Calamos Asset Management's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.28.14 | About: Calamos Asset (CLMS)

Calamos Asset Management, Inc. (NASDAQ:CLMS)

Q4 2013 Earnings Call

January 28, 2014, 5:00 PM ET

Executives

Jennifer McGuffin - Director, Corporate Communications

John Calamos - Chairman, Chief Executive Officer and Global Co-Chief Investment Officer

Nimish Bhatt - Senior Vice President, Chief Financial Officer and Head of Fund Administration

Christian Helmetag - Corporate Controller

Analysts

Adam Beatty - Bank of America Merrill Lynch

Robert Lee - KBW

John Dunn - Sidoti & Company

Operator

Good day, everyone, and welcome to the Calamos Asset Management fourth quarter 2013 earnings call. Today's conference is being recorded. Please now listen to the following disclosure.

Jennifer McGuffin

Forward-looking statements are subject to risks and uncertainties and may differ materially from actual performance and results. Please see the forward-looking information and Risk Factors sections in our periodic reports filed with the U.S. Securities and Exchange Commission. Non-GAAP financial measures help enhance an overall understanding of our financial results and facilitate comparisons of historical results. Please see the appendix for a reconciliation of GAAP and non-GAAP financial measures.

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

John Calamos

Good afternoon, and thank you for joining us on the Calamos Asset Management fourth quarter and full year 2013 earnings call. Joining me on today's call is Nimish Bhatt, our Chief Financial Officer; also in the room is Christian Helmetag, our Corporate Controller.

I will start the presentation with an overview of our financial results for the fourth quarter, followed by business update. Nimish will then provide details with respect to our financial results for the quarter and full year, along with a discussion regarding our asset flows. I will then conclude the formal presentation and will open the call for questions.

On Slide 4 of the presentation, you'll see a summary of our fourth quarter financial results. Our non-GAAP diluted earnings per share were $0.25 for the fourth quarter of 2013 compared to $0.32 in the fourth quarter of 2012. Revenues for the fourth quarter of 2013 were $66.5 million compared to $76.9 million in the prior year.

Our operating income for the fourth quarter of 2013 was $21.9 million and operating margin was 33%. This is compared to $28.1 million and 36.5% for the same period a year ago. Nimish will go into further details, as to why our current quarter's operating margin is higher than recent periods. Finally, our assets under management were $26.5 billion as of December 31, 2013, compared with $29.7 billion in the prior year. We had outflows of $1.4 billion for the quarter, which is a relative improvement from the prior year.

Turning to Slide 5, our assets under management are presented both by strategy and by product type. As of December 31, 2013, we modified our reporting to only present AUM in our published tables and charts. We no longer will include model-based portfolios in this numbers. As of December 31, those assets totaled $834 million.

As you can see in the left, equity represents 33%, lower volatility equity is 21%, followed by enhanced fixed income and alternative strategies each representing 13%. By product category, 61% of our AUM mix is in open-end funds, followed by 23% in closed-end funds, 12% in our institutional portfolios and 4% in separately managed accounts.

On Slide 6, we'll cover both fourth quarter and full year business highlights. In 2013, we embarked on a number of key strategic moods. Beginning with trends we saw on our assets under management, and although we had negative overflows, we were pleased with the positive flows we saw in our alternative strategies.

For the quarter and full year, net inflows in these strategies totaled $316 million and $917 million respectively. We view this asset class as a key driver of asset growth for the firm. The addition of Black Capital in 2012 and the launch of the Calamos Long/Short Fund complement our alternative offerings.

In 2013, we continue to build out our product breadth to meet the evolving investment needs of our clients. The company reopened four funds that were previously closed to new investors, including the Calamos Convertible Fund, Calamos Growth and Income Fund, Calamos Global Growth and Income Fund and Calamos Market Neutral Fund.

We also launched four new funds this year, the Calamos Dividend Growth Fund, Calamos Long/Short Fund, Calamos Mid Cap Growth Fund were opened earlier this year. And most recently, we opened the Calamos Emerging Market Equity Fund in December. Finally in 2013, we filed a registration statement with the SEC for our first actively managed ETF.

