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Calamos Asset Management, Inc. (NASDAQ:CLMS)

Q1 2014 Earnings Conference Call

April 24, 2014 5:00 pm ET

Executives

Jennifer McGuffin - Director, Corporate Communications

John Calamos - Chairman, CEO & Global Co-CIO

Nimish Bhatt - CFO

Christian Helmetag - Corporate Controller

Analysts

Adam Beatty - Bank of America-Merrill Lynch

Andrew Donnantuono - KBW Equity Research

John Dunn - Sidoti & Company

Danielle Matsumoto - Goldman Sachs

Operator

Good day, and welcome to the Calamos Asset Management First Quarter 2014 Earnings Conference 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 section of 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 first quarter 2014 earnings call. Joining me 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 first quarter, followed by a business update. Nimish will then provide details with respect to our financial results for the quarter, along with a discussion regarding our asset flows. I will then conclude the formal presentation and will open the call for questions.

As you know this past quarter for the markets were very volatile as the debated risk-off and risk can't throw off the period, resulting in a rather flat period for the market. It was also relatively flat quarter for Calamos as well. End of the year-end, AUM, assets under management, was $26.5 million and as of 31 January end of the first quarter was $26.1 million.

On Slide 4, you will see a summary of our first quarter financial results. We had outflows of $574 million for the quarter, which was an improvement from both last quarter and the first quarter of last year.

Our non-GAAP diluted earnings per share were $0.20 for the first quarter of 2014 compared with $0.25 last quarter, and $0.24 a year ago.

Revenues for the first quarter of 2014 were $63.9 million compared with $66.5 million last quarter, and $71.0 million in the first quarter of last year. Finally, our operating income for the first quarter of 2014 was $14.1 million and operating margin was 22%. This is compared with $22.1 million and 31.2% for the same period a year ago.

Nimish will go into further details regarding the change in the operating margin. However as you may recall from our last earnings call, our operating margins for the first quarter 2013 was high due to year-end adjustments made to our performance based incentive compensation expense.

Turning to Slide 5, our assets under management are presented both by strategy and by product type. As of March 31, 2014, our assets under management were $26.1 billion and our assets under advisement were an additional $791 million.

As you can see in the left, equity represents 31%, lower volatility equity 19%, followed alternatives at 15%, and enhanced fixed income with 14% of our AUM. By product category, 61% of our AUM mix is in open-end funds, followed by 24% in closed-end funds, 11% in our institutional portfolios, and 4% in separately managed accounts.

On Slide 6, I will cover business highlights for the quarter. Beginning with flows in our assets under management, we saw a slowing down of net outflows compared with prior periods. We were pleased with the continued positive flows we saw in our alternative and convertible strategies. For the quarter, net inflows in these strategies totaled $334 million and $134 million respectively. We continue to build out our product breadth to meet the evolving investment needs of our clients. We have been pleased with recent investor increase in our Calamos Emerging Market Equity Fund, which leverages our global investment experience.

Our newly launched Calamos Long/Short Equity Fund has also seen positive interest, which is an open-end fund that complements our market neutral product within our alternative strategies. Later this year, we are still on track to launch an actively managed ETF.

As part of our share repurchase program, Calamos Investments LLC, repurchased one million shares of Class A common stock for a total cost of $12.2 million during the first quarter. The repurchase program primarily allows the company to offset the dilution from share issuance under the incentive compensation plan. As I have mentioned on previous earnings call and within our disclosures, because of the ownership structure the related Form 4s are filed under my name. However these share repurchases are being made by Calamos Investments as part of the share buyback and are not a transaction being made by me personally.

The company also declared a quarterly dividend of $0.125 per share and has had a payout ratio of 57% and a dividend yield of 3.9% over the last 12 months.

Slide 7 shows our investment performance. We continue to encourage by our short-term performance as we've seen improvements in our one year results compared with a year ago. Even though our one year performance was adversely impacted by investment shift from secular growth sectors to defensive sectors near the end of the quarter, our three year investment performance remains challenged although poor results from the second and fourth quarter of 2011 will roll off later this year.

I like to turn it over to Nimish now who will provide greater detail on the financial results including our non-GAAP results. Nimish?

Nimish Bhatt

Thank you, John. On Slide 9 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 first quarter non-GAAP earnings per share was $0.20 compared with $0.25 in the first quarter and $0.24 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 as well as an increase in operating expenses.

GAAP earnings per share was $0.11 for the quarter compared with $0.54 in the fourth quarter, and $0.16 for the same period in the prior year. The change from last quarter was mainly as a result of decrease in deferred tax valuation allowance during the fourth quarter totaling $3.9 million or $0.19 per share and investment income in our corporate investment portfolio in the fourth quarter of $22.5 million or $0.20 per share, which both increased GAAP earrings.

