Janus Henderson Group PLC Q3 FY2022 Earnings Call

Good morning. My name is Elliot, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Third Quarter 2022 Results Briefing. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. 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 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 sections 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's my pleasure to introduce Ali Dibadj, Chief Executive Officer of Janus Henderson. Mr. Dibadj, you may begin your conference.

Welcome everyone, and thank you for joining us today on Janus Henderson's Third Quarter 2022 Earnings Call. I'm Ali Dibadj, I'm joined by our CFO, Roger Thompson. In today's call, I will start with some thoughts on the quarter before handing it over to Roger to run through the details. After Roger's comments, I will share an update on the work that's been done regarding our strategic path forward since last quarter's call. Then, we'll take your questions following those prepared remarks. Turning to slide 2. As everyone knows, market conditions remain difficult in the third quarter, tightening monetary policy from central banks, inflation, geopolitical tension, lower consumer confidence and liquidity concerns, all continue to affect markets, investor sentiment, and our results. The market decline, dollar appreciation, and $5.8 billion of net outflows reduced our AUM by 8% to $275 million. Long-term investment performance remained solid with 64% of assets ahead of benchmark on a three-year basis, which is up compared to the prior quarter. Short-term investment performance is uneven amidst extreme market volatility. The investing environment remains challenging, with high correlation among and between asset classes outweighing fundamentals and valuation. Our investment teams are remaining true to their identities and investment processes that have delivered long-term strong results and are focused on protecting clients against risk while looking for opportunities that have attractive valuations over time. During these times of market uncertainty, our clients and our clients' clients need us the most. These are the times we as Janus Henderson, and we as an asset management industry need to deliver for people all over the world who are saving for retirement, looking for a better life, and thinking of their financial future. In this environment, it's critical that we increase client outreach, share our market insights, and partner with our clients. Inside Janus Henderson, we continue to control what we can control and are looking keenly at expenses as we weather the storm in markets while creating fuel for growth. I'll now turn the call over to Roger to run you through the details of the third quarter financial results.

