Janus Henderson Group PLC Q2 FY2024 Earnings Call

Good morning. My name is Megan, and I'll be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Second Quarter 2024 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's conference call, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from those predicted in the forward-looking statements due to a number of factors, including, but not limited to, those described in the forward-looking statements in the Risks 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 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.

Welcome, everyone, and thank you for joining us today on Janus Henderson's second quarter 2024 earnings call. I'm Ali Dibadj and I'm joined by our CFO, Roger Thompson. In today's call, I'll provide some thoughts on the quarter before handing it over to Roger to run through more details. After Roger's comments, I'll provide an update on our strategic initiatives, brand strength, positioning, and our progress towards delivering consistent results over time. So I'll take your questions following those prepared remarks. Turning to Slide 2. Despite a persistent unsettled macro backdrop, market gains, and continued alpha generation provided by our world-class investment teams, the exceptional services provided by our client teams, and the productivity and execution of our operations and support teams across various functions enabled Janus Henderson to deliver a good set of quarterly results. Investment performance is consistently solid. We believe 63% of assets are beating benchmarks on a 1, 3, 5, and 10-year basis. Assets under management increased 3% to $361.4 billion, the highest quarterly AUM figure in over two years and 12% higher compared to a year ago. Net flows were positive $1.7 billion. Improvement in net flows came from our intermediary channel and the institutional channel, which benefited from over 10 distinct mandate fundings ranging from $100 million to $400 million, illustrating our efforts to grow a broad range of client sizes for our institutional business. We are encouraged by the net inflows in the quarter. Recall that we previously said that intermittent quarters of neutral to positive net flows would indicate that our strategic plan is starting to bear fruit. Net inflows marked our second quarter out of the last six with positive flows, demonstrating tangible improvement towards our aspiration of delivering consistent organic growth over the long term. Our financial results remain solid, positive markets, net inflows, outperformance delivered by our investment teams, expense management, and increased productivity resulted in adjusted diluted EPS of $0.85, a 37% increase compared to the same period a year ago. Our financial performance and a strong balance sheet continue to provide us the flexibility to invest in the business, both organically and inorganically and return cash to shareholders. In summary, while there's always work to do, the second quarter demonstrates we are squarely on the path to delivering consistent results for the long term. Investment performance and financial results are strong. Net inflows reflect areas of momentum in our business. We have a strong and stable balance sheet and each person at Janus Henderson individually and collectively continues to execute on our strategy. I'll now turn the call over to Roger to run you through the detailed financial results.