This increase in investment income was partially offset by other than temporary impairment charge of $3.1 million or $0.02 per share during the fourth quarter of 2013. A reconciliation between GAAP and non-GAAP earnings per share is included in the appendix to this presentation.

Slide 10 shows our change in the AUM. Our AUM remained relatively flat during the first quarter with net outflows of $195 million from our funds and $379 million from our institution and managed accounts, which were partially offset by $178 million in appreciation.

Compared to the first quarter of last year, AUM was down approximately 8% due to net outflows of $5.1 billion partially offset by appreciation of $2.9 billion. Net outflows for the quarter were primarily from our growth and lower volatility equity strategies. As John mentioned earlier, we did have inflows of $334 million into our alternative strategies and $134 million to our convertible strategies for the quarter.

Slide 11 provides a graphical presentation of our revenues and operating income. Total revenues for the first quarter were $63.9 million compared with $71 million from the same quarter in 2013.

Management fee revenues were $50.3 million for the first quarter. The decrease in management fee revenues was principally driven by declines in average AUM.

For the first quarter operating income of $14.1 million was down 36% from the same period in the prior year mainly due to lower revenues and an increase in operating expenses. Operating margin of 22% also decreased due to the combination of lower revenues and increased compensation expense recorded in the prior period.

As we discussed last quarter we will see continued pressure on our operating margin in 2014, as we could have full year of compensation expense related to the new hires we made in 2013. We recognize that the fund flows will lag investment performance thus the relationship between compensation expense and revenues will not necessarily correlate.

On Slide 12 we show operating expenses presented by expense type. Compensation expense for the first quarter was $24 million compared with $22.6 million for the same quarter in 2013, and $18.1 million last quarter. Compensation expense was higher than the fourth quarter due to increased seasonal payroll taxes and year-end compensation adjustments that lowered fourth quarter compensation costs.

Payroll taxes are normally high in the first quarter of the fiscal year due to the timing of the short-term incentive compensation payments. The increase in compensation expense in 2013 over the same quarter last year was largely attributable to the cost associated with the resource additions we have made to the investment team.

Distribution expense was lower compared to the previous periods presented mainly due to the lower open-end fund assets. Marketing and sales promotions expenses were marginally lower than the fourth quarter and slightly higher than the first quarter of 2013.

G&A expenses were higher than previous periods primary drivers for the change in G&A expenses included increased travel and timing of certain expenses offset by lower fees for professional services.

Slide 13 summarizes the company's non-operating activities. We recorded investment income of $1.5 million compared with $23.4 million for the fourth quarter, and $3.2 million from the same quarter last year. As previously mentioned, we had larger investment gains in the fourth quarter of 2013 offset by an other than temporary impairment charge.

On Slide 14 you will see our liquid investments consists of cash and investments totaling $473 million compared with $92 million of outstanding debt as of March 31, 2014. $46.2 million of this debt will come due later this year. These data will represent the consolidated strength of our organization. We feel this levels of liquidity support our ongoing business operations, allow us to provide seed capital for 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 15 shows our dividends payout ratio and yield for the last three years and trailing 12 months. The $0.50 per share we have paid during the last 12 months represents 57% payout ratio on our non-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.

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

John Calamos

Thank you, Nimish. In summary we are encouraged by the improved investment performance in a number of our products delivering sustainable outperformance for our clients remained the highest priority of the firm. We remain focused on investing back into our business; we are also increasing our product breadth to better serve our clients.

Management is committed to maintaining a strong balance sheets worth of product expansion and future growth. In the first quarter, Calamos Investments repurchased one million shares of Class A common stock for a total of $12.2 million. We are maintaining the word regular quarterly dividend of $0.125 per share. Our competitive dividend yield and recent share repurchase program are examples of the initiatives we have undertaken to enhance shareholder value.

Just quickly a overview of our market and economic outlook. Obviously the first quarter was very volatile, very choppy, S&P rose 1.8%, the MSCI World Index has got a return of 1.4%, 10-year Treasury has gained 3.4% has concerns above the equity market overshadowed fears of rising rates. Convertibles outpace the equity globally and we would expect as equity markets advance but fluctuated as bonds spread zero.

U.S. economy job growth sluggish falling short of the 250,000, 300,000 monthly jobs we believe are needed for the U.S. economy to achieve the cape of velocity but not fully enough to stop capering. We saw promise turn in auto sales in March, housing has being hindered by higher rates and higher prices, but we expect a pickup.

Over the long awaited recovery in CapEx we are watching it closely but has not yet occurred. U.S. looks to be to us mid cycle phase of the business cycle. Our focus is on balancing secular and cyclical growth as well as to favor companies in technology, financials, consumer discretionary, and industrials.