Thank you, Ali, and thank you again to everyone for joining us on the call today. Starting on slide 3, and I look at investment performance. Performance results versus benchmark are very similar to the prior quarter. Market conditions continue to generate considerable volatility. As Ali mentioned, our investment professionals remain disciplined in their approach and are focused on managing risk for clients and identifying opportunities that will deliver positive long-term outcomes for our clients. Long-term investment performance as of the 30th of September remains solid with 64%, 67%, and 75% of assets beating their respective benchmarks over the 3, 5, and 10-year time periods. Investment performance compared to peers continues to be competitively strong with over half of all AUM in the top two Morningstar quartiles over all time periods. Slide 4 shows company flows. For the quarter, net outflows were $5.8 billion compared to $7.8 billion last quarter. As you can see on the page, gross sales and redemptions are down significantly this quarter as global retail investors increasingly sat on the sidelines due to continued market volatility. Turning to slide 5 for a breakdown of the flows by client type. Net outflows for the intermediary channel were $2.5 billion compared to $5.7 billion in the second quarter. The improvement is attributed to lower net outflows in the US and EMEA. In the US, the improvement came from equities and was spread across several strategies led by mid-cap value, overseas, and Triton. In EMEA, the positive change was primarily from European equities and also from the one-off $1.3 billion liquidation of the UK property fund that occurred in the second quarter. Although net outflows were better, gross sales numbers are low as intermediary clients across the globe are choosing to monitor current events and are not putting money in motion. Institutional outflows were $2.6 billion, which were primarily driven by the EMEA region and include $900 million from the previously announced redemption in the Sterling buyer maintained credit strategy from a long-standing European insurance client. There is approximately $2.6 billion remaining in the mandate which is expected to be redeemed in the fourth quarter. Pleasingly, the APAC region had $800 million in positive net inflows, including $500 million from an Asian client into our global adaptive tail risk hedge strategy. Finally, net outflows for the self-directed channel which includes direct and supermarket investors was $700 million. Similar to the intermediary channel, gross sales and redemptions are down considerably over the last year as retail clients remain on the sidelines. Slide 6 shows the flows in the quarter by capability. Equity net outflows in the third quarter were $4.1 billion compared to $5.8 billion in the second quarter. The outflows were driven by global technology strategies, UK Enhanced Index, US Mid-Cap Growth, and Global Life Sciences. Third quarter net outflows for fixed income were $1.2 billion reflecting the $900 million maintain institutional redemption that I've just mentioned. Total net outflows from multi-asset were $200 million driven by the balanced strategy within our retail channels. Whilst the net outflow is in part due to short-term performance, the medium and long-term performance of balance remains very strong. The net outflows in balance were partially offset by the $500 million institutional funding I mentioned earlier. Before moving on I do want to call out a redemption that will impact the fourth quarter. The European institutional client has made the decision to bring the management of their equity assets in-house. This decision was not specific to Janus Henderson and impacts equity mandates across multiple asset managers. For Janus Henderson, the equity AUM to be redeemed is approximately $4 billion and will occur in the fourth quarter of 2022. The AUM had performance fee potential but had relatively low base fees representing approximately $5 million in annual management fees. 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 decreased 8% compared to the prior quarter primarily due to lower average AUM. Net management fee margin for the third quarter was 49.5 basis points, compared to 49.2 basis points in the prior quarter. The increase is primarily due to accounting adjustments made during this quarter which will not repeat. Third-quarter performance fees of negative $13 million, including negative $17 million from US mutual funds. All else equal, underperformance will continue to impact performance fees in the fourth quarter and into 2023. Based on current investment performance, we estimate aggregate performance fees for full year '22 will range from negative $38 million to negative $42 million. We expect this will include roughly negative $64 million from US mutual fund performance fees. Continuing on to expenses. Adjusted operating expenses in the third quarter were $269 million, down 3% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs was down 2% compared to the prior quarter, primarily due to favorable FX and lower variable costs, given lower pre-bonus profit, which was partially offset by a true-up in the cash LTI split. Adjusted LTI was up 4% compared to the prior quarter. And in the appendix, we've provided the usual table on expected future amortization of existing grants we used to use in your models. Adjusted comp to revenue ratio was 46%, which was up compared to the second quarter and in line with expectations, given the decrease in adjusted revenue. Adjusted non-comp operating expenses decreased 9% compared to the prior quarter, primarily due to favorable FX and lower discretionary expenses. Adjusted operating income in the third quarter of $125 million was down 16% over the prior quarter, driven principally by lower average assets, partially offset by our cost discipline. The third-quarter adjusted operating margin was 31.8%. And finally, adjusted diluted EPS was $0.61. I'd like to quickly touch on expectations for the fourth quarter and full year '22. Average AUM in the third quarter was 11% higher than closing AUM. All things equal, you should therefore expect management fees to be lower by this amount in the fourth quarter. And as closing AUM is significantly lower than year-to-date average AUM, all else equal, you'd anticipate '23 revenues to reflect this lower AUM. In terms of '22 guidance, we still anticipate a compensation ratio in the range of 44% to 45%. For non-compensation, we continue to proactively manage our discretionary expense base and we anticipate the '22 non-comp expense growth to be in the low single digits. Finally, our recurring effective tax rate for the third quarter was 21%. The lower effective rate in the quarter resulted from various state tax items. For the full year, the firm's statutory rate is still expected to be in the range of 23% to 25%. Skipping through slide nine to slide 10 for an update on cost efficiencies. Our philosophy has always been to maintain strong financial discipline and invest in the business where it strategically makes sense while looking to operate more efficiently to provide the fuel for growth. During the third quarter, our Executive Committee reviewed the business, seeking ways to drive efficiencies without compromising client delivery or regulatory requirements. As part of this extensive review, we've identified $40 million to $45 million in gross run rate cost efficiencies, which will be equally split between compensation and non-compensation expenses. We expect to realize approximately one-third of the gross run rate savings by the end of this year with the remaining two-thirds to be realized by the end of 2023. The implementation of these reductions will result in estimated nonrecurring charges of $30 million to $35 million. Our intent is to reinvest most or perhaps all of these savings back into the business to fuel growth, which Ali will talk about later in the presentation. It's important to note that we expect a mismatch in timing between the gross cost savings and the reinvestment in the business. Moving to slide 11 and a look at our liquidity. Cash and cash equivalents were approximately $1 billion as of 30th of September, an increase of $170 million resulting primarily from the continued strong cash flow generation, partially offset by the return of $65 million to shareholders via the quarterly dividend. Given current market volatility, we've been conservative and purposeful in our approach to capital management and have elected not to buy back stock this quarter. We have a strong liquidity position and we'll continue to balance the capital needs and investment opportunities of the business with shareholder interests. Along these lines, the Board has declared a $0.39 per share dividend to be paid on the 23rd of November to shareholders of record as of the 7th of November. With that, I'd like to turn it back over to Ali to give you an update on our strategy.

