TD Holdings, Inc.
Q1 2010 Earnings Call Transcript

Published: 7 May 2010

[Operator:]

Good day ladies and gentlemen and welcome to the first quarter 2010 GLG Partners Incorporated earnings conference call. My name is Chris and I'll be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to our host for today Ms. Shirley Chan, Associate of Public Markets. Please proceed.

[Shirley Chan:]

Good morning everyone and thank you for joining us for GLG's first quarter 2010 Investors and Analysts Conference Call. On the call with me today is Noam Gottesman our Chairman and Co-CEO; Jeff Rojek our Chief Financial Officer; and Michael Hodes, Director of Public Markets. Earlier today we issued a press release announcing our financial results for the first quarter 2010, following our prepared remarks from the quarter we will open the call to Q&A. I would like to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. Some of these factors are described in the Risk Factors section of our filings with the SEC. I want to remind you that GLG assumes no obligation to update or revise the forward-looking statements whether as a result of new information, future events or otherwise unless required by law. I would also like to remind everyone that, in addition to financial results prepared in accordance with US GAAP, GLG presents certain financial measures such as non-GAAP adjusted net income, non-GAAP weighted average fully diluted shares and non-GAAP compensation, benefits and profit share which are not prepared in accordance with the US GAAP. A reconciliation of these non-GAAP financial measures to GAAP is provided in our Q1 earnings release a copy of which is available on our Investor Relations website and has also been furnished with the SEC in our Form 8-K. GLG maintains an IR website at www.glgpartners.com where important information is ritually posted for our investors. We also use our website as means of disclosing material, non-public information and for complying with disclosure obligations under Reg FD promulgated by the SEC. These material disclosures will be included on our IR website under the overview section. Investor should monitor this portion of GLG's website in addition to following with press releases, SEC filings and other conference calls and webcast. Finally, I would like to mention it is not intended to be an offer or presentation for investment in GLG Partners Inc or any particular GLG fund. I will now turn the call over to Noam, for an overview of the quarter

[Noam Gottesman:]

Good morning. We are pleased at the opportunity to speak with you to summarize our 3Q highlight. We continue to achieve excellent performance across the board for our investing clients. Net inflows are accelerating and the outlook for close of increasing the (inaudible) and we remain in the strong competitive position ready to enjoy the benefits of operational leverage. In terms of investment performance, we delivered across a wide range of strategy and asset costs. Specifically, our alternatives are up 5.3% for the third quarter, 6.9% for the year-to-date through April 30th and 28.1% for the full year 2009. Strong performance have continued to validate the merit of investing for absolute returns. Importantly, high water mark are now largely behind us in alternatives as Jeff will outline shortly. Our 130/30 were up 6.2% for the quarter, 8% for the year-to-date through April and 33.6% for the full year 2009. Our long-only products were 6.1% for the quarter, 5.9% for the year-to-date through April and 29.6% for the full year 2009. Details of these returns were calculated can be found in our press release of today. Our multi-strategy approach continues to generate a broad range of investment opportunities and the re-conduct (inaudible) volatility is generally a positive for us. We are pleased with the performance in our long-short funds, in particular our emerging market, North America funds in addition to our macro distressed debt convertible and Japan focused strategies and we have every confidence that our talented team of professionals will continue to serve our clients well. The pacing and scale of this cycle of inflows remains difficult to forecast but we believe it has definitely begun and are optimistic about our prospects. The response from both existing and potential clients for our investing products and performance has been positive with our quarterly organic net flows accelerating in the past three quarters. Looking back on an organic basis, we saw peak net outflows in late 2008 then stability in the first half of 2009 with long-only and managed account inflows offsetting modest outflows and alternative funds followed by a trend of increasingly positive sequential net inflows for the third quarter of 2009, the fourth quarter of 2009 and now the first quarter of 2010. More specifically, in the first quarter of 2010 we saw net inflows of $954 million from a variety of our strategies with particularly strong showing in our UCITS III products. This follows positive net inflows of 216 million in the third quarter of 2009 and 723 million in the fourth quarter of 2009. Moving on to GLG's financial performance, we experienced a non-GAAP adjusted net loss this quarter of $3.1 million or $0.01 loss for non-GAAP weighted average fully diluted share. I would note that our strong investment performance was largely not reflected in our revenues as our performance fees are recognized only when they crystallize generally on June 30th or December 31st. General and administrative and other expenses included in non-recurring charge of $4.1 million type of sub-leasing of excess office space in London and our income tax has benefited from a reversal of the $7.3 million provision relating to certain (inaudible) liability. First quarter dynamics aside, with given the transitional phase in many respects. While we have now recovered through the lion's share of our high water marks, strengthening as we moves forward the linkage between investment, performance and revenues. Our infrastructure and staffing have been calibrated to support significantly more assets. Specifically, over the past 18 to 24 months, we have consciously strengthened our extensive multi-structured platform, until the product spreads and distribution and we have retained an EBIT to our base of key investment professionals. These investments have positioned us to opportunistically grow the franchise but has taken away from GLG's mid-term earnings. As we said with our fourth quarter 2009 results, we expect to see operating leverage in our business model, should we continue to deliver strong investment returns and see net inflows. Most notable of our products resort to much higher AUM levels and can earn substantially more money without affecting their performance. Marginal profitability will accordingly be higher on new assets rate. So harnessing flows while keeping cost discipline will be key drivers of GLG's profitability for 2010. At our current price in the AUM mix, absent performance fees, which should be slightly loss making on non-GAAP adjusted net income basis. Importantly though, the outlook for performance fees at GLG is brightening. At the end of Q1, we had approximately $9.8 billion in AUM above water within 5% of high water mark out of a potential $13.2 billion in performance fees eligible AUM. We had another $0.6 billion in AUM within 5% of their respective high water marks and further progresses made in April. Now let me turn over to Jeff Rojek of our CFO who'll run through the financial results in a little more debt.

