Manning & Napier, Inc.
Q2 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Operator:]

Good evening. My name is Catherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Manning & Napier Second Quarter 2021 Earnings Conference Call. Our hosts for today's call are Nicole Kingsley Brunner, Chief Marketing Officer; Marc Mayer, Chairman and Chief Executive Officer; and Paul Battaglia, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 8

[Nicole Kingsley Brunner:]

Thank you, Catherine, and thank you, everyone, for joining us today to discuss Manning & Napier's second quarter 2021 results.

[Marc Mayer:]

Thank you, Nicole. Last quarter, we made progress on our key initiatives, improving our positioning for the future. We will get to those updates in a moment, but first, we should begin, as we always do, with an update on how we performed for our clients. Our investment teams delivered another fine quarter of results to our clients, further bolstering our strong first quarter performance and delivering what has become excellent short to intermediate-term performance across nearly all strategies and standard time periods. Pages 6 and 7 of the earnings supplement contain the relevant metrics. All of our bottom-up multi-asset strategies, which represent 67% of our assets under management, delivered strong absolute returns during the second quarter and for the year-to-date. Each outperforming their respective blended benchmarks over both time periods as well as they have consistently over the past few years. We believe these excellent results are a product of our distinctive, disciplined and flexible research processes, which have been time-tested over many cycles over the past half-century. Using our flagship long-term growth strategy as a proxy for the entire suite, our investment research teams added significantly positive relative value through asset allocation, sector positioning and security selection decision-making throughout the quarter. In our more benchmark relative accounts, performance was strong and above benchmark across most of our investment suite for the quarter. Our core bottom-up strategies, U.S. equity, core non-U.S. equity, global equity and core equity unconstrained strategy all deliver material outperformance for 4, and each are well ahead of their respective benchmarks on the year. Moreover, each are meaningfully ahead of benchmarks over the intermediate-term as well, with all 4 strategies materially outperforming over their trailing 3 and 5-year time periods. Global equity is well into the top decile for both 3 and 5 years.

[Paul Battaglia:]