Thanks, Roger. Moving to slide 13. I wanted to remind you of where we left things on last quarter's earnings call, three things. First, there's a lot to like about Janus Henderson. The engine is strong from investment acumen to client service to strong cash flow generation and a robust balance sheet and there is much work to do. Second, we introduced our initial strategic framework to protect and grow 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. That framework persists; you'll hear more about it in a minute. And third, although we're starting from a good foundation, we are in a transition period that is going to last at least through most of 2023. With that baseline and the progress made on the strategic path over the last three months, I'm convinced now more than ever that there is an enormous amount of potential at the firm to deliver long-term success for all stakeholders: clients, shareholders, employees, communities, and others—not overnight but over time. Now let me turn it to slide 14 to offer some more detail on the work that's been undertaken since our last update. This summer we assembled a group of senior employees from all major departments of the firm and all geographies as an important step in getting the best thinking and buy-in for our strategic direction. We not only sought internal views, but sought external views, also importantly including our clients, and sifted through a broad set of strategic opportunities that included both organic and inorganic options. The initial list of approximately 200 ideas went through an extensive filtering process designed to capture those opportunities that provide the best possible outcomes for our clients and that will lead to organic growth and attractive operating margins over time. That initial list of 200 ideas will result in less than 10 that are actioned. That portfolio of activity will also deliberately have laddered delivery periods over the horizon of time. Slide 15 lays out an illustrative example of how the opportunities were aligned quite purposely to the client voice. It's absolutely imperative that the clients be at the heart of everything we do in order for us to win. With that mindset, we brought the client completely forward in the process, seeking their input upfront, so that their voice would be woven into our strategic evolution from the start. Thank you to those clients with whom we've spoken so far. We'll continue to gather client input as our strategy evolves, as our client understanding evolves. From the client feedback to date, we identified five essential beliefs against which each opportunity was measured. From there, we continue to further prioritize and calibrate the opportunities as illustrated on Slide 16. Our strategic leadership team evaluated the initiatives along two dimensions: Janus Henderson's right to win and how the opportunity measures against future client and industry importance. The opportunities need to be relevant for our clients and the industry in general in places where we have or can have, via buying, building, or partnering, the right to win. Another element we wanted to be sure to address is broadening the universe of AUM in which we participate, as it was illustrated on Slide 17. Janus Henderson is a global firm with a presence in the largest markets. In fact, we estimate that based on our product set and distribution footprint, Janus Henderson's current addressable market is about $40 trillion. That is a big puddle to swim in. We need to do a better job of becoming a bigger fish where we already have a presence. You've heard us talk about that in our last earnings call. In addition to improving market share, we also want to think bigger and turn the puddle into an ocean. Our strategy intentionally and carefully increases the denominator for us, meaning it increases the addressable AUM for us to target. Based on the initiatives identified through our process and future initiatives that will come as our strategy evolves, we believe our addressable target market can double over time. Slide 18 looks at how all this fits into our strategic framework. The process undertaken at the beginning of the summer allowed us to build out the early strategic framework. While this summer and into the fall, we identified opportunities that fit within this framework. Over the next few slides, you'll start to see just a sample of initiatives that will be a part of our focus for us to deliver our strategy. On Slide 19, a business we must protect and grow is our US intermediary business. Our US intermediary business is our largest client segment representing about one-third of our assets. It has attractive net management fee rates and contribution margins. While it is an extremely competitive market, it's also one of the fastest growing. We know this space well and have established well-connected pipes through which we distribute traditional mutual funds, sub-advised assets, ETFs, SMAs, CITs, and VITs among others. We believe our investment strategies, which are underpinned by deep fundamental research, strong risk management, and therapy to clients, are critical components in investor portfolios. However, we've been losing market share in this strategically important market. We think having a more focused and thoughtful approach around our best strategies and products will strengthen our relationships with clients and improve sales. In order to re-energize the channel, support the team further, and capture market share, we'll invest in areas including five places: repositioning ourselves to target faster-growing segments of the market, expanding product offerings and vehicles that meet the demands of clients, improving branding to better align with the market and our strategy, leveraging our data better to action business development, and improving execution by enhancing the organizational structure properly aligning incentives and defining KPIs to increase accountability and measure success. Moving to Amplify on Slide 20. New product adjacencies are an opportunity for Janus Henderson to leverage the strength of our product development and investment teams. Our product development track record has proven that we can deliver on clients' needs as you can see on the slide. We paused for a while several years ago, but we have the muscle memory and capabilities still here. More recently, we have many new product launches in the pipeline that are developing a three-year track record, a key milestone for client adoption. Some of the products will be successful and I believe some will not. We'll amplify the products with a successful performance track record coupled with strong client demand; we see real potential here. Growth areas of focus will start in asset classes such as multi-asset solutions and liquid alternatives, where we've seen recent client-led momentum and ESG, along with differentiated equity and fixed income products. These spaces bring higher fees and higher value add and offer significant total addressable market. Again, this won't happen immediately, but the runway is there and should continue to build. Turning to Slide 21 and diversifying. For Janus Henderson, bolt-on acquisitions and team lift-outs have played a key role in capability development. We haven't been perfect, but certainly have some successes, as you can see on the chart. You can also see on the page that Q2, we slowed down activity. However, as you know, that machinery is ramping back up, as evinced by the recent addition of our emerging market debt team. My team and I have a track record of successfully identifying, executing, and delivering value from M&A and we're actively looking at targeted areas to fill gaps and expand into areas in which clients are asking to work with us, including places we've mentioned before, like private credit and insurance, gaps we have in traditional investments and regions of the world we would like to bolster further. Of course, we will be disciplined in identifying where to buy, build, or partner. We are looking for people who want to partner with us to grow; we want to leverage our global distribution footprint, research skill set, and product development tools and who can provide Janus Henderson capabilities that fill gaps and, importantly, we want people who are like-minded in terms of culture and client service. Flipping to Slide 22. As we continue to work on the strategic path forward, we know it will take time for the initiatives to bear fruit. While that transition is ongoing, it's important to note that in the short term, we do have energy building internally and externally, given some early wins and positive client activity. There are several examples. The E&D team, which started Janus Henderson in September, has hit the ground running, and we anticipate that the group will have $500 million in AUM by year-end after starting with zero last month; zero to 500 in just a few months is a testament to what we can do when we put our minds to it. Elsewhere, we are having a greater number of higher quality interactions with clients in this challenging market backdrop, when, as I said at the outset, clients need our insights, client service, and investment acumen the most. In our US intermediary space, we've seen client touches increase over 25% compared to the third quarter of last year, positive institutional consultant activity which is vital for our success is improving, with consultant meetings increasing by 33% compared to 2021, and annualized consultant-advised inflows on pace to be two times higher than last year. Our ETF franchise continues to do well, ranking second in domestic fixed income active ETF inflows on a year-to-date basis. Our recently announced board changes bring new energy and world-class and varied expertise. And finally, our identified cost savings which included delayering, removal of duplication, and surgical performance moves will provide the Fuel for Growth or FFG to allow us to be more dynamic and faster moving, enhance accountability and, most importantly, invest in areas such as research, new products, and distribution. It's these investments that will improve the core value proposition to our clients. As Roger mentioned earlier in this section, it is important to remember that there will be a timing mismatch with the realized gross cost efficiencies and investments in the business. And we'll continue to update you on our FFG progress going forward. Now wrapping up on slide 23, as I said before and I believe now more than ever, there's a lot to like about our firm and there's much work to do. We've identified opportunities that we believe will return us to a path of organic growth in the future. We're still in the early days and that path will be a market-dependent one, whether we like it or not. Success will not happen overnight and progress will definitely not be linear, but I am convinced now four months on the job it will happen over time. In the short-term, there's energy building around the strategy and early wins are emerging. I look forward to providing updates on our progress in future calls and delivering desired outcomes for our clients, shareholders, employees, and our other stakeholders. Let me turn the call back over to the operator for your questions.