[Jeff Rojek:]

Thank you Noam. Gentlemen I'm going to provide some details on the financial highlights for the quarter. Non-GAAP adjusted net loss was $3.1 million or $0.01 per non-GAAP weight average fully diluted share. GAAP net loss attributable to common stockholders was $60.8 million or a loss of $0.27 per share. The GAAP loss includes certain significant and largely non-cash expenses associated with our November 2007 reverse acquisition transaction with Freedom Acquisition Holdings. In the quarter we recognized $66.4 million of acquisition related compensation expense. Our total net AUM for the quarter stood at $23.7 billion which is up $1.5 billion sequentially and $9.6 billion year-over-year. As Noam mentioned in his opening statements we are pleased to see positive net inflows continue in the first quarter of 2010. Specifically we saw $954 million of net inflows together with $1.3 billion in positive performance gains which was offset by $753 million negative impact on currency translation. On a trailing 12 month basis, net AUM was up approximately $4.1 billion on net inflows which includes organic net inflows of $1.5 billion and incremental net AUM of $2.6 billion acquired from [Societe Generale] Asset Management UK. $5 billion of positive performance and $528 million of favorable impact from currency translations. Our quarterly average net AUM was up 5% sequentially nearly doubled year-over-year. In terms of revenues, we saw an increase of 4% year-over-year in the first quarter, $53.7 million versus $51.7 million a year ago. Our annualized management and administration fee yield for the first quarter was 87 [dips] which is down five basis points from the fourth quarter of 2009 and a decline of 52 basis points compared to the yield in the first quarter of 2009. The decline in annualized yield compared to the fourth quarter of 2009 is largely the result of net inflows arriving towards the end of first quarter of 2010 and the calculation for average net AUM being based on a two point average. Run rate yield exiting the fourth quarter and the first quarter were actually comparable at roughly 89 dips. Greater representation in net AUM from long-only funds and managed accounts which starts lower management administration fees and GLG's alternative strategy funds drove the decline compared to the year ago period. We would expect based on current run rate for the management and administration fee yield to continue in the high 80 basis point range. Performance fees were $2.7 million which is consist with our practice of only recognizing performance fees when they crystallize which is generally in June and December. Last quarter performance fees such as those in the first quarter are typically the result of redemption of transfers added above water funds. Sustained performance from the first quarter on above water AUM will generally be recognized in the second quarter when the fees crystallized on June 30. Accordingly the second quarter's performance fees will largely reflect the first half performance. As a result of the strong positive performance our investment professionals achieved during the first three months of this year, we continue to make big progress relative to high water marks. At the end of March, we had roughly $9.8 million, added a possible $13.2 billion of performance fee eligible AUM above over than 5% of the respective high water marks. These numbers exclude AUM and special asset vehicles and other liquidating strategies. Broken down by strategy, approximately $4.1 billion of our alternative AUM. $1.1 billion of our long-only AUM and $1.5 billion of our 130/30 or similar AUM is above order and approximately $0.6 billion of our alternative AUM. $0.4 billion of our long-only AUM and $2.1 billion of our 130/30 or similar AUM is within 5% of their respective high water marks. Of the remaining $3.4 billion of AUM underwater, $1 billion is in alternative strategies and $2.4 billion is in long-only strategies. Broken down even further, $0.4 billion of our alternative AUM and 0.2 billion of long-only AUM is between 5% and 10% of their respective high water marks. $0.1 Billion of alternative AUM and $1.7 billion of long-only AUM is between 10% and 30% of their respective high water marks. While $0.5 billion of alternative AUM and $0.5 billion of long-only AUM is more than 30% below their high water marks. We're pleased to inform you that in recent months, several significant strategies of average are covered from being below their