Thanks, Ali, and thank you, everyone, for joining us on the call today. Starting on Slide 3 and investment performance. As Ali mentioned, investment performance versus benchmarks remained solid with more than 60% of aggregate AUM beating their respective benchmarks over all time periods. Looking at further detail, at least half of each capability's AUM is ahead of benchmark over all time periods, reflecting consistent investment performance across time periods and capabilities. Overall, investment performance compared to peers is competitive with almost three-quarters of AUM in the top two Morningstar quartiles over the 1, 3, 5, and 10-year time periods. Slide 4 shows total company flows by quarter. As Ali mentioned, net inflows of $1.7 billion for the quarter compared to $3 billion of net outflows last quarter. We're pleased with the results and believe it shows that we're making progress towards our goal of delivering consistent organic growth over time. On Slide 5, flows by client type. Second quarter net inflows for the intermediary channel were positive $2.4 billion, equating to a 5% annual organic growth rate. The quarterly flow results were supported by a 45% increase in gross sales year-over-year and were the best quarterly gross sales figure in over two years. The U.S. intermediary channel was positive for the fourth consecutive quarter with net inflows in several strategies, including most of the active ETFs, multi-sector credit, international alpha, and U.S. mid-cap growth. As we've spoken about previously, the U.S. intermediary is a key initiative under our Protect & Grow strategic pillar. We're pleased by the results for the quarter and that we're gaining market share. Under the Amplify strategic pillar, we've talked about amplifying our investment and client service strengths using various means, including vehicles in which to deliver products. In addition to ETFs, flows into CITs, SMAs, and our biotech innovation hedge fund were positive in the second quarter in this channel. Moving to the EMEA and Latin American intermediary segment, here, we have previously spoken about expanding our strategic efforts. In the region, net flows improved for the third consecutive quarter, finishing slightly positive this quarter, and we increased market share. Similar to the first quarter, both Continental Europe and Latin America delivered positive flows, while the UK remained in net outflows. Institutional net inflows were positive $200 million, which improved meaningfully compared to the $3.1 billion of net outflows in the previous quarter. Reiterating Ali's commentary, institutional net flows were aided by over 10 distinct fundings of between $100 million and $400 million, demonstrating that our efforts to fill the missing middle, as we call it, in our institutional client base are beginning to bear fruit. Notably, each of these fundings went into a different strategy spanning all capabilities. We continue to work to create a sustainable pipeline. We're pleased with the work our distribution team is doing, and we're encouraged by the increasing number of opportunities across all of our regions. But the continued development and maturation of the pipeline will still take time. Net outflows for the self-directed channel, which includes direct and supermarket investors were flat to the prior quarter at $900 million. Slide 6 is flows in the quarter by capability. Equity flows were negative $1.4 billion compared to negative $1.1 billion in the first quarter. Pleasingly, in a challenging environment for active equities across all regions, we continue to take equity market share. Net inflows for fixed income were $3.3 billion. Several strategies contributed to positive fixed income flows in the intermediary channel led by fixed income ETFs, which had positive flows of $4.1 billion in the quarter, led by flows into JAAA, but also including $600 million into the JBBB CLO and $100 million into the JSI to securitized income ETF, both at a fee rate in the mid- to high 40s. Other strategies contributing to the positive flows were multi-sector credit, Global Buy and Maintain Credit, and Australian Tactical Income, and offsetting net inflows were net outflows in the lower fee institutional channel. Total net outflows for the multi-asset capability were $800 million. And finally, net inflows in the alternatives capability amounted to $600 million, driven by institutional fundings in absolute return, global commodity enhanced index, and multi-strategy. Moving onto the financials. Slide 7 is our U.S. GAAP statement of income. And on Slide 8, we explain the adjusted financial results. Adjusted operating results improved compared