Thanks. Good morning. I wanted to follow up on the expense initiatives. You mentioned gross savings, and I understand that you plan to reinvest those. Could you elaborate on the areas where you're cutting expenses, specifically if they impact client-facing operations and any potential repercussions from those cuts? Looking ahead, although it's early and you're making significant changes on the expense front, should we anticipate maintaining our expense base moving forward while prioritizing investments alongside efficiencies and other improvements?

Okay. Hey Dan, I’ll start and then Roger can add in. As you've heard, we’re discussing $40 million to $45 million in gross savings. To address your question, this is fairly widespread; about half of it relates to fixed compensation, while the other half pertains to non-compensation areas. We aim to achieve roughly a third of this savings this year. We will continue to monitor expenses and ensure our expense base remains appropriate, which we have been doing for quite some time. This is a specific program in itself. We will keep investing in the business where the return on investment indicates it's beneficial, allowing us to deliver better results for our clients. As we identified cost reduction opportunities, our primary directive was to avoid disrupting clients or affecting any regulatory responsibilities, and I believe we have adhered to this. We sought areas where we could simplify our structure and enhance integration, addressing instances where we had too many layers or slow decision-making processes. Importantly, we want to create opportunities for our high performers to grow and enhance client outcomes. Regarding significant areas for investment, they are traditional ones: upgrading and incentivizing our people, improving internal processes as well as those that engage with clients, and investing in technology. We've spoken about this before and will continue to do so, whether it's data that serves our clients or data needed for internal operations.

I think that just about covers everything Ali. The only other piece, sorry, Dan, it’s Roger. The only other pieces that I guess we should comment on and Ali commented on in as part of the examples of where we’d be looking to invest and fill out is both filling out, continuing to fill out. We’ve got some great geographical reach but there are some areas we can do more in. And there are some gaps in our capabilities that we think we should fill in over time. And emerging market debt was a great first step, but there are some other areas we’ve talked about private debt in the past that you should expect us to continue to look at.

Great. That’s helpful. Thank you. And then on the protect and growth side of the strategy, you talked about the US intermediary channel where you guys have historically been quite strong. You said it's growing, I guess on the active mutual fund side. I'm just curious if you say if you would agree if that's where you think it's growing. And then the capabilities that you’re looking to either amplify or grow. I'm curious about the SMAs, CITs, and VITs, how much AUM do you have in those buckets today roughly? And do you have the capabilities to scale in those product vehicles going forward currently?

Yeah. So maybe let me start with that one and work backwards. The short answer is not enough. But the longer answer is, yes, we do have the capabilities. We offer many of our key investment strategies that have delivered performance to our investors, to our clients for a very long time and performed quite well in that form and we want to continue to do that. And we do have the capabilities to do that at this point. I would argue we didn’t not so long ago, but today we do, and we have the interest to do that whether it be on SMAs or CITs or VITs or other places. And, of course, you know about the successes we’ve had in the ETF world. So our view is that we are packaging or vehicle agnostic. We want to deliver in a manner that is client need focused, and we have the investment capabilities to do so. So that’s the second part of your question. For the first part of your question, look, as I said before we said in our last call as well, we are losing market share even where we play and have significant scale. And that is something that I think is driven by a lot of the things that you’ll see on page 19 at the bottom where we have to make sure we’re focused not only on the fastest vehicles that are growing, yes, absolutely. We have to make sure we’re focused on the right advisers and the right support that we can provide to our clients in making sure that they grow with us and not away from us. We do think that we have to do a better job in terms of organizational structure of the US intermediary in this example of Protect & Grow, as well as make sure the incentives are aligned with the right set of KPIs. I think about these things as target the right clients, make sure we deliver for them, make sure the org structure is right, and then make sure we have the right KPIs to have measurements around. And then, pave people on that. And it sounds simple, Dan. It doesn’t always happen. That’s certainly a path that we’re on, which does require, to your earlier question, a little bit of investment as well.