high water marks. More specifically, nearly all of the assets in our North American opportunity fund which had an AUM of approximately $430 million as of March 31 and the majority of our market neutral fund which had an AUM of approximately $920 million as of March 31, cleared their respective high water marks and are now earning full fees on their above water AUM. Continued positive investment performance along with more of our funds above their respective high water marks improves our ability to earn performance fees in the future. Other income for the first quarter of 2010 increased by $0.5 million from the fourth quarter of 2009 to $1 million but was flat compared to the year ago period. The increase sequentially from the fourth quarter reflected a currency translation impact of a strong US dollar and non-dollar denominated cash held on GLG's balance sheet. On the expense front, there was some noise in the general and administrative and other line this quarter, and compensation rose for reasons which I'll mention shortly. Internally, we view compensation using the measure of non-GAAP compensation benefits or profit share or non-GAAP CBP which reflects GAAP compensation benefits and profit share adjusted to exclude acquisition related compensation. The expense in connection with the reverse acquisition transaction with Freedom in November of 2010. First quarter 2010 non-GAAP CBP was $34.9 million versus $19.9 million in the year ago period. Non-GAAP CBP as a percentage of net revenues were 65% for the first quarter of 2010 versus 63% for all of 2009 and 39% in the first quarter of last year. The increase reflects increased compensation costs as a result of the SGAM UK acquisition in the second quarter of 2009 as well as the increased level of non-cash share based compensation. The recognition of deferred compensation and lower management and administration fee yields. This first quarter 2010 ratio is above where we had expected to be on average overtime and our comp ratio is more indicative when viewed over six or 12 months periods which fully capture performance fee crystallization. The compensation will not be finalized for year-end and will be heavily impacted by investment performance and to a lesser extent flows we expect that our comp ratio for the full year 2010 to be lower than the 65% we saw in the first quarter. In terms of non-compensation related expenses, first quarter of 2010 general, administrative and other expense increased 16% sequentially and 2% from the first quarter of last year to $22.7 million excluding a one-time expense of $4.1 million or losses related to the sub-lease of vacant space on the first floor of our building in our London office. The addition of expenses from the operations acquired with SGAM UK in the second quarter of 2009 drove the modest run rate increase versus the year ago period. Higher net interest expense of $3 million versus $2.6 million a year ago reflects the cost of borrowings under GLG's term loan revolving credit facilities and convertible notes offset by the amortization of deferred gain in our debt restructuring during the second quarter of last year and interest income on cash balances. On the tax front, we reported on a non-GAAP adjusted net loss basis an effective rate of tax of 74.3% for the first quarter of 2010 versus 22.8% on a non-GAAP adjusted net profit basis for the same quarter last year. The first quarter 2010 rate was influenced largely by one time reversal of $7.3 million provision which related to [indiscernible] liabilities. Excluding this reversal, the first quarter of 2010 effective tax rate would have been 12.6%. Looking forward we expect cumulative dividends to impact the effective tax rate and our full year 2010 effective tax rate excluding one time items to be in the range of 20%-25% consistent with the past. With respect to out GLG UK business, we saw a modest contribution in the first quarter and expect the business to continue being accretive through the year. Finally with respect to Lehman, we continue to make good progress and expect to see the recovery of a modest amount of assets currently controlled by LBIE beginning this month with meaningful progress achieved over the next several months. Before I open the call for questions, I want to mention that we have updated our investor presentation which is available on our website, www.glgpartners.com, and has been included in our Form 8-K filed today with the SEC. Operator, please open up the Q&A session.