Historically companies in these sectors have performed well as the economic activity accelerates with minimal inflation and upward slope in yield curve. U.S. opportunities in growth stocks remained significantly. They tend to outperform during the middle and later cycles of the business cycle and we feel that growth can significantly outperform value in these business cycles as has done in the past.

Convertibles has also displayed renounced equity characteristics and involved for markets convertibles have tended to do well. The equity market volatility combined with the likelihood of higher interest rates provides a very favorable backup for convertibles. With that blend of equity fixed income characteristics, convertibles historically demonstrated less interest rate sensitivity versus traditional investment grade banks.

Globally our outlook remains positive as well. We estimate 2014 global economic growth to be 2.5% to 3%. Inflation is nearly non-existent in developed market and looks to be on a decline in emerging markets. Eurozone recovery is gaining meaningful traction. Our Eurozone fourth quarter GDP growth turned positive at about 0.5%. We believe the ECB will continue to maintain a timely policy providing any floor for equity markets.

Japan, it was still, we are looking at very closely, it's not very clear what may be happening there. So we are adding at the margins there as where we believe we can benefit most directly from the stimulus measures, which are financials and industrials.

Finally, in the emerging markets we are seeing attractive PEs versus the global average. Yes in the development markets we are emphasizing a blend of cyclical and secular growth opportunities in emerging markets. As the markets have located we continue to find a breadth of choice of good valuations. Many emerging market countries have made meaningful progress and reforms others have federal elections this year potentially opening the door to better economic and investment prospects.

We see opportunities in Mexico, Philippines, Taiwan, Indonesia, and South Korea, while in countries where key reforms are still in earlier stages we take a much more selective approach, India, Indonesia, and Thailand. Emerging market is not so much whether to be in them or not but which ones to be in.

I now like to open up the call for questions.

Question-And-Answer Session

Operator

Thank you so much. (Operator Instructions). Our first question will come from Adam Beatty with Bank of America-Merrill Lynch.

Adam Beatty - Bank of America-Merrill Lynch

And thanks for the remarks on the market outlook you just gave. Just a quick follow-up to that. You mentioned that it's becoming a more favorable environment for convertible as I noticed; the mutual fund seems to have done some inflow attraction during the quarter. Where do you see I mean you just reopen the fund last year, issue and pricing just to starting a pickup, would any or we kind of in and how do you size the opportunity around convertibles?

John Calamos

Adam we do like the opportunities and convertibles. As you know, we're probably in a period of volatility as we saw in the first quarter here, convertibles, that's certainly their nature they have damped volatility. So we do see interest there.

As you mentioned issuance has picked up in convertibles and we're seeing there both here in the U.S. as well as the non-US so that's good news. So we think the convertible market and also by the way if we do tend to give more higher interest rates we will see more convertible issuance as companies will issue convertibles to lower their interest rate costs as well. So we're very favorable about the convertible market looking forward here.

Adam Beatty - Bank of America-Merrill Lynch

And you mentioned sort of volatility I know it's the role volatility equity had some outflows, may be that was early in the quarter coming off last year. But where do you see that, do you see interest picking up for you which I guess one would expect in this environment?

John Calamos

Yes, I think we do. There is obviously a lot of them certainly in the market the risk-on, risk-off it seems to almost change every day.

Adam Beatty - Bank of America-Merrill Lynch

Right.

John Calamos

So I think the volatility is there and so as investors, as you know, many investors are coming out of the bond market or on the sidelines in cash. One of the ways they may kind of put their toe in the water in the equity markets is to really go into low volatility equity strategies. So we do see that as a good area going forward.

Adam Beatty - Bank of America-Merrill Lynch

Just one more. Thanks for taking on my questions. In terms of more the overall from an improvement in the net flows was that a case of higher sales, more redemptions, and may be you could talk about that in terms of the retail channel and also the separate accounts? Thanks.

John Calamos

Yes, it's a combination of all those. We had been in net outflows for a while and we have as you know opened up the convertible fund and the other products last year. So we're seeing our flows into there. But we still have some challenges there that we're working on.

Operator

Thank you, Adam. Our next question will come from Robert Lee with KBW Equity Research.

Andrew Donnantuono - KBW Equity Research

Hi this is actually Andrew Donnantuono sitting in for Rob. Thanks for taking my questions. Firstly you mentioned that actively managed ETF launch coming later this year. Would you just be able to provide us with a little bit more color on your expectations on timing and further down the road assets that could potentially be gathered from that opportunity.