Moving to Slide number 7, we have made a significant investment in building out our investment organization. As of December 31, 2013, we now have 78 investment professionals, which is an increase from 53 investment professionals at the end of 2012.

We undertook this expansion because we believe the global market demands increasingly specialize fundamental research and investment management expertise. We are pleased that we have attracted so many talented investment professionals, who share our commitment to rigorous research in a team-centric environment.

We believe our greater depth and focus combined with the shift in our top down view since September 2012 have helped improve overall investment performance. With respect to performance, we are pleased with the significant improvement in the year-over-year performance by number of our portfolios.

As shown on Slide number 7, for the six month period and percent of our funds the performance average for the respective Morningstar category. Our three year performance is still a challenge, but includes periods from 2011 that will soon run-off. While we are encouraged with the short-term performance, we remain focused on delivering sustained investment performance for our clients. This is the highest priority of our firm.

Moving to Slide 8. As part of our share repurchase program, Calamos Investments LLC repurchased 1.2 million shares of Class A common stock for a total cost of $13.2 million during 2013. The repurchase program primarily allows the company to offset the dilution from shares issuance under the incentive compensation plan.

The company declared a regular quarterly dividend of $12.5 per share and had a payout ratio of 54% and a dividend yield of 4.2% for 2013. Our corporate investment portfolio generated returns of 6% for the fourth quarter and 13.2% for the year.

I'd like to turn it over to Nimish now, who will provide greater detail on the financials results including our non-GAAP results.

Nimish Bhatt

Thank you, John. On Slide 10, we present non-GAAP results, which provide additional transparency in evaluating the core operations of our asset management business. As John previously mentioned, for the fourth quarter, non-GAAP earnings per share was $0.25 compared to $0.32 in the prior year. The decrease in non-GAAP earnings per share is attributable to the decrease in management fee revenue, as we experienced a decline in average assets under management during the last year.

GAAP earnings per share was $0.54 for the quarter compared to $0.22 from the same period in the prior year. The change was mainly as result of a decrease in the valuation allowance, totaling $3.9 million or $0.19 per share, which represents the portion of the realized capital gains from the corporate investment portfolio.

Included in non-operating income is investment income of $22.5 million or $0.20 per share, which increased GAAP earnings for the fourth quarter. The increase in investment income was partially offset by other-than-temporary impairment charge of $3.1 million or $0.02 per share. The other-than-temporary impairment charge was recorded on certain available-for-sale securities with unrealized losses held in the investment portfolio. A reconciliation between GAAP and non-GAAP earnings per share is included in the appendix to this presentation.

Slide 11 shows our change in AUM. Our AUM remained relatively flat during the fourth quarter with $1.4 billion in net outflows, which were mostly offset by $1.3 billion in appreciation. For the year, AUM was down approximately 10% due to net outflows of $3.9 billion in funds and $3.1 billion from institutional and managed accounts, partially offset by appreciation of $3.9 billion.

Market appreciation for both the quarter and the year were driven primarily by equity and lower-volatility equity strategies. Net outflows for both the quarter and the year were primarily driven from our growth and global equity strategies. As John mentioned earlier, we did have inflows of $316 million and $917 million to our alternative strategies for the quarter and year respectively.

Slide 12 provides a graphical presentation of our revenues and operating income. Total revenues for the fourth quarter were $66.5 million, compared to $76.9 million for the same quarter in 2012. Management fee revenues were $52.5 million for the fourth quarter. Total revenues for the year were $269.1 million compared to $326.7 million in 2012. Management fee revenues were $212.4 million for the year. The decrease in management fee revenues for both the quarter and the year was principally driven by declines in AUM.

Slide 13 provides a graphical presentation of operating income and margin. For the fourth quarter, operating income of $21.9 million was down 22% from the same period in prior year, mainly due to lower revenues and partially offset by decrease in operating expenses. Operating margin of 33% also decreased due to combination of lower revenue and the decrease of performance-based incentive compensation recorded in the period.

