixed income were $1 billion compared to $3.6 billion in the prior quarter. We remain encouraged that despite the challenging short and medium-term investment performance in fixed income, we have differentiated breadth of products that is able to capture flows across multiple channels and regions. Several strategies contributed to positive fixed income flows including emerging market debt which had $600 million in net inflows for the quarter and has crossed the $1 billion market of assets under management. Elsewhere, fixed income ETFs had positive flows of $870 million in the quarter led by the AAA CLO ETF and our mortgage-backed securities ETF. For the year, our fixed income ETFs have gathered $1.7 billion in inflows and our ETF AUM has grown to over $7 billion.
Total net outflows for multi-assets was $700 million driven by the balanced strategy within the US retail channel. Whilst the net outflow is in part due to short-term underperformance back in 2022, the strategy is currently outperforming versus benchmark and peers across one, three, five and 10-year time periods. Finally, net outflows in the alternatives capability were $800 million, primarily from the multi-strategy and the absolute return strategies in the UK and Continental Europe. Moving on to the financials. Slide 7 is the US GAAP statement of income. And on slide 8, we explain the adjusted financial results. Adjusted revenue increased 5% compared to the prior quarter primarily due to increased management fees on higher average AUM in addition to seasonal performance fees.
Net management fee margin for the second quarter was 48.5 basis points compared to the prior quarter of 49.8. The decline is primarily due to the impact of large institutional mandate fundings during the first half of 2023. All else equal, we anticipate the net management fee margin to stabilize in the third quarter. Second quarter performance fees were negative $6 million and include negative $17 million of US mutual fund fees, partially offset by performance fees, primarily generated from the European Smaller Companies Investment Trust. As we sit here today, based on our current investment performance, our estimate of aggregate performance fees for the full year remains unchanged towards the lower end of negative $35 million to negative $45 million.
This includes roughly negative $65 million from US mutual fund performance fees. Clearly the result will be dependent on future performance. Continuing on to expenses. Adjusted operating expenses in the second quarter were $280 million, up 1% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was up 5% compared to the prior quarter, primarily due to higher variable cost accrual. Adjusted LTI was down 30% compared to the prior quarter, largely due to seasonal payroll taxes attributed by annual vestings in the prior quarter. In the appendix, we’ve provided the usual table on the expected future amortization of existing grants BTUs in your models. The second quarter adjusted comp to revenue ratio was 45.6% in line with expectations.
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Adjusted non-comp operating expenses increased 13%, again in line with expectations compared to the prior quarter, primarily due to higher G&A and marketing expenses. Adjusted operating income increased 15% over the prior quarter to $121.5 million in Q2. Second quarter adjusted operating margin was 30.2%. Finally, adjusted diluted EPS was $0.62. Updating on our expectations for full year 2023 operating expenses. We continue to be disciplined on costs and are always looking for ways to operate more efficiently. We now expect to deliver at least to the high end of the $40 million to $45 million in previously communicated cost saves to provide fuel for growth to strategically and reinvest back into the business. Our compensation and non-comp guidance remains unchanged.
We expect our adjusted compensation ratio to be in the mid-40s. We expect adjusted non-compensation expense percentage growth of mid to high-single-digits compared to the prior year, which implies an acceleration in our non-compensation costs for the second half of the year as we continue to execute on our strategy. This will include our previously mentioned brand campaign; increased but very disciplined T&E expenses; and the amortization of capitalized costs associated with our OMST project, which just began following the successful go-live of this important project in June. Skipping over to slide 9 and moving to slide 10 and a look at our liquidity. Our balance sheet remains very strong. Cash and cash equivalents were $966 million as of the 30 June, an increase of approximately $137 million, resulting primarily from strong cash flow generation partially offset by capital return and strategic spend.
We’ve maintained a strong liquidity position and we continue to balance the capital needs and the investment opportunities of the business with returning capital to shareholders. As I stated on last quarter’s call, given the opportunities we see in investing in the business organically and inorganically, we do not anticipate buying back shares at this time. We’ll continue to return cash to shareholders through a strong quarterly dividend and the Board has declared a $0.39 per share dividend to be paid on the 30 August to shareholders of record as of the 14 August. With that, I’d like to turn it back over to Ali to give an update on our strategic progress.
Ali Dibadj: Thanks Roger. Turning to slide 11. A reminder of our three strategic pillars of Protect & Grow our core businesses amplify our strengths not fully leveraged and diversify where clients give us the right to win. We are in the execution phase and we believe this strategic vision will lead to consistent organic revenue growth over time. In Protect & Grow, we’ve talked previously about the importance of protecting and growing our US intermediary business and have been investing in and supporting this channel. We’ve appointed a new Head of North America Client Group, launched a national brand campaign, selectively upgraded talent, aligned org structure and compensation with the growth strategy and increased wholesaler client engagement.