to the prior quarter and the prior year. The improvement was primarily due to higher average AUM, good investment performance generating higher performance fees and strong operating leverage along with lower LTI expense. Adjusted operating income improved 28% and EPS improved 20% quarter-over-quarter, improvements over a year ago were even stronger, with operating income and EPS up 36% and 37%, respectively. Looking at the detail, adjusted revenue increased 7% compared to the prior quarter and 14% compared to the prior year, primarily due to higher management fees and higher AUM and improved seasonal SICAV and UK OEIC performance fees. Net management fee margin declined slightly from the prior quarter, but more importantly, was unchanged year-on-year at 48.5 basis points. Our roughly stable net management fee margin continues to be a differentiator compared to many peers considering the fee pressures experienced in the asset management industry. While we're not immune to these pressures, we do see our competitively resilient fee rate as a differentiator given the mix of capabilities and channels where we're seeing success and our strong investment performance. Continuing on to expenses. Adjusted operating expenses in the second quarter declined 2% to $294 million. Adjusted LTI declined nearly 30% compared to the prior quarter, largely due to seasonal payroll taxes driven by annual vestings in the prior quarter. And in the appendix, we've provided you with the usual table on the expected future amortization of existing grants for to use in your model. The second quarter adjusted comp-to-revenue ratio declined to 42.8% from 48.2% in the seasonally higher first quarter and declined from 45.6% year-over-year demonstrating the leverage in our business. Our 2024 expectation of an adjusted compensation ratio range of 43% to 45% remains unchanged. Adjusted non-comp operating expenses increased 5% compared to the prior quarter, primarily due to higher G&A expenses and increased marketing and advertising expenses. Compared to the prior year, adjusted non-comp operating expenses were flat, reflecting our disciplined expense management and our commitment to operate more efficiently while reinvesting in the business. Similar to my comments last quarter, we still anticipate adjusted non-compensation costs to accelerate in the second half of the year and result in an annual growth of mid- to high single digits compared to the prior year. We expect non-compensation expenses to increase as a result of investments supporting areas of opportunity in our business. Examples include higher expected marketing, advertising, and T&E. We also expect higher operational expenses, such as increased investment administration expenses and the addition of NBK and Tabula expenses in the second half of the year. As I said earlier, adjusted operating income increased 28% compared to the prior quarter and increased 36% over the same period a year ago to $165 million. Compared to the prior year, operating income increased $43 million on $56 million of incremental revenue. Our second quarter adjusted operating margin was 36%, an increase of 570 basis points from a year ago, demonstrating the operating leverage in our business. Adjusted diluted EPS was $0.85, up 20% from the prior quarter and up nearly 40% from the second quarter of 2023. The increase in adjusted diluted EPS primarily reflects higher operating income. Skipping over to Slide 9 and moving to Slide 10 and a look at our liquidity profile. The capital position remained strong as we generated over $220 million in cash flows from operations in the second quarter. Cash and cash equivalents were $985 million as of June 30, an increase of 9% and 2% from the prior quarter and prior year respectively. During the quarter, we funded our quarterly dividend and repurchased approximately 1 million shares for $34 million. The board has also declared a $0.39 per share dividend to be paid on August 12 to shareholders of record as of August 12. Slide 11 looks in more detail at our consistent return of capital to shareholders. We've maintained a healthy quarterly dividend and have reduced shares outstanding by over 20% since 2018. During the first half of 2024, we returned $241 million, including $115 million by share repurchases. As we've communicated previously, our return of capital reflects our positive financial outlook, our cash flow, and a strong and stable balance sheet, but it does not impede our ability to buy, build, or partner should opportunities arise to diversify where clients give us the right to win. With that, I'd like to turn it back over to Ali for an update on our strategic progress.