However, we will see continued pressure on our operating margin in 2014 as we will have a full year of compensation expense related to new hires we made in 2013. We recognize fund flows will lag investment performance, but relationship between compensation expense and revenues will not necessarily correlate.

For the year, operating income of $77.9 million decreased from 2012 mainly due to lower revenues and partially offset by a decrease in operating expenses. Operating margin of 28.9% also decreased due to the combination of lower revenues and change in operating expenses.

On Slide 14, we show operating expenses presented by expense type. Compensation expense for the fourth quarter was $18.1 million compared to $19.2 million for the same quarter 2012. For the year, compensation was $85.5 million. The increase in compensation expense in 2013 is largely attributable to the costs associated with the resource additions we have made to the investment team.

Distribution expenses were lower compared to previous periods presented, mainly due to lower open-end fund assets. Marketing and sales promotion expenses were lower than previous periods. G&A expenses were also lower than previous periods as we continue to look for opportunities to reduce overhead expenses. Primary drivers for the decrease in G&A expenses in 2013 include lower fees for professional services as well as lower legal fees.

Slide 15 summarizes the company's non-operating activities. We recorded investment income of $23.4 million for the fourth quarter compared to $1.4 million from the same quarter last year. Our investment income for 2013 was $35.2 million compared to $26.6 million last year. As previously mentioned, we recorded an other-than-temporary impairment charge of $3.1 million or $0.02 per share during the fourth quarter and $7.5 million or $0.05 per share for the year, which negatively impacted investment income.

On Slide 16, you will see our liquid investments consist of cash and investments totaling $538 million compared to $92 million of outstanding debt as of December 31, 2013. $46 million of this debt will come due in July of 2014. In 2013, the company's investment portfolio generated a return of 13.2%.

These balances represent the consolidated strength of our organization. We feel these levels of liquidity support our ongoing business operations, allow us to provide seed capital for our new funds, provide conservative levels of capital for the company's regulated subsidiaries, fund the company's share repurchase program and invest in other corporate strategic initiatives.

Slide 17, shows our dividends, payout ratio and yield for the last three years. The $0.50 per share we have paid during 2013 represents a 54% payout ratio on our 2013 GAAP earnings. Our dividend yield of 4.2% is comparable to our peers. The company's dividend policy is an important component to the overall objective of creating long-term shareholder value.

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

John Calamos

Thank you, Nimish. On Slide 19 is our executive summary. We are encouraged by the improved investment performance in a number of our products. Delivering sustainable outperformance for our client remains a highest priority of the firm. We remain focused in investing back into our business, while also increasing our product breadth to better service our clients.

During 2013, we launched four new funds and we reopened four funds that were previously closed to new investors. As part of our commitment to our clients and demonstrating our long-term confidence in the firm, we've added senior resources to our investment team. Management is committed to maintaining a strong balance sheet to support product expansion and future growth.

In 2013, Calamos Investments repurchased 1.2 million shares of Class A common stock totaling $13.2 million. We are maintaining the regular quarterly dividend of $12.5 per share. Our competitive dividend yield and the recent share repurchase programs are examples of initiatives we have undertaken to enhance shareholder value.

The summary of our market outlook. As we all know the markets have been evolved until recently, but our global outlook is still cautiously optimistic. Despite more uncertainty in the emerging markets, we don't think the recent emerging market volatility will derail the U.S. or global recoveries. There are positive trends in the Eurozone and Japan. GDP in the Eurozone is likely to turn positive in 2014, led by a stronger growth in Germany's stimulative fiscal policy. Countries that have gone through austerity such as Greece, Spain and Ireland are emerging to better prospects.

There are structural imbalances however, such as high unemployment that are still up there. Japan seems to be making progress. The yen is much weaker, but there still is overcapacity issue and stagnant wage problem. In the developed markets, the U.S. is not too hot, not too cold period. Economic recovery is supported by the wealth effect consumer activity. Tapering, we've seen a lot about that. We think its good news for monitory policy, with the low yields caused by QE provided banks little incentive to lend.

