Manning & Napier, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Good evening. My name is Erica, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Manning & Napier Fourth Quarter 2020 Earnings Teleconference. Our hosts for today's call are Nicole Kingsley Brunner, Chief Marketing Officer; Marc Mayer, 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, Erica, and thank you, everyone, for joining us today to discuss Manning & Napier's fourth quarter and full year 2020 results.

[Marc Mayer:]

Thank you, Nicole. There are three main points we would like to make. One, we have made good progress on our strategic initiatives; two, that progress has translated into excellent results for clients, and an improvement in our financials; and three, our improved financial position will allow us to return capital to our shareholders. Paul and I will elaborate on each of these. But we will begin first, as we always do, and as we always should, as fiduciaries, with a review of our results for clients in both the fourth quarter and full year. Let's begin with our traditional multi-asset class solutions as they represent approximately 70% of total AUM, have track records dating back to the early 1970s and are core to who we are as an active, fully integrated wealth and investment manager. Our fourth quarter multi-asset class results were competitive with modest underperformance and more aggressive objectives and slight outperformance in the more conservative strategies. Broadly speaking, our small overweight to equities and a very strong quarter for global stocks compared to our blended benchmarks, helped overcome some underperformance within our equity portfolios in the quarter. We are pleased to have helped clients strongly participate in the end of the year equity market rally. Our disciplined approach to dynamic asset allocation and risk has since led us to reduce the substantial overweight to equities that we had in place in the late spring and summer of 2020. For the full year, our traditional multi-asset class strategies delivered significant outperformance versus benchmarks across all risk-based objectives. Our strong performance was a result of a combination of timely asset allocation adjustments during the first half of the year as well as excellent sector positioning and security selection decisions.

[Paul Battaglia:]

Thanks, Marc. Good evening, everyone, and thanks for joining us today. I hope everyone on the call is doing well. My remarks will be focused on our fourth quarter and full year 2020 results, starting with assets under management. We finished December with AUM of $20.1 billion, up from $19.2 billion as of September 30. The 5% increase was the result of approximately $1.7 billion of market appreciation, partially offset by $800 million of net client outflows. Gross inflows were just over $600 million for the quarter, with $290 million of inflows from our wealth management channel and $315 million through our intermediary and institutional team. Gross client outflows for the quarter were $1.4 billion, with the increase from prior quarters due to the few institutional and platform redemptions that we mentioned during our last call, which accounted for approximately $500 million of the total outflows. By sales team, the wealth management team had net client outflows of $142 million during the quarter, and the institutional intermediary team had $674 million in net outflows. For the full year of 2020, we reported $2.3 billion of net client outflows, an improvement from the $4.5 billion of net outflows in 2019. This result was consistent with our outlook on flows going into 2020, which was that net client flows for the year would be improved from prior years, though still negative as we work towards stabilizing AUM. While gross client inflows decreased slightly from $2.7 billion to $2.4 billion, we saw significant improvement in gross outflows, down from $7.2 billion in 2019 to $4.7 billion in 2020. Our separate account retention rate improved to 96% for the 12 months ended December 31. Turning to our fourth quarter P&L, we reported revenue of $33.5 million for the quarter with overall revenue margins of 68 basis points compared to revenue of $32.1 million reported last quarter with revenue margins of 66 basis points. The increase in revenue was due to changes in average assets in our business mix during the period. Operating expenses were $28.9 million in the quarter, an increase of $1.1 million compared to the previous quarter, and an $8.3 million decrease compared to the fourth quarter of 2019. Compensation and related costs increased by approximately $550,000 or 3% compared to last quarter. The increase was driven by finalizing our analyst bonuses as well as one-time severance costs from reductions in our workforce. Our compensation and related costs as a percentage of revenue was 57%. Distribution, servicing and custody expenses decreased by $190,000 or 7% during the quarter, the change can be explained by a 4% decrease in average mutual fund and collective trust assets as well as changes in the overall funding collective business mix. These expenses continue to represent approximately 18 basis points of average funding collective trust assets. Other operating expenses were $7.4 million in the quarter, an increase of $708,000 from last quarter. The majority of the increase is attributable to activity from last quarter and specifically the one-time $1.2 million gain recognized last quarter that was reported as a reduction of other operating expenses. These expenses represent 22% of revenue for the quarter. Non-operating income increased by approximately $550,000 for the quarter, predominantly due to investment returns on our invested cash. As a result, on a GAAP basis, we reported pretax income for the quarter of $5.7 million compared to $4.8 million last quarter. After accounting for approximately $750,000 of strategic restructuring costs, we reported economic income, a non-GAAP measure of $6.4 million. Our non-GAAP effective tax rate for the quarter was 10.4%, resulting in economic net income of approximately $5.7 million. The effective tax rate was down from our usual rate in the low 30% range and from the 39% reported during the third quarter. The reduction was due to a number of factors specific to the fourth quarter, including the discrete tax benefit recognized during the quarter from the RSU vesting and options exercised during the period, coupled with a higher-than-projected taxable income for the quarter and updated tax impacts of IRS Rule 162(m) based on final regulations issued in December. As a reminder, our effective tax rate is a non-GAAP measure that is intended to represent the taxes that we would incur if all of our earnings were taxed as C Corporation. Considering current federal and state tax rates, we continue to assume that our future effective tax rate will be in the low 30% range. However, as we learned during 2020, this rate may change from quarter-to-quarter as events unfold. All told, we reported fourth quarter economic net income per adjusted share of $0.26, a $0.12 improvement from $0.14 per adjusted share last quarter. With that, I will summarize our full year results. We reported revenue of $127 million, down 7% from $136 million last year, with overall revenue margins of 67 basis points. Operating expenses were $113 million, a $20 million decrease or 15% from last year, with reductions in compensation and other operating costs driving the overall decrease. Compensation-related costs of approximately $74 million decreased by $6.6 million since last year and represented 59% of revenue. We finished 2020 with 276 employees down from 307 at the start of the year. Other operating expenses decreased by $11.2 million when compared to last year. The decrease compared to 2019 was due to a combination of a few factors

[End of Q&A:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.