[Operator:]

(Operator Instructions). Our first question comes from the line of Craig Siegenthaler of Credit Suisse. Please proceed.

[Craig Siegenthaler:]

Just given the strong performance you've year-to-date and specially towards the end of last year, I am wondering if maybe you could get a little more detail that -- you have just comments were regarding opportunities, really help us strained a good level opportunities to the second and fourth quarter, given that fourth quarter data point was $64 million, so where, you know given the position of funds can we really get to next quarter?

[Noam Gottesman:]

Craig, I think we don't want to comment on future performance. It's looking very good so far both in the first quarter and the year-to-date and we're hopeful that the opportunities and volatility in the market will continue to provide us with a multitude of opportunities; it has done so far this year, but wouldn't want to get pinned down on any expectations of numbers until we actually crystallize our performance fees.

[Craig Siegenthaler:]

Maybe then just shifting it to net close and asset growth. You mentioned the UCITS product, I am wondering if you can just highlight which products have been the bestsellers among your mix and also in which geographies are you seeing and which client are you seeing the demand from?

[Noam Gottesman:]

We've seen very strong demand in our European and UK focused usage funds as well as our emerging market focus usage funds. We are seeing the bulk of the inflows coming in to our alternative products I think that $811 million of the net inflow for the first quarter went into our alternative and 130/30 with $143 million of it going into our long-only products. And we're seeing the diversity of the appetite coming from US pension fronts from endowments from sovereign wealth fund as well as private clients. As we look forward roughly $500 million of net inflows are expected from managed accounts in the second quarter that we now so far significantly $280 million of that from a large US consultant, we've also got the launch of new UCITS funds which we expect to bolster our franchise and meet demand and we're also expecting to launch our first US fund to continue our expansion in the geography.

[Craig Siegenthaler:]

Got it, so it sounds very broad based on.

[Noam Gottesman:]

Yeah, it is broad based.

[Craig Siegenthaler:]

And just have final question on the account expense structure. I'm just wondering given where operating expenses are versus operating revenues, ex-performance fees is the goal here really to kind of grow very quickly to get core revenues up to a higher level or could we see some downward pressure in the expense items here and I heard the guidance on kind of the non-GAAP comp ratio too, but just how do you think about that?

[Noam Gottesman:]

In the terms of operating expenses, I would expect to be fairly consistent with last year on a G&A front and possibly a slight up tick but the marginal increase, we don't expect the large marginal increase in our expense base.

[Operator:]

Our next question comes from the line of Roger Freeman of Barclays Capital. Please proceed.

[Roger Freeman:]

Hi, good morning. Just on the flows to clarify the UCITS III, I thought that was mostly long-only but that includes alternatives as well?

[Noam Gottesman:]

The UCITS III products have a management fee in addition to having performance fees associated with them.

[Roger Freeman:]

Okay, but I mean is most of that alternative or long, I guess most of it is alternative then.

[Noam Gottesman:]

Yes, it is.

