Manning & Napier, Inc.
Q2 2020 Earnings Call Transcript

Published: 2 Aug 2020

[Operator:]

Good evening. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Manning & Napier Second Quarter 2020 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 7

[Nicole Brunner:]

Thank you, Angela, and thank you, everyone, for joining us today to discuss Manning & Napier's second quarter 2020 results. Before we begin, I would like to remind everyone that certain statements made during this call not based on historical facts, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Manning & Napier assumes no obligation or responsibility to update any forward-looking statements. During this call, some comments may include reference to non-GAAP financial measures. Full GAAP reconciliations can be found on our earnings release and related SEC filings. With that, I will turn the call over to our Chairman and Chief Executive Officer, Mr. Marc Mayer. Marc?

[Marc Mayer:]

Thank you, Nicole. As always, I will begin with a review of our performance for clients, after which I'll assess our second quarter progress on the strategic initiatives we discussed in detail during our last call. The past six months have been the ultimate test for active managers. In the first half of 2020, investors experienced both a historically sharp fair market and a historically strong market rebound, challenging the ability of managers to adapt to changing market conditions. Thus far in 2020, we have done exactly what we committed to clients

[Paul Battaglia:]

Thanks, Marc. Good afternoon, everyone, and thanks for joining us today. I hope everyone on the call with us is healthy and well. I'll begin my remarks on our second quarter 2020 financial results, starting with assets under management. We finished June with AUM of $18.6 billion, up from $17.1 billion as of March 31. This 9% increase came on the heels of the market rebound that Marc outlined earlier, with $2 billion in market appreciation offset by approximately $660 million of net client outflows. Analysis of our net client cash flows must consider that the second quarter of 2020 took place exclusively during a period of COVID-related travel restrictions. Gross client inflows were approximately $550 million, down from $670 million in Q1 of 2020 and from our trailing four quarter average, which is also $670 million. However, second quarter inflows were comparable to what we brought in during the second quarter of 2019 despite COVID, an indicator that our sales strategy is gaining traction in a challenging environment. We reported approximately $200 million of inflows through our wealth management channel, generally in line with last quarter, with approximately $360 million of inflows through our intermediary and institutional team where travel restrictions limited wholesaling efforts. Reducing client outflows has been a priority for us. And we have been encouraged that our competitive investment results and service-driven model have allowed us to achieve some traction toward that goal. Gross client outflows for the quarter were $1.2 billion, an improvement from our trailing 4-quarter average outflows of $1.7 billion. And our separate account retention rate for the quarter was approximately 93%. By sales team, the wealth management team had net client outflows of $167 million during the quarter, and the institutional/intermediary team had $491 million in net outflows. Also notable here, there was a single Taft-Hartley relationship that rebalanced a portion of their portfolio away from us that caused approximately $200 million of intermediary/institutional outflows. Aside from that single relationship, outflows for that channel would have been in line with last quarter. We are pleased that we have reduced the rate of net client outflows compared to prior periods despite the impacts of COVID. We continue to see indicators that our strategy is gaining momentum in the form of improved activity with our wealth management prospects and the quality of our conversations with third-party intermediaries and in Taft-Hartley opportunities. However, uncertainty continues to be the theme of this market and economic environment. And as such, we continue to have a conservative outlook regarding net client flows in the near term. Turning to our second quarter P&L. We reported revenue of $30.3 million for the quarter, down by 2% from $31.1 million reported in Q1 driven by the change in average AUM during the quarter. Overall revenue margins were 67 basis points. Operating expenses were $27.3 million in the quarter, a decrease of $1.9 million or 6% compared to last quarter and a $4.5 million decline compared to Q2 2019. The majority of the sequential decrease is explained by a 10% drop in compensation-related costs. This reduction is attributable to charges included in the first quarter, including severance costs, stock compensation paid to our directors as well as the seasonality of our payroll benefits, like our 401(k) match. We are also seeing the impact of the overall reduction in the size of our workforce, which is down to 288 employees as of June 30. Our compensation-related cost as a percentage of revenue was 57%, down from 62% in the first quarter. Distribution, servicing and custody expenses were $2.4 million for the quarter or 18 basis points of average fund and collective trust assets. And the nearly $400,000 decrease from last quarter is driven by changes in AUM. Other operating expenses increased sequentially by $400,000 to $7.5 million for the quarter. The current quarter includes a noncash impairment charge of approximately $600,000 attributable to a portion of our leased space in Fairport, which we vacated as part of our workforce downsizing. Looking ahead, we expect that other operating expenses will increase beginning in the fourth quarter and into 2021 as the new technologies that Marc mentioned earlier come online and the associated fees begin hitting our P&L. The outsized reduction in operating expenses resulted in improvement in operating income, with $3.1 million of operating income compared to $1.9 million last quarter. Non-operating