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Calamos Asset Management, Inc. (NASDAQ:CLMS)

Q4 2012 Earnings Call

February 4, 2013 5:00 pm ET

Executives

John P. Calamos, Sr. – Chairman, Chief Executive Officer and Global Co-Chief Investment Officer

James J. Boyne – Executive Vice President and Chief Operating Officer

Nimish S. Bhatt – Senior Vice President and Chief Financial Officer

Analysts

Adam Q. Beatty – Bank of America Merrill Lynch

Robert Lee – Keefe, Bruyette & Woods, Inc.

Operator

Good day and welcome to the Calamos Advisors’ Fourth Quarter 2012 Earnings Call. Today’s conference is being recorded. Please be aware of the following disclosure.

This presentation may contain certain forward-looking statements relating to future events, future financial performance, strategies, expectations, the competitive environment, and regulations. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.

Such risks and uncertainties include, but are not limited to loss of revenues due to contract terminations and redemptions, our ownership structure, changes in market conditions and the economy, catastrophic or unpredictable events, availability of third-party retail distribution channels, damage to our reputation, competitive conditions, and poor performance of our investment strategies.

For a discussion concerning some of these and other risks, uncertainties and other important factors that could affect future results, see forward-looking information in management’s discussion and analysis of financial conditions and results of operations and were applicable risk factors in the Company’s annual and quarterly reports filed with the U.S. Securities and Exchange Commission.

This presentation contains non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. In calculating operating performance for the year and three months ended December 31 2012 and prior period that’s presented net income and diluted earnings per share represented in accordance with accounting principles generally accepted in the United States, GAAP, and also on an as-adjusted basis, which constitute non-GAAP financial measures, items presented on an as-adjusted basis exclude certain expenses, charges, gains and losses, management believes these non-GAAP financial measures provide the reader with the necessary information to analyze the Company’s operations for the periods compared. Please refer to the appendix of this presentation for a reconciliation of GAAP to non-GAAP diluted earnings per share.

I would now like to turn over the call to John Calamos, Sr.

John P. Calamos, Sr.

Good afternoon and thank you for joining us on the Calamos Asset Management fourth quarter 2012 earnings call. Participating on the call is Jim Boyne, our President and Chief Operating Officer; Nimish Bhatt, our Chief Financial Officer; Christian Helmetag, our Corporate Controller. We’ll start by having me provide a business update to discuss some of the highlights and challenges during the period and the year. Jim will then talk you through our distribution efforts and flows and Nimish will provide more detail with respect to our financial results. We will then near the end of the call, we have a Q&A to answer your questions.

On slide four, we begin with a snapshot of our total assets, which were $30.6 billion as of December 31. The charts here show the total asset mix by strategy and by product category. As you can see on the left, the largest representation by strategy continues to be equities at 36%, the next largest percentage are convertibles at 16%, and enhanced fixed income at 10%, By product category, 58% of our total assets mix is in open-ended funds followed by 18% in our close-end funds, and 17% in our institutional strategies. Our usage funds, which are included here in the open-end portion of the pie chart, are still a relatively small percentage of our assets.

Slide five, breaks down the important developments for the quarter as well as the year. As mentioned our total assets were down 11% for the quarter and 7% year-over-year. We experienced net outflows of $3.1 billion for the quarter, $4.6 billion for the full year, primarily from U.S. growth equities where we’ve had performance challenges. The other main contributor to net outflows were strategies that have been close to new investors in 2012.

Our challenges were exacerbated by the headwinds of overall industry outflows in U.S. and international equities during the fourth quarter. However, we are cautiously optimistic and encouraged by the recent industry flows, we are seeing into equity oriented products. We did see continued inflows from the quarter of more than $90 million and more than $1.1 billion from the year into our global and international strategies that were opened to new investors, which we feel will be key drivers to the future growth of the firm.

Last month, we reopened our market neutral and lower volatility equity strategies, which has been closed to new investors during 2012. We continue our focus on improving short-term and mid-term investment performance of our strategies. We’ll talk more about that in a moment.