Thanks, Roger. Turning to Slide 12, a reminder of our three strategic pillars: Protect & Grow our core businesses, amplify our strength 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 growth over time. In Protect & Grow, we've talked previously about the importance of protecting and growing our U.S. intermediary business and the progress we've made in capturing market share. We are now working to leverage the strategic plan to drive change and improve results in the EMEA and Latin American intermediary channels. As Roger discussed, trends across our global intermediary businesses are encouraging, with more work to do to deliver steady results. Within Amplify, we've talked about our institutional and diversified alternative businesses and our product development and expansion efforts such as our build-out of the active ETFs in the U.S. and now outside of the U.S. with our acquisition of Tabula Investment Management, which closed on July 1. We believe the acquisition of Tabula allows Janus Henderson early access to the growing European ETF market and helps to build on our successful suite of active ETFs in the U.S. We believe it will also expand our reach into key growth markets in Latin America, the Middle East, and APAC where there's rising demand for the use of ETFs. While retaining all existing Tabula products, we anticipate launching a range of new active products across equities and fixed-income strategies beginning in the second half of this year. Under Diversify, we continue to look actively to buy, build, or partner to diversify where clients give us the right to win. We've previously discussed our joint venture, Privacore, formed in June 2023, which seeks to take advantage of and be a leader in the democratization of private alternatives into the retail channel. Privacore assembled a highly experienced team within the market, placing products, has probably launched new alternative products including interval and tender offer funds, and continues to have active conversations with high-quality asset managers interested in partnering with Privacore. Last quarter, we announced a strategic partnership with National Bank of Kuwait Groups and NBK Wealth, along with the pending acquisition of their private investment team, NBK Capital Partners, which allows Janus Henderson an early entry into the rapidly expanding emerging markets private capital space. The M&A pipeline is active for Janus Henderson, and Privacore Capital, Tabula, and NBK are only the beginning of what we expect to be more well-thought-out acquisitions and partnerships of varying sizes to meet our clients' needs and to support the growth of the firm. As I said previously, we will be disciplined in identifying where to buy, build or partner, finding the right teams with the right products at the right price for our clients, shareholders, and employees. Moving to Slide 13, for an update on the trends we're seeing in strengthening our brand and positioning Janus Henderson as a trusted financial partner. In early 2023, we launched a national brand campaign in the U.S., which was something new for Janus Henderson and a big change from what we've done in the past. Brand matters. The data suggests that there are a lot of great funds out there, but if the brand isn't relevant, it's difficult to capture flows. We're pleased that a few recent external surveys seem to confirm that Janus Henderson is making progress in strengthening its brand profile. First is a Broadridge fund brand, 50 Global survey, asset manager brand strength. Our global brand rank climbed to 16, improving by 7 spots. For additional context, Janus Henderson made the top 25 for the first time in the last year survey at #23, so it's been a significant climb for us in a relatively short period of time. Second, specific to our institutional business, was a global institutional NMG consulting report. We moved up 17 spots from last year to a global brand rank of 52 among 890 managers ranking in the top 6% of asset managers in the survey. Lastly is a Citywire Pro Buyer report, which is a client experience and satisfaction survey from asset allocators and fund buyers in the U.S. Janus Henderson showed strong improvement overall, earning higher year-over-year scores in 15 of 16 categories. Overall, some of the areas where Janus Henderson did well across all these reports included accessibility of portfolio managers, knowledge of the markets, client interactions, and transparency. I want to thank my colleagues from across the firm for their collective efforts around strengthening our brand profile. It's a great example of one of our core firm values: together we win, which you might recall, we articulated as part of our mission values and purpose launched just about a year ago. We'll continue to invest in our brand globally to raise our profile, drive our business forward, and communicate our purpose of investing in our brighter future together for the over 60 million people globally who directly or indirectly rely on Janus Henderson for their financial well-being. Slide 14 highlights some of the progress Janus Henderson is making towards delivering results more consistently for those clients and our shareholders and employees. We believe executing on our strategic vision will lead to consistent organic revenue growth over time. Remember, we've previously said that success will not happen overnight and progress will not be linear. While we are not at our destination yet of delivering steady results over the long term, we are beginning to see indications of real progress across areas of the business that we believe will eventually lead to a virtuous cycle. Our world-class investment team continues to generate solid investment results versus benchmarks and peers, positioning us well to deliver the best possible outcomes for our clients and their clients. Client retention and activity metrics are improving. As previously mentioned, our brand position is strengthening. In looking at financial metrics, our net management fee margin is roughly stable and a key differentiator for Janus Henderson in an industry experiencing relentless fee pressures. We are disciplined in expense management and investing in the business where strategically it makes sense to do so. Being disciplined with our expense base and the productivity of our technology, operations, and other functional teams, in particular, are also contributing to increased operating leverage in the business. A strong balance sheet and cash flow generation enable us to maintain capital return to shareholders while continuing to invest in the business for future growth. Organizationally, we've added external talent and promoted from within with a best athlete lens, attracting and retaining the best talent allowed to deliver for our clients and execute our strategy over the long term. Establishing and embedding our enhanced mission, values, and purpose across the organization over the last 15 months has allowed colleagues to move together with quiet confidence in the same direction. Finally, enacting an effective M&A strategy brings in highly experienced talent while creating expanded opportunities for colleagues and allows us to fill capability gaps in areas of the industry that are growing where clients give us the right to win. Finishing up on Slide 15. We are proud of and energized by the progress made this quarter, building on the results of past quarters. And while there is more work to do, we believe we are on the path to deliver consistent results over time. Investment performance is solid across all time periods versus benchmarks and peers. Net inflows were positive $1.7 billion, an almost 2% organic growth rate and reflect a 19% increase in gross sales compared to the prior year. It marks our second quarter of net inflows in the last six quarters and provides a tangible indication that our strategic plan is certainly starting to take hold. Adjusted diluted EPS increased 37% compared to last year, reflecting strong markets, investment performance, positive flows, expense management, and increased productivity. Our strong balance sheet and financial results allow us to continue returning cash to shareholders through dividends and share buybacks while reinvesting in the business for future growth. We are executing against our strategic objectives and I'd like to thank my teammates at Janus Henderson for putting in all the extra efforts. It is clearly, clearly starting to pay off. 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 stakeholders. Let me now turn the call back over to the operator to take your questions.