Great, thank you.

Hey. Good morning, everyone. Could you remind us how much of the cash balance is kind of locked up for regulatory reasons or anything? And then, more broadly on that point, maybe frame your willingness and balance sheet flexibility to take on bigger M&A opportunities as that's a part of the strategy now?

Hey Patrick, it's Roger. Yes, as you can see, we have a very strong balance sheet with several billion in cash and cash equivalents. The regulatory environment in the UK is stricter than in other areas, and there is a significant amount of capital tied up in that system, approximately $250 million required from a European group perspective. That constitutes the largest portion. We also have some debt coming due in a couple of years, but that's the main amount.

And maybe let me tackle the second part of the question. You look at our balance sheet Patrick, and you certainly, either compare it to others or just look at where we are from a net cash perspective. And it's obvious that we have plenty of room, right? We have plenty of room on the balance sheet for M&A for sure, but we are going to be disciplined, right? We're going to be disciplined; we're going to be client-led in the way we think about M&A. I'm happy to elaborate on our thought process on M&A. But from a pure balance sheet perspective, we do have capacity to do things that will deliver better results for our clients in size.

Thanks. And then, could you update us on the UK domiciled AUM, and within that, how much of it is in UK pensions? And then more broadly, are you seeing any impact positively or negatively as pension funds have been seeking liquidity there or might even move away from LDI now?

Yes. We have a relatively small LDI book, specifically to your question, Patrick. About $500 million of the outflows that we saw in Q3 are related to clients requiring collateral or requiring cash to satisfy collateral calls in the third quarter. So again, we're not directly managing LDI, but there, obviously, was that significant demand in the UK market. That's not a big business for us. But like I say, it's about $500 million of the outflow in the third quarter that relates to LDI.

But could you give the AUM exposed to pensions more broadly in the UK? Like not just LDI?

Probably in total about $10 billion. I'll follow up either specifically with an answer, Patrick.

Hi, thanks for taking my question. In terms of strategy, I know we only discussed this for a few minutes, but if I summarize what I heard it seems like the strategy was about doing many of the things that Janus has done in the past, but doing them better. So, comments you made like improving execution, leveraging existing data, better alignment, enhancing organizational structures, filling in gaps sort of lead me to that conclusion. How meaningful are the changes that you're really proposing here? And maybe why do you think they're substantial enough to change the outcome for clients and shareholders when since the merger with Henderson the strategy seems to have underperformed pretty substantially?

Thank you for the question, Ken. What we've talked about so far is more about evolution than a complete overhaul, and I think that's a valid point. In this industry, there's rarely a single solution that solves everything. Our strategy focuses on building from the solid foundation we have, which is essential for us to progress and potentially introduce more transformative initiatives in the future. Evolution over revolution is acceptable, especially considering the opportunities we have to enhance client service and improve our financial situation. You've observed our progress on managing costs, and we're also on the lookout for opportunities to diversify and better serve our clients. If we reflect on past strategies that haven’t worked well, often it's because of an improperly defined target market. In our case, it's clear where our clients want to engage with us, which is why we emphasize a client-centric approach and the skills we bring to meet their needs. This clarity gives us confidence in our execution strategy. Many strategies fail because they come from the top down without engaging the team. We've made an effort to refine our processes to ensure we get buy-in, which is essential since a strategy is only as good as its implementation. Often, strategies fall short due to insufficient analysis or data, but we've done extensive research to ensure we're targeting the right areas of growth that align with our clients' interests. Execution is crucial, and it hinges on accountability, performance tracking, and a sense of urgency. Our overarching vision is to benefit our clients and their customers, which is central to our mission at Janus Henderson. We believe this vision should resonate within the asset management industry, aiming to improve lives. While we’re focusing on a few key areas, we've already started to see some initial positive outcomes, whether it's our emerging market debt platform, impressive fixed income inflows, or the success of our operations in Australia, where we plan to visit next week. These indicators don’t mean everything is perfect, and I don't want to suggest that, Ken. However, I want to convey that we've thoughtfully developed our strategy and are committed to achieving better results for our clients, shareholders, and all our stakeholders.

Okay. I very much appreciate your comments. And maybe a quick one for Roger. Talk about how you hedge FX, how much of the FX risk that you hedge, and maybe how the hedges flow through the P&L and what the impact may be for 4Q?