Hopefully that changes going forward. And hopefully, we'll have Congress start to take into account fiscal policy to lower tax rate and make us more competitive and encourage job growth. Led by the developed market, especially U.S., we're seeing positive synchronization among major global economies, but growth rates still seem to be uneven from country-to-country.

We are in a period where active management will be rewarded because markets are increasingly driven by fundamentals. The U.S. growth equities continue to be attractive and we feel we're in the mid-phase of the secular bull market with more room for valuations to expand. We especially like cyclical growth areas, consumer discretionary, information technology, industrials and financials. Fixed income in a rising rate environment is challenging here.

High yield, mid-grade corporate bond seem compelling, but duration management remains essential. We are seeing interest in some of the liquid alternatives strategies and dividend growth strategies as an alternative to fixed income investing. Additionally, convertibles are also interesting and both the fixed income side as well as the low-volatility equity side, and has been recently demonstrated this January with the sell-off in the market, the convertibles did well in cushioning that downside.

So at this point, I'd like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our fist question will come from Adam Beatty with Bank of America Merrill Lynch.

Adam Beatty - Bank of America Merrill Lynch

First a question on the different fund products, especially the ones that recently reopened or I guess during the year you mentioned net flows to those products were improving. Could you give us some color on the dynamics of reopening the fund and how it's sort of gradually gains traction? Should we expect some sort of inflection point at some point in the flows assuming good or decent performance? Or how do you see the outlook for that?

John Calamos

It really all depends on the market environment. Every fund has different aspects to it. But with the funds we opened, we have seen flows start to gain a bit of traction. We've got to get the message out a bit more yet, but we feel that that's a positive for us for 2014 in here.

Adam Beatty - Bank of America Merrill Lynch

A question on your compensation expense, and I guess you mentioned to build out of the investment team, which has been occurring for a few periods now. When the comp expense was the lowest in at least several quarters maybe a couple of few years, how did that happen and what were the dynamics behind that and what do you expect for a run rate?

Nimish Bhatt

The decrease in expenses driven by adjustment to incentive compensation accruals that reflect the overall performance of the company, so we anticipate Q1 expenses going forward will be higher than Q4, more in line of 2013 Q3 or little bit higher than those levels.

Adam Beatty - Bank of America Merrill Lynch

It sounds like an annual, what I would call a true-up, is that an accurate characterization?

Nimish Bhatt

That is accurate. Yes.

Adam Beatty - Bank of America Merrill Lynch

And then finally, going back to the investment team and their roles, you mentioned hiring Sector Heads as well as Co-Portfolio Managers. I mean I know you have rolled out some new products, so it makes sense that you would have a new team associated with some of the new products. But in terms of Sector Heads and what have you, has your investment process changed? How does some of the new hires play into the investment process?

John Calamos

The process has not changed, it's just more focused. Whereby prior to this, Adam, you might be a co-PM and also have a sector, and that we thought the team was getting stretched a little bit there. So now we focus where we have the person focus on the sector and the co-PM does not have sector responsibilities, so that that really helped us. And as you may know, earlier we did bring on a value team. We also brought in Black Capital on the long/short, those are separate teams.

Operator

We'll go next to Robert Lee with KBW.

Robert Lee - KBW

I'm just curious that, John, I think few weeks ago, maybe a month or so ago, you did mentioned that, I guess senior executives will going to have an opportunity to buy into Calamos Family Partners. I mean just kind of curious how you're thinking about how that kind of helps the alignment with public shareholders? Why not just kind of increase their participation through restricted stock or what not in the public entity?

John Calamos

Well, I think there is some incentives on the private side, some tax incentives, so they can take advantage of that. And on the private side, it's a longer-term commitment, where the restricted stock is really more part of compensation with shorter-type investing. So the Calamos Partners is really a long-term commitment.