Thank you. Our first question goes from the line of Bill Katz with TD Securities. Your line is now open.

Thank you very much. Good morning. Thank you for all the details. I'm intrigued by your discussion on the brand improvement across your platform, which is nice to see. Can you talk a little bit about as you step up the relative ranks of any statistical relevance you see in terms of the improvement for gross and/or net sale opportunities, whether it be on the retail intermediary side, institutional side, and how that might compare to U.S. versus globally?

Hey, Bill. Thanks for the question. We are very pleased with the brand progress that we're making. You'd imagine that it's not a one-to-one correlation between brand rankings and getting flows in the door. But it's very clear that we have to be in the consideration set. If your brand isn't known, if you're not up there in terms of the rankings, you won't be considered. That's from an institutional perspective directly, from a consultant perspective, and certainly from the intermediary view of advisers. A lot of what folks on the client side want to do is deliver for their clients with trusted brands, and that's something that we are building up here over time. Now, we are, just to be very clear, maniacal about our ROI as well. We have analytics around all of this stuff. We are very surgical in the way that we promote our brand. The good news is we have a lot to say. We have a lot to say now about Janus Henderson. Janus Henderson is really special in terms of the investors that we have. We do client service like no one else, and we want people to experience that, we want clients to experience that. Our infrastructure, IT operations, everything else is reliable and trustworthy. So we have a lot to say. So we want to get our brand out there. It is working, and you're seeing it correlated, not one-to-one, not a formula, but correlated with our success in the business.

Okay. Thank you. And just as a follow-up, maybe strategically toward the end of your comments, Ali, you talked about that only at the beginning of the M&A pipeline, which is active and alive and well. Could you talk a little bit about where it's seasoning, what kind of things you're looking at? And could you loop into that just maybe an update on how the economics work with Privacore? Because I think there's been a lot of signings of late. And then how you're thinking about maybe buying in the second part of that platform in the second half of this year?

Sure. Thanks again for that question. Our view on M&A hasn't changed at all. We're going to continue to be client-led. We're going to look actively to buy, build, or partner to support our strategy and to support our clients. M&A is not our strategy. It is a tool to deliver on our strategy. M&A timing is difficult to predict; obviously, some transactions come and go. However, we are aware of everything that is out there in the marketplace. We are very careful in the way we go about M&A. We look at performance of the teams, we look at the processes they go through, and we look at people. I would say that 90% of where we triage is actually around culture and people. It's extraordinarily important to ensure that the culture and the people tie into our culture, which is fundamentally focused on understanding what we're investing in. We want to partner with teams that want to grow, that want to leverage our global distribution and our strong infrastructure. We've talked about areas we're looking at. We need to find opportunities that are not overlapping with the businesses we have, focusing on private credit, solutions, and areas with differentiation.

Yeah. I mean, I guess, to start before we get into the accounting for it, we're really excited by the significant progress to date at Privacore Capital. They partnered with a premier alternative asset manager. They completed a placement in the second quarter. It's a private placement. We've also previously talked about them partnering with a second firm, a tech investment firm, and they're working with other alternative managers. We currently own 49%, so it is costs at the moment. Those revenues starting to come through with that first fundraise appear as NCI. We do have the option to purchase the other 51%, but that's still some months away.