income also improved as we recognized a $2.7 million gain in the quarter compared to a $4.3 million loss in Q1. About half of the $7 million improvement was attributable to gains on our marketable securities for the quarter. We are reporting $1.4 million in gains on our investments compared to nearly $2 million in losses last quarter. The remainder of the improvement is attributable to the accounting for the tax receivable agreement. As last quarter, we reported a nearly $3 million non-operating loss resulting from changes under the CARES Act compared to the income of $900,000 in Q2. As a result, on a GAAP basis, we reported pretax income for the quarter of $5.7 million compared to a $2.4 million loss last quarter. After accounting for nearly $1 million of strategic restructuring costs, including the $600,000 noncash charge associated with our vacated facilities that I mentioned earlier, we reported economic income of $6.7 million. Our effective tax rate for the quarter was 41%, resulting in economic net income of approximately $4 million. All told, we reported second quarter economic net income per adjusted share of $0.08, a $0.06 improvement from $0.02 per adjusted share last quarter. This increase is attributable to both the improvement in our operating results and also a result of the reduced share count stemming from the accretive exchange transaction that we closed during the quarter. Our weighted average adjusted share count for the quarter was approximately 48 million adjusted shares, down from 81 million in the first quarter. I'll have more comments regarding the impact of the exchange transaction that closed in mid-May shortly. But before we leave the P&L discussion, let me quickly summarize our year-to-date results. We reported revenue of $61.5 million, down 11% from $69.1 million this time last year, with overall revenue margins of 66 basis points. Operating expenses were $56.5 million, a decrease of $8.9 million or 14% from last year. More than half of the decrease is attributable to reductions in compensation, though expenses are down across the board from last year largely as a result of our smaller workforce, down from 336 this time last year to 288 as of June 30, as well as reductions in AUM and expense reductions resulting from COVID. We reported operating income of nearly $5 million through June 30, an improvement from $3.8 million last year. In addition, we recognized a non-operating loss of $1.6 million through June 30, 2020, driven by the losses reported in the first quarter stemming from the COVID-related volatility. As a result, despite the improvement in operating income, pretax earnings and economic income through June 30 of $3.4 million and $5 million, respectively, are down from last year. However, economic net income per adjusted share shows an improvement from this time last year as a result of the reduced share count following the exchange transaction. Looking at the balance sheet. We reported approximately $65 million of cash and investments with no debt. The decrease from March 31 was expected and is entirely attributable to the completion of the annual exchange transaction that we have discussed previously, with approximately $90 million of cash being used to buy back and subsequently retire 60 million private units held by Bill Manning and other legacy shareholders. The completion of the exchange led to a reduction in the adjusted share count and meaningful accretion for non-selling shareholders. Post-exchange, the adjusted share count of 22 million shares outstanding includes approximately 16 million Class A shares. As of June 30, our employees and directors own approximately 30% of the adjusted shares, including a portion of the 16 million Class A shares along with unvested equity awards and privately held units. In closing, as we reflect back on the quarter, we are grateful to our people in everything we've achieved during the challenging circumstances. April started with unprecedented market volatility caused by the pandemic that led to our most active trading period ever. In May, we completed the largest of our annual exchange transactions, achieving meaningful accretion for our shareholders. And throughout the quarter, our team worked tirelessly to focus on strategic initiatives, including implementation of a new technology platform, all while working remotely. We are very proud of how we executed and the results we achieved for clients and shareholders in this environment. We are excited about our positioning for future growth and long-term distribution prospects, but there's still significant work to be done in the near term, during which time we continue to expect P&L pressure as we navigate this environment. We expect that flows across channels will continue to be slowed by the uncertainty of the times. While the first phase of our technology platforms will begin to come online during the third quarter, these are multiyear installations that will continue to use resources into 2021. And we continue to evaluate our product and service offerings and back-office processes to identify opportunities to simplify and improve our business. However, this evaluation is complex because of the current status of our technology implementation and the overall environment. It is our expectation that the pressure on top line growth and earnings that we have faced thus far in 2020 will remain in place for the second half of the year and likely the first part of 2021. It is crucial that the focus be on our clients and on executing our strategic plan during this time despite the pressure on earnings so that we can build a foundation from which we can grow and deliver returns for both clients and shareholders in the future. That concludes my formal remarks. I'll now turn the call back over to the operator, and we'll take any questions. Operator?

[Operator:]

[Operator Instructions] And there are no questions at this time. Thank you. This does conclude today's conference call. Please disconnect your lines at this time, and have a wonderful day.

[Marc Mayer:]

Thanks everyone. Bye.

[Paul Battaglia:]

Thank you.