We do feel that the enhancements we made to our investment platform last year with the value team and expansion of our alternatives platform through the acquisition of a Long/Short team will position the firm well to capitalize any broader opportunity set. We are pleased that we continue to maintain our balance sheet strength with high-level liquidity relative to debt, which we believe provides us with flexibility and capped into invest and grow our business.

From a corporate standpoint, we have increased the dividend this quarter to $0.125 per share, a new high watermark for our shareholders, and also approve a share buyback to repurchase up to 3 million shares of our Class A common stock from time-to-time over the next two years, subject of course to market conditions and applicable regulations. The shares will be acquired by Calamos Investments and the funding for the stock repurchase will come from liquid assets. We are implementing this buyback primarily to manage dilution from the share issuance through the Company’s incentive compensation plan.

Next slide, on slide six, I’d like to share some of the financial highlights for the quarter. To see there, the non-GAAP diluted earnings per share were $0.32 for the fourth quarter and $1.22 for the year. Revenues for the period were $76.9 million with $28.1 million in operating income and an operating margin of 36.5%.

for the year, we earned $326.7 million in total revenues, $119.8 million in operating income and an operating margin of 36.7%. Our average total assets at the end of the quarter were $32.3 billion down from $33.2 billion at the same time last year. Average total assets on a year-over-year basis were down as well to $33.9 billion. Later, Nimish will provide greater detail on the financial metrics including our non-GAAP results.

Turning to slide number 7, I’d like to discuss our investment performance, which of course, remains the highest priority of the firm. We’re disappointed in the short and mid-term performance of a number of our strategies and we are very focused on overcoming these performance challenges. We now feel our outlook in 2012 was too pessimistic, which hindered the performance in some strategies.

We did a number of things, which I feel will help going forward. we formalize our top-down view to an investment committee, which has helped performance over the very near-term. We have upgraded our top-down view to cautiously optimistic as we moved into 2013, and while we were too overly concerned about the fiscal cliff and some strategies, we were hedging the market for a market event and that turn out to be a detrimental performance.

So as a result, we have made and we’ll continue to make adjustments in the portfolio in a number of strategies. Our investment team is finding new opportunities in various sectors and asset class globally including the convertible market.

Additionally, we continue to make enhancement to our investment team and process and have added additional resources to improve performance going forward. Given our more positive outlook in January, we reopened several of our strategies, which have been closed to new investors for most of 2012, including our market neutral and our lower volatility equity strategies. We feel this will help attract new investors and also help flows. Also we are encouraged by recent numbers; we’re seeing going into the equity oriented products from an industrial point of view. Despite our shorter term performance challenges we remained pleased with the overall long-term performance of many Calamos strategies through multiple market cycles.

I now would like to turn over to Jim who will discuss the distribution and flows. Jim?

James J. Boyne

Thanks, John. As John mentioned and as noted here on slide nine, our total assets were $30.6 billion at the end of the year and our average total assets for the quarter was $32.3 billion. As you can see, net outflows will drive this quarter with $3.1 billion in outflows, and this was split primarily between our U.S. growth strategies where we have performance challenges, and from our strategies, which were closed to new investors for most of 2012.

This negative flow trend continued into the New Year with January outflows estimated to be in the range of around $800 million with market appreciation of approximately $1 billion at total assets expected to be slightly higher than they were at year-end. We’ll release the official figures in several days.

On slide 10, you can see our net flows by product type for each quarter and for the full year. Outflows during the fourth quarter were driven primarily by nearly $2 billion of net outflows from our funds. This was coupled with approximately $1.1 billion in net outflows from our institutional and managed accounts. For the year, net outflows were about $4.6 billion were slightly more than $3.4 billion coming from our funds and $1.1 billion from separate accounts.

Within our open-end funds our U.S. gross strategy was a key contributor as I mentioned before the outflows for the quarter and for the year together with the outflows and strategies that were closed.

Our global and international strategies open to new investors, it provide positive flows for in both funds and separate accounts totaling more than $90 million for the quarter and more than $1.1 billion in positive flows for the year. Although we had challenges in garnering positive flows for the quarter, and for the year, we believe that the reopening of our market neutral and lower volatility equity strategies, together with our ability to garner new clients and assets in capabilities and products through the expansion of our alternatives platforms with the Long/Short team, and the addition of our value team would help provide we need to turnaround our net growth performance.