Just to add a little bit to remind folks of why Privacore is so exciting. It sits at the nexus of clear needs in this industry. We have clients who want access beyond some of the larger firms. Privacore is structured to meet that need, and we believe the clients will benefit from this access. The wealth clients want to differentiate, and we see opportunities where the performance of smaller firms can shine through, driving significant value for our clients.

Hi, good morning. Thanks for taking the question. Want to dig into the ETF business and Tabula. So maybe first, can you give us more color on how you see the non-U.S. ETF business growing? Are you thinking of going active, passive, factor-based? I think your U.S. side has been very creative. So how are you thinking about taking that creativity outside the U.S.?

Thanks, Ken, for the questions. We're very proud of the progress we've been making with our ETF franchise. The team has done a phenomenal job, and we're excited about continuing this momentum. We're bringing a broad range of strategies from the U.S. to the European market. We continue to launch new products with active management at the forefront. We expect to launch both fixed income and equity products on the Tabula platform, reflecting client demand across various regions. Our goal is to democratize investment opportunities and make our innovative ETF strategies widely accessible.

Great. Thank you. I wanted to just expand upon some of the comments, just as you think about momentum in the business, the flow trend certainly in the second quarter coming in strong. Can you just talk about where you're seeing the most improvement in gross sales and how you think that translates prospectively into the back half of the year?

Sure. Thanks, Dan. It's difficult to give projections because many factors are out of anyone's control, but we will continue to control what we can. We anticipate growth in the U.S. intermediary, which has been expanding into EMEA and Latin America. We believe our brand is gaining recognition, and this momentum will drive sales in the back half of the year. The focus remains on investment performance and providing exceptional client service.

Again, we talked about leveraging from the U.S. intermediary business. We've seen some significant progress there over the last couple of years on both the gross and net side. The breadth of that is starting to show. It's not going to be a linear path, but the second quarter demonstrates the beginnings of the broadening flow across the world.

Congrats on the positive flows. A big part of that positive flow trajectory was the fixed-income business. How much of that is accelerating reallocations and duration extension, which we've been seeing more in the industry? And then what part of that would you attribute specifically to Janus' lineup especially with the big hit you've had with JAAA?

Thanks for the question. We are seeing increasing interest in fixed income from clients. Our positioning in that space is strong, and we have been successfully growing in various strategies. We believe as we see a change in the market environment, we can leverage our performance to drive further interest.

Just wanted to ask another question here on Privacore. If this is successful looking out three to five years, what does that look like? What might the contribution to bottom-line earnings at Janus be over time?

Thanks, Michael. It's difficult to project exact contributions, but there's a significant opportunity in the democratization of alternatives, particularly within the wealth channel. Privacore aims to capture significant market share, providing access to alternatives which are expected to grow substantially over the coming years.

Our capital profile allows us to invest in the business while returning capital to shareholders. The buyback has been pretty consistent, and we'd expect to complete the remaining amount. We will maintain capital for regulatory needs, invest in the business, and return capital to shareholders.

I wanted to check in on the balance fund. It's now been two quarters of improved performance. How long has it taken for improved performance to show up in inflows in that fund?

Thanks, John. The balanced fund has strong performance, and we're seeing increased client interest in it. It takes time for performance improvements to translate into inflows, but we are optimistic given the strong returns and demand for balance fund strategies.

Just a quick follow-up on the institutional channel. It looks like the redemptions have stabilized there, and the swing factor is improving gross sales. So just wondering on the redemption side, do you feel there's still some opportunity there? Or are we kind of at a run rate level?

Adam, it is tough to tell. A lot of what happens in the institutional world is reallocations among asset classes. Our investment performance remains strong; thus, we feel confident about stability and potential for improvement. I want to thank every employee at Janus Henderson. The hard work that everyone contributes while living our values enables us to deliver these results. We hope to continue to deliver for our clients, shareholders, employees, and all stakeholders. Thank you for listening to this call, and goodbye for now.

That concludes today's conference call. Thank you for your participation. I hope you have a wonderful rest of your day.