Thanks, Marc. Good afternoon, everyone, and thanks for joining us today. The highlights for the second quarter included continued improvement in assets under management and revenue resulting from the investment performance metrics that Marc alluded to earlier and further reduction in net client outflows, more progress on our share repurchase program with more than $5 million of stock repurchased through June 30 and another step in the simplification of our complex corporate structure with the completion of the 2021 annual exchange transaction in June. Starting with net client flows and assets under management, AUM at the end of June was $22.3 billion, up from $21.1 billion as of March 31. The 5% increase was the result of $1.2 billion of market appreciation, partially offset by $62 million of net client outflows. When compared to June 30, 2020, AUM has improved by $3.6 billion or 19%. Though net client flows remained negative, $62 million of net client outflows for the quarter represents approximately half of the net outflows from Q1. Year-to-date net client outflows of $194 million represent an 83% improvement from net outflows of $1.1 billion reported this time last year. Second quarter gross client inflows of $787 million improved by more than $150 million or 25% over last quarter. Year-to-date, gross client inflows have increased by 16% since last year to $1.4 billion. On the wealth management side, we reported gross inflows of approximately $215 million in Q2 and $440 million through June 30, and we reported gross client inflows of $570 million for the quarter and $970 million through June 30 from the intermediary and institutional channel. Gross client outflows for the quarter were $850 million, slightly up when compared to last quarter but improved from $1.2 billion in Q2 2020. Our turnover rate, which we measure as annualized gross client outflows for the quarter, divided by beginning of the period AUM was approximately 16% for the second consecutive quarter, which is an improvement from last year when our turnover rate was in the mid-20% range. For the six months ended June 30, client outflows were $1.6 billion, well below the $2.3 billion in the first half of 2020. Our separate account retention rate during the quarter was approximately 98%. When looking at net client flows, we think it is notable that net flows for the intermediary and institutional channel turned positive for the quarter with $17 million of net inflows. The wealth management team remained in a net outflow position with $79 million out during the quarter. Also noteworthy, net flows for our mutual funds in collective trust turned positive in the quarter with approximately $64 million of net inflows compared to $126 million of net outflows from our separate accounts. The improvement in our net flows has been driven by the intermediary channel, which has historically been the most responsive to performance and where our mutual funds have good traction. So these trends do line up. As Marc noted, the majority of our track records looked very competitive against benchmarks across 1, 3 and 5 year periods, and therefore, we expect that gross inflow should continue to improve across all of our channels. Turning to our second quarter P&L. We reported revenue of $36.1 million for the quarter, with revenue margins of 66 basis points compared to revenue of $34.2 million reported last quarter with revenue margins of 68 basis points. Operating expenses were $28.3 million in the quarter, an increase of $365,000 compared to last quarter and a $1 million increase compared to the second quarter of 2020. When comparing operating expenses against last quarter, we see the compensation is down 3%, though that decrease is offset by an increase in other operating expenses. The sequential decrease in compensation and related costs is mainly the result of seasonality of payroll benefits, driven by the timing of incentive compensation payments, a decrease in share-based compensation due to the timing of equity award grants, and reduced severance costs during the quarter. I'm going to pause here and drill down a bit more on compensation and related costs. Compensation as a percentage of revenue was 51% for Q2, an improvement from last quarter when we reported 55% and from prior periods where the ratio ranged from the high 50% to low 60% range. Part of this improving trend can be explained by the size of our workforce, which has decreased from 288 employees at this time last year to 272 as of June 30. The net decrease in headcount is the result of ongoing reductions in middle and back-office staffing that has been partially offset by additions to our sales teams in our existing geographies designed to expand our sales and servicing capacity. The other driver of the improved compensation ratio has been the implementation of our deferred compensation program in 2021, which we've addressed on prior calls. Under this plan, a fraction of incentive compensation for our highly compensated employees is deferred, invested in our mutual funds, invested over future periods. The accounting for the vesting of the deferred compensation over multiple periods has resulted in onetime compensation savings during 2021, which is contributing to the improved compensation ratio. As we look ahead in the near term, I expect our compensation ratio for the next few quarters will likely be in the mid-50% range, assuming no significant market volatility or changes to our assets and revenues. Longer-term, our goal is to have a compensation ratio of less than 50%, which will be achieved through both revenue growth and efficiencies achieved through our digital transformation. Returning to our second quarter results. Distribution, servicing and custody expenses increased by 6% during the quarter, in line with the growth in revenue and other operating expenses increased by 11% to $7.5 million in the quarter, with the change stemming from costs associated with our continuing digital transformation efforts, costs associated with the closing of our annual exchange transaction and an overall uptick in travel and client-related activities. These expenses continue to run at approximately 20% of total revenue. All told, second quarter operating income of $7.8 million represents a 25% improvement from last quarter, with operating margins of 21.5%. Nonoperating income for the quarter was approximately $250,000, resulting in pretax income of approximately $8 million with margins of 22.2% compared to $6.7 million last quarter. Looking at our non-GAAP financial metrics, with approximately $800,000 of strategic restructuring costs, we reported economic income of $8.8 million. Similar to the first quarter, we reported a reduced effective tax rate in Q2 of approximately 16.4% caused by the tax benefits recorded by the company, resulting from stock options exercised during the quarter. After accounting for our adjusted