Yes, Ken. The profit and loss statement is naturally hedged to a degree. We are slightly short in non-US dollar currencies globally. This means our costs in these currencies are a bit higher than our revenues, but overall it's a balanced situation. While we don't hedge the profit and loss statement itself, we do hedge our balance sheet and manage what we can in our seed capital. The key takeaway from a profit and loss perspective is the natural hedge between revenues and expenses, which is relatively even, though slightly leaning short regarding currency. There is an overall impact of lower assets and revenue in US dollar terms, but we are beginning to see that reflected in lower expenses.

Perfect. Thank you so much.

Hi, can you hear me?

Yes.

Yes.

Okay. Great. Sorry, I don’t know what happened earlier. My first question is just in relation to the marketing spend and the general and admin spend. Apologies if you've already covered it, but I sort of have to toll in a couple of times to get back on. It was materially lower this quarter than where we were expecting for both the big pockets. And relative to the last couple of quarters. Is that really just some of the cost control measures that you guys are starting to implement, or was there anything else nuanced there?

It's a number of things, Elizabeth. Part of it is the FX; we just talked about from Ken's question. There is definitely the cost efficiency that we've talked about today going forward, but we've obviously been looking at our cost base through the year. If you noticed my commentary on our expectations of non-comp over the year has gone from–I think we originally talked in the teens for the year, and we're now talking about low single-digit growth. So you're seeing that come through. But–specifically, within marketing, yeah, we're being careful with what we do. We want to do the right things where we see opportunity. But again, as we've talked about in terms of flows at the moment, a lot of investors are sitting on the sidelines. So we probably have slowed some of the things down because there's less opportunity. But we will push hard when we see the opportunity to do so.

Okay. Thank you. And in terms of–I know, you obviously haven't got guidance out beyond FY 2023. But how should we be thinking around potentially the cost-to-income ratio or even the comp ratio; the non-comp growth rates? Obviously, there's a lot of moving parts with all the things you guys are doing as well as the cost out opportunity as well. So, yeah, how should we think about it in the sort of more medium-term basis?

Well, it will obviously be impacted by revenue more than anything else. And it will go – it will be so – and again, I think I made the comment in my prepared remarks earlier that the average assets for the quarter were 11% higher than the ending assets. So that will flow through and all things being equal, that's going to flow through into 2023, and that will mean higher cost to income. There will also be some volatility that will come through as we talked about in terms of the investments that we're making and the cost saves that we're making, when those come through over different time periods. But we will continue to be disciplined around the cost base for the organization. We'll invest where we see real opportunity where we've assessed the ROI, and where we believe that we can really deliver for clients and ultimately for shareholders as well. But I think, yeah, it's obviously very important to understand that headline AUM figure is our starting point, and our cost base obviously has some variability in it, in terms of variable comp and some of our third-party costs, which are a little bit more variable. But obviously there is a fixed cost element—it's part of the reason why we looked hard at our cost base and we have made some of the changes that we announced last week.

Okay. Thank you.

Thank you. Thank you for taking my questions. Two for me. First one, if you just go to slide 17, can you just give us a little bit of a breakdown of the increase in TAM? What comes from new vehicles versus what comes from new capacity or new capabilities you're going to put on?

Sure, Ed. So I can't give you the exact breakdown of it, but let me give it a go here. The left-hand side, obviously, is exactly where we are today, right? So current vehicles, current states, current geographies, current everything. If you go over to the right that expands the list of areas that we think we have the right to play and the right to win in that is client-led. So things like ESG are in there where we have some presence, but not a lot things like multi-asset and solutions, things like alternatives, some of the differentiated equity and fixed income opportunities that we think there's room there. There's some elements of privates in their private credit in particular. That will give you a sense of it. I would say that the vast, vast majority of going from that little pea-sized Janus Henderson on the left to a slightly larger one on the right is organic in nature, the way it's laid out here. Could that be bigger with inorganic moves, it certainly could be, but most of it—the vast majority is through organic means going into new vehicles and new asset classes that we have the right to play in.

And it sounds like from what you said there, while it's both new vehicles, it sounds like it's more new capabilities that you're not in now while they're still organic?

New capabilities that we have a base to work from. So a lot in the amplified bucket. We've mentioned for example the $18 billion number of newly seeded things that have come out since 2016. We have covered not everything in the cover will be good. Some will be past the expiration date or not performing quite well, but we feel very comfortable with some of the areas in there, which do include multi-asset, which we have a capability in; we just haven't amplified it, do include things like sustainability or ESG, do include putting things in new vehicles like SMAs that we have that is a big fast-growing area for the industry and for us. So I’d say it’s a combination of all, but most of it organic—that's correct.

Okay. No, that's great. And then just a second question, if you could just give us some more detail a little bit more short-term on flows. You talked today about having lots of conversations with clients and increasing. If you just think about the intermediary channel, obviously, you've seen a slowdown in sales there. Is there anything starting to happen there, or is it just the uncertainty still weighing on people and the conversations you’re having? And then in the institutional channel, is it still people uncertain there and investors not moving around money? If you could give us any more color on what you're seeing from your conversations at the moment would be very helpful.