Robert Lee - KBW

And one last question, I know a couple of years back you talked a little bit, spent a little bit of money trying to looking at maybe rationalizing the overall corporate structure, so it's not as complex. And I'm just kind of curious, at this point, which certainly doesn't feel, seem like it's going to occur. What were the kind of main impediments to doing that? Were they just overwhelming kind of tax issues, actually to unitize or unitize the structure at this point? I mean, I'm over some of the things that doesn't make that peaceful.

John Calamos

The board has not addressed that issue currently, but we continue to look at that. And if we can make our structure more transparent to the market side, I know people like you, Robert, get it. But somebody just googling us and going there, they're not going to see a good market cap on what we are, the 80% private side of the business is not reflected. So we continue to think about that and see if there is something in the future we can do to correct that up, but we have not made any decision at this point.

Robert Lee - KBW

And maybe one last question, if that's okay. I mean, clearly you spent a lot of time, energy and money to kind of beef-up the investment side of the shop. Can you maybe touch a little bit on any changes that either you've made or contemplate making on kind of the distribution side. I mean where and maybe you kind of realigned things or added some bodies or staff, and anything planned on that side of the fence as we look ahead to 2014?

John Calamos

That's a good question, Robert. We continue to look at that and how we're organized on the distribution side. We have added some people to our international distribution. So we need to have sort of the boots on the ground, so to speak, in some of those areas. So we're continuing to look at that.

As you know, our industry continues to change a lot, so we want to adapt to the change in environment, so we continue to review that and look at ways. So we've added some people in our distribution. We're adding both internationally and both here in the U.S. to make sure we're communicating with the financial advisor community, the RIAs and the institutional market. So we continue to look at that very carefully.

Robert Lee - KBW

Just one last one. On that topic, is there any one distribution channel in particular that focused on at this point where at times you see, maybe you have the most kind of near-term traction or you see the most potential for some traction in the coming year or so?

John Calamos

We do have an office in London and in Europe, so we wanted to make sure that that is working as positive as it should be there. So we're focused on Europe for increasing our distribution there a bit more. We're also in the South America as well. We're focused on that as well. So we see those opportunities as something that -- in both areas, we feel we need a little bit more support in those areas, we continue to look at that.

Operator

Our next question comes from John Dunn with Sidoti & Company.

John Dunn - Sidoti & Company

Can you just talk a little bit more about that shift away from the top-down view, and how that actually showing up and how investment professionals are interacting with one another?

John Calamos

Over the years, John, many years, as an investor, we've always had both the bottom-up and top-down views. And if we go back over many, many years in cycles, our top-down view has added a lot of value to our performance. Our top-down view back a couple of years ago did not add that we were overly concerned about systemic risk and where overly we had a goal play on. We were worried about the fiscal cliff. We were worried about too many those things. And one of the changes we did in reorganizing the investment department is really creating investment committee and formalized that process quite a bit, and I think that proved to be very valuable.

We had a good discussion bringing different view points into the room, and I think changed our whole view on that systemic risk in the goal play, which really hurt performance. And especially over the last six, seven, eight, nine months, we're really seeing the benefit of that right now. So that's really the change that we made is really to kind of formalize the top-down view, get other peoples opinion, and then we got to act as a team in executing it.

John Dunn - Sidoti & Company

It's important to have that top down voice as well.

John Calamos

Yes.

John Dunn - Sidoti & Company

And then on the G&A line, it looks like that it rose, was there anything specific in there or just part of that investment process?

John Calamos

Sorry, on the G&A line, what's your question?

John Calamos

It bumped up, is that just seasonality or there's something else?

Nimish Bhatt

It's pretty flat. It's only about $300 million, but yes, its seasonality. But going forward, as we introduce new products, obviously we'll see some reasonable increase there.

Operator

And ladies and gentlemen, that is all the time we have for questions-and-answers. I'd like to turn the call back to John Calamos for any additional or closing remark.

John Calamos

Well, thank you all for joining us on the call today. We appreciate your support and we will continue to add value and work hard. We look forward to speaking you next quarter. Thank you very much.

Operator

And that will conclude today's conference. Thank you again for your participation. You may now disconnect.

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