income taxes, we reported economic net income of $7.4 million or $0.31 of economic net income per adjusted share, a $0.02 improvement from $0.29 per adjusted share last quarter. Our effective tax rate has been below the normalized 30% tax rate for the last several quarters as a result of both options exercised during the periods as well as other onetime activity, including the impacts of the Cares Act in 2020. However, for our planning purposes, we continue to model an estimated 30% effective tax rate for future quarters. Turning to our midyear results. We reported revenue of $70.2 million, up 14% from $61.5 million this time last year, with overall revenue margins of 67 basis points. Operating expenses of $56.2 million were effectively flat compared to the 6 months ended June 30, 2020. Compensation and related costs for the half year of $37.2 million increased by $580,000 since last year and represented 53% of revenue. This change was driven by increased variable incentive compensation accruals based on strong investment performance and improved sales for year-to-date 2021 versus 2020, partially offset by the aforementioned reductions in headcount and the onetime savings derived from the deferred compensation program. The $580,000 increase in compensation was more than offset by $800,000 of decreases in distribution, servicing and custody expenses and other operating costs. Operating income of nearly $14 million for the 6 months ended June 30, 2021, is a 180% improvement from this time last year when we reported operating income of approximately $5 million. Our year-to-date non-GAAP earnings per adjusted share of $0.60 is a dramatic increase from $0.09 per adjusted share reported this time last year and is a function of the improved operating results I outlined above, as well as the accretive redemption transaction that was completed during 2020. Turning to the balance sheet. We reported approximately $80 million of cash and investments as of June 30, an increase of $10 million compared to what we reported on March 31. This change in cash position is not unusual for us as we tend to use more cash during the first and third quarters in conjunction with annual and midyear incentive compensation payments while accenting more cash in Q2 and Q4. We continue to maintain a debt-free capital structure. The cash increase comes after accounting for about $2.3 million of share repurchases during the quarter under the $10 million share repurchase program we announced in February. The repurchase shares are being reported as treasury shares on our balance sheet and will remain there until they are retired or reissued. Through June 30, we have repurchased $5.3 million of stock or 714,000 shares at an average price that has been below our current share price in a manner that has been accretive to our Class A shareholders. In addition to returning capital to shareholders through our share repurchase program, I'm pleased to report that last week, the Board of Directors reinstated our quarterly dividend by declaring a $0.05 per share dividend to our Class A shareholders that will be paid next month. We've always prioritized returning capital to shareholders. Earlier this year, the strength of our balance sheet led the Board to authorize the share repurchase program as a means to return capital and offset dilution stemming from our long-term incentive plan awards. The continued strength of our balance sheet, along with the renewed stability of our P&L, provided the Board addition - with an additional level of confidence to reinstate the dividend while continuing our share repurchase program. Looking at ownership. Our adjusted share count decreased during the quarter from $23.7 million adjusted shares outstanding as of March 31 to $23.2 million as of June 30. The $23.2 million adjusted shares outstanding includes $18.5 million Class A shares, $4 million unvested stock awards issued under our long-term incentive plan, approximately 420,000 privately held units held by legacy shareholders and 330,000 vested stock options. As of June 30, our employees and directors own 34% of the adjusted share count, including unvested awards, but only 19% of the votable Class A common stock. Earlier this month, we disclosed the closing of the 2021 annual exchange transaction. On June 30, 1.6 million privately held units held by legacy shareholders were exchanged on a one-for-one basis for unregistered Class A shares of common stock. Because the transaction was completed using Class A common stock, there was no impact to our adjusted share count. However, upon completion of the transaction, the public company's ownership of Manning & Napier Group increased from 89% to 98%. As you'll recall, since our IPO, Manning & Napier Group has been owned by member entities. Manning & Napier, Inc., the public company and managing member, along with Manning & Napier Group Holdings and Manning & Napier Capital Company. Entities where ownership was held through legacy private units. With the completion of this year's exchange transaction, the ownership of Manning & Napier Capital Company has now been fully redeemed. And during the second half of the year, we'll be working towards dissolving that entity. To summarize, following the completion of the exchange transaction, Manning Group's ownership is split, whereby Manning & Napier, Inc. now owns approximately 98%, with the remaining ownership held by the remaining legacy shareholders of Manning & Napier Group Holdings. We'll have more disclosures on this in our Form 10-Q, and we'll provide updates on future calls. In closing, our focus remains on delivering outstanding investment results and exceptional service to our clients while driving growth in client inflows, AUM and revenue. We believe that providing superior outcomes for our clients will drive superior outcomes for our shareholders. We've reported good progress on these items during the first half of 2021, and our operating results, in turn, have improved. However, considerable work remains for us to drive future top-line growth while completing our digital transformation and reengineering our business processes so that we are positioned for scalable growth in the future. In the meantime, our balance sheet remains strong and provides us the flexibility to continue to invest in the business while increasing our return of capital to shareholders. That concludes today's call. If you have any questions on the topics addressed today, please contact us using the inquiries portal of our Investor Relations website, and we'll promptly address your inquiry. Thank you for listening and for your interest in Manning & Napier. And I'll turn the call now back over to the operator. Catherine?

[Operator:]

Thank you. This does conclude today's conference call. Please disconnect your line at this time, and have a wonderful day.

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