Progress has been tangible. Significantly improved net positive flows into our adviser group is pleasing to see and has been offset by negative flows in the typically lumpy retirement channel, resulting in overall negative 1% annualized organic growth rate for the first half of 2023, at a strong progress compared to a negative 6% organic rate for all of 2022. As Roger mentioned, importantly, we are capturing market share in this channel. Under Amplify, we’ve previously talked about our institutional and diversified alternatives businesses. In the institutional business, which is almost $9 billion of positive flows year-to-date we’ve restructured coverage to be more aligned to different client types, helping us to better serve their needs through greater specialization.
We’ve made many new appointments and other professionals are joining in the coming months. Diversified alternatives, which includes multi-strategy hedge funds and enhanced index funds has experienced 35% growth in AUM in the first six months of 2023. We also continue to launch new products and vehicles based on what our clients are telling us. For example in 2023, we’ve established a Global Property Equities fund in an OEIC the sustainable credit active ETF in Australia, additional SMA strategies in the US and in an Emerging Markets Innovation Fund in a CCAP. Under our diversified pillar, our emerging markets debt team which we brought in last September, now manages $1.2 billion in AUM after starting at zero, less than a year ago. Finally, we continue to look actively to buy, build or partner to diversify where clients give us the right to win.
As an example, we announced a Joint Venture Privacore that looks to take advantage of the democratization of private alternatives into the retail channel. Moving to slide 12 for more background on Privacore, in June, we announced a new joint venture with Privacore, which is an open-architecture distributor and trusted adviser for alternative investment products tailored to Private Wealth clients in the US and aligns with our strategic ambitions to diversify and grow our business. Privacore taps into the fast-growing market with a strong leadership team in a strategically important segment of the industry where Janus Henderson’s clients have asked for help. The initiative position Janus Henderson, to grow with our clients and further strengthens our credibility as a future partners strategic M&A, in Private and Alternative asset classes of focus for our firm.
Very importantly, it allows us to do all this without distracting any part of our firm, from our core businesses. We recognize that the democratization of alternatives among Private Wealth clients is still in the early stages. And this trend represents a significant opportunity for firms with strong relationships with retail intermediaries, like we have at Janus Henderson to provide a broader range of alternative investment solutions for clients. Alternatives as a category, represents a $12 trillion market today with assets expected to roughly double in size over the next five years. High net worth investors commend $80 trillion of assets globally and are expected to account for much of the growth in private markets. We expect that Privacore with Janus Henderson will plan integral role in bridging the gap between managers of alternative assets and an investors through diligence investor education, portfolio construction and client service across private equity, debt, real estate, infrastructure and other non-traditional asset classes.
Privacore’s mission, to partner with the best-in-class managers alternative investments paired with extensive relationships at wirehouses, broker-dealers and RIAs creates value on both ends of the value chain accelerating GP fundraising and bringing differentiated institutional quality investment opportunities to set of clients that are notably under allocated to alternatives today. This partnership seeks to provide access to best-in-class largely private alternative investments, managed by both third-party investment managers and with Janus Henderson’s proprietary term capabilities where we have the right to win. Privacore is led by two principals: Brendan Boyle and Bill Cashel, a pair of industry veterans each with proven track records of building dynamic alternatives-focused businesses.
Brendan and Bill are truly the best in the business. And Janus Henderson’s robust heritage, combined with this new entrepreneurial team demonstrates our commitment to ensuring our clients come first always. Turning now to slide 13, for a reminder of a few of the things each and every person at Janus Henderson has pulled together to accomplish over the past year. We’ve made a significant amount of positive change in just a few short months that are showing tangible progress and setting us up for the long-term success of the firm despite some volatility in the short-term, reflecting my first impressions from last summer there was and continues to be a strong foundation in place at Janus Henderson. They’re very talented people who want to win.
We are an investment powerhouse with world-class client focus with global corporate functions and infrastructure and underpinning all these attributes is a strong financial position including a fortress balance sheet. We leveraged this strong foundation through a new strategy and focused execution with increased collaboration accountability and urgency with the intent of repositioning Janus Henderson to meet our clients’ and their clients’ needs and thus for our future growth. We established a strategic leadership team that created and is now executing on our new strategic plan. We have seven new board members including a new Board Chair and their exceptional breadth and depth of experience will be critical in leading Janus Henderson. We’ve created Fuel for Growth to reinvest in Janus Henderson’s strategic growth initiatives on behalf of the client.
The operating model has been upgraded and simplified including the order of management system transformation project that went live smoothly in the second quarter. This multiyear effort is a monumental step forward in our technology evolution and will help our clients and their clients achieve superior financial outcomes. And finally, we’ve added talent and promoted from within across the firm while removing layers within the organization. Attracting and retaining the best talent enables us to deliver for clients and execute our strategy over the long-term. Notably, of the talents coming in, many are high-caliber former employees who’ve taken notice of the positive changes happening at Janus Henderson, see the great opportunity at hand and want to come back and be a part of it.