As John mentioned we believe the recent shift in market sentiment toward equity oriented products, may also be winded our back as well. Nimish Bhatt will now talk through the firms’ financial results for the quarter, Nimish.

Nimish S. Bhatt

Thank you Jim. On slide 12, we present non-GAAP results which provide additional transparency in evaluating the core operations of our asset management business. These non-GAAP measures provide investors a better understanding of our operating financial performance as well facilitate comparisons with historical earnings results.

For the fourth quarter non-GAAP earnings per share was $0.32, an increase over both last quarter and fourth quarter 2011. Non-GAAP net income was $6.6 million compared to $6.5 million last quarter and $6.1 million a year ago. The change in non-GAAP earnings per share is driven by lower revenues, but offset by lower operating expenses and a lower tax rate for the quarter.

GAAP earnings per share were $0.22 for the quarter, which was $0.01 lower than the third quarter and $0.22 higher than the year ago. The change from last year was partially due to non-operating charge of $4 million or $0.19 per share recorded in fourth quarter 2011 that was related to an increase in the Company’s deferred tax valuation allowance attributable to CAM’s capital loss carryforwards from 2008 and 2009. Our reconciliation between GAAP and non-GAAP earnings per share is included in appendix to this presentation.

Slide 13, provides a graphical presentation of our revenues and management fees. Total revenues for the fourth quarter was $77 million, a decrease of 6% from the third quarter, and 7% from the same quarter a year ago. Management fee revenues were $61 million for the fourth quarter and $256 million for the full year. The decrease in management fee revenues for both comparative periods presented was principally driven by declines in our average total assets. While average total assets are fluctuated average basis points are continue to remain stable at approximately 75 basis points period-over-period.

As we move on to slide 14, you will see our operating income and margin, for the fourth quarter operating income was $28 million, of $28 million was down 12% from the third quarter due to lower revenues partially offset by a 3% decrease in total operating expenses. Operating margin of 36.5% also decreased due to lower revenues, which was greater than the decrease in operating expenses. Operating income for the year was $120 million, a decrease of 15% from the prior year. Operating margin for the year was 36.7%, a decline from the last year was driven by 7% decrease in total revenues partially offset by lower total operating expenses.

On slide 15, we show operating expenses presented by expense type. Compensation expense decreased in the fourth quarter primarily due to lower performance based incentive compensation and lower equity compensation partially offset by increases in salary and benefit expenses.

Distribution expenses were lower for both the current quarter and the year mainly due to lower mutual fund assets and the management. Marketing and sales promotion expenses are slightly higher in the fourth quarter due to increased supplemental distribution and sending our related expenses. Marketing expenses were higher for the year as a result of increased reimbursements of fund expenses above the GAAP.

G&A expenses were lower quarter-over-quarter, but slightly higher for the year primarily due to an increase in the travel expenses that occurred throughout the year and client reimbursements related to the trade correction expenses that were recorded in first quarter of 2012.

Slide 16 summarizes Company’s non-operating activities. net interest expense was lower in 2012, because the Company paid down $32.9 million of its long-term debt during the second quarter of 2011. Since then net interest expense has stayed constant. We recorded net investment income of $1.4 million for the fourth quarter and $26.6 million for the year. The Company’s investment portfolio return was flat for the fourth quarter of 2012, however it generated a return of 7.1% for the 12 months ended December 31, 2012.

On slide 17, you will see our liquid investments consist of cash and investments totaling $497 million as of December 31, 2012. These balances represent the consolidated strength of our organization, we feel these levels of liquidity support our ongoing business operations, and allow us to provide seed capital for new funds provide conservative levels of capital for the Company’s regulated subsidiaries and invest in the growth of the firm. This strategy is an important part of our efforts to grow business, maintain a strong investment grade credit rating and reflect our philosophy of investing along side our clients. Seed capital investments have played an important role in our overall growth of Calamos. Over the past 10 years, the Company’s seed investments have helped launch domestic and foreign funds that now totaled several billion in total assets and are generating significant management fee revenue.