Yes. So it's a great question. The short answer Roger gave you a little bit of sense from in his prepared remarks and answered an earlier question. Look, think about Q4, we've already told you about something like $7 billion of outflows in the institutional channel that we'll have to deal with. That is not helpful, right, as in and of itself. It's tough to predict where you'll start seeing the positive flows. We're certainly getting a lot of client interest. And we think that's real sustainable interest, but to your point, there's not a ton of money in motion unless it's because of things where we don't participate like LDI or other places they don't necessarily participate in a very big way. I don't get a sense that there's a lot of desire to move money today, today. But again, we are controlling what we can control. We're having increased client outreach where cutting costs to reinvest back in the business. We're putting the right people in the right seats. We have good performance. We're ready, and we're sort of priming the pump for when we do have an opportunity to get some of that flow trajectory. I wouldn't expect it to happen overnight, but I would expect organic growth to happen over time for us.

That’s great. Thank you for the color.

Okay. Thank you very much for taking the questions this morning, this afternoon. So first one for me just around capital. You mentioned you didn't buy back any stock this quarter. I was wondering if you could maybe step back a little bit. It sounds like big deals are off the table, but how should we be thinking about capital priorities from here? Within that, I think you had had some commitment to buy back stock through early spring of next year. Has your thinking changed there? And then, just could you review your dividend policy, just given what looks to be a pretty significant step down in earnings power to next year? Thank you.

Hi Bill, it's Roger. Yes, I mean, there's no change in our capital management philosophy. Given current market volatility and some of those opportunities that we've talked about, we have been conservative and purposeful in the approach to capital management, including the buying back of stock. The Board will make the decision as to whether to restart the program at some point in the future. You're right, we do have an approved program in place. But we will continue to look at our capital philosophy in the same way. Hopefully, we've been consistent with that over a number of years. We will reinvest in the business where we see that we've got opportunity there, whether that be organically or inorganically, and where we don’t have a need or we don’t see the value, then we will turn cash flow generation to shareholders. But this quarter, as I say, we were conservative and purposeful and did not buy back stock. In terms of the dividend, the dividend is well covered. It is a relatively high yield. Hopefully, that provides some interest for the stocking while we look for those long-term flows that we’ve been talking about. But as I say, you see from the earnings, I think our payout over the last 12 months is just over 50%. As earnings have fallen over the last couple of quarters, that is obviously increasing as a payout, but the dividend is still well covered.

Okay. That's helpful. And then just one follow-up, just coming back to the expenses a little bit, maybe a couple in the question I apologize for trying to cheat here a little bit. Will you break out just sort of where you're spending versus where you're saving, so we can sort of track the pacing of the sort of the gross synergies? And then, just maybe more of a conceptual question, if we would use the third quarter as a sort of a start point on expenses, all else being equal, is there any inflationary pressure on that expense base, or do we end this time next year at the same place net of all the savings and reinvestment?

Let me begin with the first part, and Roger can provide insight on the second and correct me if necessary. It's challenging to manage because some efforts overlap. Consider a scenario where you want to improve talent by removing costs in one area and reallocating those funds to a growing segment. Such adjustments will balance out. As Roger mentioned, the investments we make in people, processes, and technology include cutting expenditure in some areas while spending more in others. He pointed out that nearly all of this will be reinvested to foster growth, which is accurate. It's important to note that we are actively spending. We might be investing in upgrades sooner than the savings materialize, and predicting exact outcomes is difficult. The timing of technology availability and the right moments to enhance our processes and personnel vary, making it hard to anticipate fluctuations. However, we are currently investing and aim to do so promptly to achieve better returns and growth as early as possible. Roger, I’m willing to...

Yes, I’d like to add to that, Bill. I can assure you that our control and discipline around the cost efficiency program is very robust. We will evaluate and monitor what we proposed, what we decided on, what we implemented, and what we actually achieved. This will be tracked for each individual related to compensation, as well as by department and specific line items for other aspects. Initially, we will highlight the areas we are proposing and then finalize those sales. While, as Ali mentioned, we may reinvest some of that back into the same areas, we have a solid program to ensure we extract the intended costs. Looking back at the merger five or six years ago, we delivered on our promises. This should reassure you that when we cut costs, we will follow through. Furthermore, as Ali indicated, we will reinvest in areas that promise greater growth. Regarding inflation, like everyone else, we are experiencing inflation and wage inflation. We will continue to manage that, and we are also currently affected by lower markets impacting our revenue. It's a challenging balance, but we will remain disciplined about our cost base. However, we are not immune to inflation.

Thank you.

Good morning, everyone. I wanted to ask a few questions about cost efficiency. Ali, I hope you don't mind a multipart question. You mentioned that the review was extensive, and I was curious if there will be any flexibility on expenses if the markets continue to be challenging. That's my first question. I'm a bit confused about the discrepancy between the expense reductions and the reinvestments. Will this be a favorable or unfavorable discrepancy? Regarding the $30 million to $35 million in expense implementation, how much of that is cash-based compared to accounting? Finally, is any of the expense reduction coming from investment professionals, or is it all focused on the mid-office? Thank you.