Net-net, we have a solid foundation the core team is nearly fully in place and our plan is in motion. The element about our team, our people is so key given we want an enduring culture of performance built upon our stable and client-focused processes at Janus Henderson, and we are well on our way. Moving to Slide 14, which shows how we’re enhancing our culture through our company-wide mission values and purpose or MVP. I’m a firm believer that a strong MVP is essential to the success of a company. This shows that firms with a clearly defined MVP are more successful in the long-term and generate better returns than those companies that don’t. We introduced our MVP earlier this year to define who we are and what we stand for as a collection of individuals and a firm not just for today, but what we want to be in the future.
It gives us a clear North Star. Importantly, we developed our MVP much like we did our strategy inclusively and from a bottom-up as opposed to top-down, a truly crowd source and thus bought in articulation and aspiration. The feedback internally has been overwhelmingly positive. I’ve been extremely encouraged by how quickly colleagues have embedded our mission values and purpose into their daily work. Our MVP coupled with our strategy on a foundation of creating Fuel for Growth guides our decision-making and prioritization and allows all colleagues to move together in the same direction to help us win in this competitive landscape. Wrapping up on Slide 15. I’m proud of the progress made this quarter building on the progress of past quarters.
Net flows are positive $5 billion year-to-date. Investment performance is solid, financial results are good and we continue to execute on our strategies, including providing more Fuel for Growth to reinvest back in the business. Success will not happen overnight and progress will not be linear, particularly as we rebuild our institutional pipeline, retail flows remain negative and we go through pockets of transition over the next few quarters, which when taking an aggregate will lead to negative flows in at least the third quarter. Even so, 2023 flows are set to be significantly improved versus 2022. We are in the early stages of executing our strategic plan. And as we have shown, progress is starting to bear fruit. We believe our strategy will lead to organic revenue growth over time.
Our focus continues to be helping clients define and achieve superior financial outcomes and to deliver desired results for our clients, shareholders employees and all our other stakeholders. Let me turn the call back over to the operator for your questions.
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Q&A Session
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Operator: Thank you [Operator Instructions] Our first question comes from Ken Worthington from JPMorgan. Ken, your line is now open. Please go ahead.
Ken Worthington: Hi. Good morning. Thanks for taking the question. In relationship with Privacore, what are the Janus alternative products that seem best positioned to succeed with this relationship? I think you mentioned that Privacore is really a US-focused distribution strategy or platform. But I also think your biggest alternative products like Absolute Return are sort of registered in Europe. So what existing products seem better positioned to sell well on this platform? And how much assets do those products have today? And will you be developing new alternative products to kind of maximize this relationship?
Ali Dibadj: Hi, Ken. Thanks very much for the question. So, look first off, we’re very enthusiastic about the potential of Privacore. We firmly believe in the democratization of private alternatives and the broader democratization of sophisticated investment products. And we certainly believe that this is going to be a very exciting way that Janus Henderson, can participate in with our joint venture with Privacore. Because it does serve and this will start to answer your question, Privacore does serve to deliver on both ends of the value chain. A set of clients, who have told us that they want more access to alternative investment capabilities, but perhaps don’t have the ability to have client service from those alternatives capability managers.
On the flip side, the GPs, the actual investment managers want to get access to private wealth, given that $80 trillion of wealth is sitting there and that a lot of allocations are lower relative to where they should be from a broader alternative perspective. And so the investors want to get access there, but they don’t have the scale to develop the client service that the clients need. So Privacore, sits right in the middle ,and answers both of those questions answers both of those needs. And coupled with the Janus Henderson brand, and our ability to reach out to the retail channel starting in the US, we think that’s going to be a really interesting and exciting opportunity for us to deliver for our clients and for our shareholders. So, that’s the broad view.
Now to your question, very specifically Privacore, is an open architecture platform. Its point, it’s value proposition, it’s not just the client service part, but it’s also selecting the best-in-class alternative asset managers, then deliver that to the client base that is in great need of access there. We may have products currently. You’re exactly, right. If there’s anything that’s closest that will be in our liquid alternatives businesses. But right now, we don’t have necessarily, the right products to Privacore, which is why it’s open architecture, which is why the team of Privacore has a great experience that it has, in selecting the best culture of managers out there to deliver to the clients. Over time could we have more capabilities, that we can bring to clients via Privacore to your second part of your question?
Absolutely. That’s part of the plan. And in fact, having a relationship with Privacore legitimizes us even further, for potential M&A down the line in the liquid alternatives and illiquid alternatives area. Thanks for the question, Ken.
Ken Worthington: Okay. Yes. Understood. Maybe as a follow-up, outflows for the 3Q, you mentioned EMEA. Any rationale for the redemption or redemptions? And can you compare the fee rate to the assets being lost, versus the fee rate in the larger mandates that you’ve been winning in recent quarters?