Slide 18, shows our dividends, payout ratio and yield for the last three years, the $0.41 per share we have paid during the last 12 months represent a 47% payout ratio on our 2012 GAAP earnings. Our dividend yield of 3.9% is comparable to our peers. The Company’s dividend policy is an important component to the overall objective of creating long-term shareholder value. Management and Board continue to evaluate the overall strength of the Company and its future cash needs for growth that include seeding new investments funds while ensuring these objectives are balanced against our existing financial debt covenants. As John mentioned earlier, we have increased the dividend this quarter to $0.125 per share representing an increase of 14%.

Now I would like to turn it over to John for his concluding remarks. John?

John P. Calamos, Sr.

Nimish, thank you. And on slide 20, just a summary to hit some of the highlights, our total assets dropped to 11% in the fourth quarter, ending at $30.6 billion. We did experience negative overflows for the quarter and year due to a large of investment under performance and outflows of strategies that were closed to new investors during 2012. However, we did see continued interest in positive flows into our global and international strategies they were opened during the quarter.

During January, we had asset appreciation of our some outflows continued through the month, therefore our AUM should have a small increase as of the end of January. Investment performance had been a challenge due to our hedging strategy as I indicated earlier, and we have and we’ll continue to take step to improve our performance going forward. A key factor for improving performance are the enhances we made in 2012, and continue to make to our investment platform. An example is the addition of the value team and expansion of our alternatives platform through the acquisition of a Long/Short team. We believe these new capabilities create opportunities for the firm and for our clients.

In addition, we expect that the reopening of our market neutral and lower volatility equity strategies last month should position us to attract new investors and flows. We continue to maintain our balance sheet and have declared an increase of our dividend to $0.125 per share. Also we approved a share repurchase program of up to 3 million shares of our Class A common stock, which should occur over the next two years, primarily to manage dilution from our share issuance and to continue to incentivize our investment team and staff.

I now would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Adam Beatty with Bank of America Merrill Lynch.

Adam Q. Beatty – Bank of America Merrill Lynch

Thank you and good afternoon. Just a question on some of the newly reopened funds, first of all, I was wondering if you could give us just a little bit of background around the decision-making there, whether it was something that you were hearing from clients or more of the proactive initiative by the firm, and also recognizing that it’s early days, kind of what you’ve seen so far in terms of the level flows and maybe more importantly the level of interest in the nearly reopened funds.

John P. Calamos, Sr.

Well, first Adam obviously we hear from clients all the time and responding to their interest in us reopening their fund, it was part of it, but also we feel that at this point the issues that surround the closing the funds have changed a bit here, and we feel that opening these funds will help us going forward, and we continue to manage those funds very effectively. I think it’s a little bit too soon to really look at the flows; we just made the announcement just a few weeks ago. So we haven’t really seen much cap in, we have received positive calls about this, so but I think it’s a little bit too soon for us to see the flows.

Adam Q. Beatty – Bank of America Merrill Lynch

Okay, and maybe grinding in and out a little bit on the institutional side, maybe some color from you or from Jim on your RFP activity and what have found a potential new mandates.

James J. Boyne

I think we continue to see activity and interest in our global and international strategy, as John mentioned we’ve had some challenges in some of or strategies notably our U.S. pro strategy, and we are working on turning around performance there. So while I think there is interest, we do have some work to do, and we are seeking to retain clients, through what’s a shorter to mid term rough cash and some of the strategies. The other thing, I would add on the market neutral and more volatility equity strategies, John mentioned our outlook has become cautiously optimistic so in looking at reopening these strategies the primary driver is, can we continue to perform for our shareholders and given the broader opportunities set, we feel that we can and it’s a win-win for shareholders as well as for the prospect of new clients.

Adam Q. Beatty – Bank of America Merrill Lynch

Great, that make sense. Thank you. And then turning a little bit just to margins, you’re ending you were a little bit down from the average, it sounds like it bounced a bit since then the market, do you have any sort of contingency plans in place to address maybe for the declining revenues and/or margin pressure, or do you feel as though with the solid balance sheet, you can continue – pursuing all your initiatives and write it out.