[Roger Freeman:]

Okay, which is consistently flow come in. Okay, of the flows in the first quarter, how much actually came from US clients versus the rest of the world?

[Noam Gottesman:]

I don't have the detail at hand. I'll give you a call outside.

[Roger Freeman:]

Okay, but it sounds like you're starting to get some reasonable penetration. The comment you made about the funds coming in from a large consultant, I guess in the second quarter is that representing a number of clients that is coming to that consultant or one large one?

[Noam Gottesman:]

Well, that particularly one is mandate from one large one. What I would say is we're getting very good traction. We're pleased with what we're seeing, good responses and we'd expect the number to increase and the (inaudible) is very decent also as the top flows we're seeing interest in the whole range of strategies and the US is definitely beginning to deliver.

[Roger Freeman:]

Okay, that's great and there was an article yesterday about the SEC starting to look at some of the side pocket funds, I presume that given you haven't really had a real US presence until now that's probably not affecting you?

[Noam Gottesman:]

That's probably good assumption.

[Roger Freeman:]

Okay. And one 130/30, so can you just help me understand the sort of performance issues there, the benchmarks are relative right? It means that, that's where the bulk of the assets that are under you know under high water marks and doesn't seem to be rectifying itself. I guess I'm just trying to understand the performance in those funds and why maybe there maybe consistently missing benchmarks I am not sure if that is the correct reading.

[Noam Gottesman:]

I think that'd be the wrong way to read because it's consistently beating benchmark. We had as of the $1.5 billion of our water out of 2.1 and 2.1 billion that's between zero and below 5%. Just making up loss ground, but as you can see from the last few quarters, we've been outperforming on the relative basis (inaudible).

[Roger Freeman:]

Okay I thought $1.7 million of long was within 10% to 30% I guess.

[Noam Gottesman:]

That's long only.

[Roger Freeman:]

That's just long-only. And then lastly, just one on the lease, what's the difference in the per square foot that you're leasing out at versus what your seeing.

[Noam Gottesman:]

The difference was $4.1 million for the quarter.

[Roger Freeman:]

I am just curious how much lease rates have come down commercial property there.

[Noam Gottesman:]

On commercial property we're getting about 60% of the sub-leasing income offset by the lease that we have to pay. And the difference between those two over the period we had taken a one-time charge.

[Operator:]

(Operator Instructions). Our next question comes from the line of Robert Lee of KBW. Please proceed

[Robert Lee:]

Thanks, good morning. Real quickly now. Can you just update us on some of your addition expansion plans? If I recall you were in the process of setting up some operations in the Far East and maybe update us on some of that?

[Noam Gottesman:]

We're progressing well in Hong Kong working on, expansion in Dubai, we've recently opened our office in Geneva and are continuing to stock those and buying opportunities in the regions.

[Robert Lee:]

Okay and I assume that most of the costs related to some of that expansion, for the most part in the run rate is there anything as you go through that and (inaudible) over the coming quarters kind of pick up or down as…

[Noam Gottesman:]

It's in the run rate numbers right now. Those operations currently won't add a lot to the marginal run rate hence expenses.

[Robert Lee:]

Okay and just going back to the good question on consultants and I apologize if I missed some earlier comments, I know you mentioned you've been seeing good traction with them. I think going back to a couple of calls, you had mentioned having gone on the approved list for two consultants in the US and working on another. I mean have you since then seen kind of the number of approved list you are on continue to expand, there is still just the two or you've now on kind of a wider variety and I guess I'm focusing in on the US.

[Noam Gottesman:]

I think our approvals are accelerating and broadening and were [commencedly] getting into a lot more people and so all the trends are positive.

[Robert Lee:]

And while those approved list I am assuming are increasingly for alternative strategies not just the long-only?

[Noam Gottesman:]

Both are alternative and long-only.

[Operator:]

And there are no further questions at this time.

[Noam Gottesman:]

So thank you very much that conclude our first quarter earnings conference call today and behalf of all of us at GLG, thank you for participating.

[Operator:]

Thank you for your participation in today's conference. That concludes the presentation, you may now disconnect. Have a great day.