Sure. We’ll try to stay honest on those, Ryan, the questions. It was extensive. It was very broad-based. We will obviously continue to be disciplined on our cost on behalf of shareholders and clients. We don’t have, if you’re asking the question, kind of a ripcord situation if the market goes down. That’s not how we operate. We are however going to continue to be disciplined on our cost structure obviously. But the $40 million to $45 million is what we’ve identified and are executing on. In terms of the balance of the positives or the negatives, without stepping into giving guidance, what I would say is some cost savings one has to invest in first. If you want to hire somebody and they're available, you may hire them before you get the cost savings out. So the volatility will be there. You’ll probably have to invest a little bit before you get those cost savings out initially would be the way I would think about modeling it for what it’s worth. But again, it will be clearer as time goes on with the volatility is. So I would think unfavorable I guess is a short answer. Let me go to a number Roger go ahead.

Sorry. Regarding the cost of implementation, most of the one-time costs will be cash. There may be some accounting acceleration of long-term incentives. We will also review our real estate footprint, and there could be some small lease write-offs. Overall, the majority will be cash.

And then your last question specifically, as we said at the outset goes back to your first question, we were very broad-based. And the instructions were, as I mentioned earlier, to make sure that we deliver for clients and then we have no issues on the regulatory side of things. And we support our responsibilities on the regulatory side. So in that first context of client focus, we have to look at all aspects of the business. So yes, we look to PM as well. And if it was in the best interest of the client to change, we certainly did that.

Thank you. Good morning, everyone. I appreciate the opportunity to ask my question. I have two questions related to your strategic improvement plan presentation. First, regarding the US intermediary channel, I appreciate the details on your planned investments. On the sales force front, do you feel that your team is smaller compared to your competitors in this key area, or is it more about reorganizing the current sales force and making adjustments? Are you focusing more on wirehouses or other sectors like RIAs? Secondly, regarding slides 14 through 16, how confident are you about achieving positive organic growth in the long term, even if we face ongoing secular challenges from the shift from active to passive investments?

Yeah. Okay. So on the first one I don’t think we're undersized from a number of people perspective. There may be some selective things one could do. But really it's around leveraging the right set of data to make sure we're applying those resources in the areas that can deliver the best results for our clients and deliver growth. So it's an alignment question more than it is kind of we're underserved, right? We don’t have enough coverage of things. That’s part of the good news, right? The good news is we actually have a really strong vibrant team in the US intermediary business. It is an excellent distribution pipe so to speak, and great relationships with clients. We can do a better job on activities and resourcing and making sure everybody understands what the KPIs are and aligning incentives, et cetera, along the way. So it's more on that side of things than it is, gosh we got to go out and hire 200 people. That’s not the case. We actually have really good foundation to work from there. On the second question around kind of predicting I guess organic growth or not. Look, that is our intention, absolutely. Our intention is if we pick the right pockets to target from not just a new intermediary; I mentioned a second ago, but more broadly as a firm, right pockets in the industry there is growth. There is growth and we should be aligned to those bigger pockets that are growing better. And again, there too the good news is we have a foundation of capabilities to allow us to do that for the most part to one of the earlier questions. We may have to do things organically—sorry, inorganically, the emerging market debt team was an example of that. But I’m fine doing things bigger as well than that if it delivers capabilities that our clients want from us and where we have the right to win—where in their eyes we have the right to win. So yes, the intent is to get to organic growth; one has to recognize that things are going to be market dependent, whether one likes it or not. But in a more normalized environment, that is the intention, and that is what we’re all heading towards to deliver for our clients, which will deliver organic growth and thus for our shareholders as well.

Thank you. Kind of a continuation on that. Maybe on the third piece, particularly the lift-outs, given the market moves we had in the second half, could you give us a sense of where kind of people's temperatures are and how quickly they could kind of warm up and look at maybe joining you guys?

Yes. So it's a pretty vibrant market out there from an M&A perspective. I think what’s happened over the past year maybe two, certainly a year, has gotten a lot of folks to be realistic about being part of a broader, very strong foundation of a platform, being part of a bigger organization. As Roger mentioned a couple of times, and it's probably worth underlying again, just look at our balance sheet, right? It is an extraordinarily strong balance sheet that weathers storms like this. And you can imagine there are folks who want to be part of that. Importantly, there are folks who want to be part of–to some of the earlier questions, a really great distribution platform. And see the flexibility of them building their own broader global distribution platform is something that may not be as attractive as a smaller company as opposed to as a larger company. And so, I think the temperature is just right, so to speak. I wouldn’t expect that everybody is buying stuff tomorrow. People are kind of feeling things out. But I would anticipate over the next 12 months there will be more M&A activity in this industry than what you’ve seen over the past six to nine months. Great. Thanks, Elliott. Thank you all for joining. I hope you have a little bit of a better sense of the work that needs to be done, what we've hopefully started to deliver so far, and the excellent foundation that we have at Janus Henderson. And we look forward to updating you further on future earnings calls. Thanks all for joining.

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