James J. Boyne

Well I think we continue to look at that very carefully, but we also are looking to make sure that the investment we’re making in the future is sound, we have added resources to the investment team, which we think will benefit us over the long term,. And so we feel that we are making the right moves here.

Adam Q. Beatty – Bank of America Merrill Lynch

Okay, much appreciated, thank you. for taking all my questions.

John P. Calamos, Sr.

Thank you Adam.

Operator

(Operator Instructions) We’ll take our next question from Robert Lee with KBW.

Robert Lee – Keefe, Bruyette & Woods, Inc.

Thanks good afternoon everyone. Have a question maybe on the share repurchase, I mean in the past, I don’t think you’ve been that big issuer of shares for comp, so should we think this as a signal that you expect the share issuance be kind of revamp some of the investment team and process that correct maybe share issuance in your ramp up at a fairly healthy rate

John P. Calamos, Sr.

I don’t think that we are ramping up that much we’ve had a long-term incentive program in place for many years, and we just need to carefully manage that going forward. So this is a program to do that. It’s not that we’re ramping that up any more than we have in the past?

Nimish S. Bhatt

I think as John said, we’re looking to purchase shares over the next two years, I think it’s an art, not a science and part of that is to manage the dilution, but we’re not anticipating something a bunch of shares from the LTI program tomorrow, it’s just trying to project out and look at what we have outstanding and look at trying to match that in some fashion.

Robert Lee – Keefe, Bruyette & Woods, Inc.

I appreciate 20 million shares outstanding and 3 million share program even in two years is pretty hefty. So it was the one we…

Nimish S. Bhatt

Right now, we’ve got $2.6 million outstanding. And so we’re again looking at it from an art standpoint, we were trying to set a number that we thought was in the ballpark and reasonable and obviously, we can reevaluate that.

Robert Lee – Keefe, Bruyette & Woods, Inc.

Okay. And maybe, as part of this, I think in the call you mentioned that you think I guess existing balance sheet assets or liquidity to fund it, but I’m just curious since this is the public entity, this is going to be using the cash that’s accumulated from the DTA at the public entity or is this going to be cash that’s kind of available at upstream from the operating business?

Nimish S. Bhatt

Yeah. I think if you look from an accounting standpoint, the way long-term incentive works, we’re incentivizing employee account most investments for the benefit of the whole organization and the way that works it’s a comp expense that’s formed ratably by all the shareholders. and so buying it back at Calamos Investment kind of matches the proportionality of the expense and allows us as we continue to issue shares address we can use the shares held at Calamos Investments to redeem if you will the new outstanding shares. So that’s a technical complexity, but again, that’s the way it works from an accounting standpoint.

Robert Lee – Keefe, Bruyette & Woods, Inc.

Okay. And maybe just one last follow-up question, and just curious, I apologize if you mentioned it on the call, but the tax rate in the quarter was unusually low, maybe talk about what some of the adjustments were there and maybe what we should be thinking about going forward?

James J. Boyne

Sure. In the current quarter, we re-valued the deferred tax asset related to equity compensation awards, which resulted in an increase in the value of our asset with corresponding reduction in provision for income taxes. In addition, if you look at it for the full year, our tax was lower this year compared to prior year due to a large deferred tax valuation allowance that we took last year. So those were the differences that we expect our effective tax rate to return to 37%, 38% levels in 2013, excluding any further deferred tax valuation allowance relating to the remaining capital loss carryforwards that we have from 2008 and 2009.

Robert Lee – Keefe, Bruyette & Woods, Inc.

Great. Thanks for taking my question.

Operator

And there are no further questions at this time. Mr. Calamos, I’ll go ahead and turn the call back over to you for any additional or closing remarks.

John P. Calamos, Sr.

Well, I want to thank you all for participating in our call this afternoon. Should you have any questions, please feel free to contact us. So thank you very much for your attention and interest in Calamos Asset Management.

Operator

And that does conclude today’s conference. We thank you for your participation.

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