John Calamos

Andrew, it's really hard to determine at this point. We did file and we're going through that process as you know that can take a while. And so it's hard to anticipate when exactly that a third win it's a -- it will be and actively managed ETF. So that's the difference. So we're hoping to get it done this year but the process isn't that certain. But we're out there trying to push it along.

Andrew Donnantuono - KBW Equity Research

And then on the same topic, would you kind of be able to speak to some of the demand that you've been seeing for that product or what -- whether it's existing clients or potentially new ones that have shown interest. That's kind of caused you to go that route?

John Calamos

Well I think there is obviously as you know, there are some demands for ETF and I think going to more an active ETF that's what we think. We can add some value and we obviously we feel there is some demand out there else we won't be doing this. But it's hard to measure exactly what that might be at this point.

Andrew Donnantuono - KBW Equity Research

And then just one very quick last question here, getting back to kind of the elevated compensation in 2014. Just we're kind of expecting that this year just specifically with respect to new hires and kind of adding to your investment team. Would you say that that process is mostly taken place last year with adding additional headcount investment staff or are you still kind of looking for new team members in 2014?

John Calamos

Yes, I think we're continued to build out the team, but more around the edges at this point. So we don't feel we will have significant hires going forward. But it would be more around the edges. I think the larger number we've already passed beyond that.

Operator

Thank you. Our next question will come from John Dunn with Sidoti & Company.

John Dunn - Sidoti & Company

Wanted to just ask you about some of the strategies that you have for increasing sales on the institutional side of the house? And are there going to be -- I'm sorry increasing hires over on the sales side just to sort of put that to inflows?

John Calamos

Are you talking about hiring on the institutional side or --?

John Dunn - Sidoti & Company

Yes. I mean that's part of it. And then, also just some of the strategies you have for improving your sales on the institutional side?

John Calamos

Yes, I think we do have some key strategies on the institutional side. As I stated in the outlook, one of the things that are happening right now with the spectrum of higher interest rates, what we're doing is we're seeing interest in -- and this is by institutional investors by the way. How do they manage interest rate risk in this environment? And we feel we have several strategies that really can help them manage interest rate risk. Obviously, convertibles are our strategy on the institutional side.

And as we mentioned before, it was close to new investors. Last year we opened that up. So we think that's a key strategy. And we continue to build out our alternative area. So the Long/Short area is another way that may be I would categorize that as enhanced fixed income, but it's a way to manage interest rate risk in this environment so both our Long/Short strategy, our market neutral upon, it kind of fits into that solution in the asset allocation.

The other one I think on the institutional side is emerging markets a lot of interest in emerging markets. Are they coming back? Aren't they coming back? Are evolving world fund is really a risk managed way to participate in the emerging market? And for many funds and pension funds and others, it appeals to them in a sense that it takes away some of the volatility. So in the emerging market area the emerging market our evolving world strategy plays well to that. And we did open up a new emerging market fund this year as well. So I think we have several strategies that would appeal to the institutional investors, not only here in the U.S. but in the non-US the global market as well.

John Dunn - Sidoti & Company

And then, my follow-up was, can you touch on your outlook for that where the seed rate might go in 2014 and some of the puts and takes there?

Nimish Bhatt

We had expected though this is and we have said the seed to remain flat as what we have seen in past years, in past quarters.

Operator

Thank you so much. Our next question will come from Marc Irizarry with Goldman Sachs.

Danielle Matsumoto - Goldman Sachs

Great. Thanks. This is Danielle Matsumoto for Marc Irizarry today. We just have a couple questions around the balance sheet. First, I think I suspect that the composition of the seed investment portfolio has changed to bad over time, particularly given all the new strategies that you add to the marketing. So I just like to get a little color on kind of what strategies are in the seed portfolio and also what drove the impairment, what was the dynamic there? Thanks.

John Calamos

Well, if I understand your question correctly, the cap being the investments that we have we show on our balance sheet, is across all of our strategies, a lot of ours are funds that's a seed capital. It is not one particular strategy that we invested in. As we try to launch -- as we launched different funds, we seed them with our capital or we redeploy our capital. Secondly, your question was with respect to the impairments, am I correct?

Danielle Matsumoto - Goldman Sachs

Right.

John Calamos

Okay. The impairment was with respect to the core other than temporary impairment, which is that if a secure, if a portfolio or investment is an accounting rule, that if a portfolio that we are holding is at an unrealized loss position for a certain number of months and more, then we have to take a charge into our P&L and that's what it was during the last year.

Danielle Matsumoto - Goldman Sachs

And then, just on -- an update on your thoughts on the mix of dividend increase potentially versus share repurchase going forward?

John Calamos

Yes. We continue to look at that both the share buyback and the dividend. So we continue to review that with the board. Board is not making any change right at this moment, but we will continue to look at that very carefully.

Danielle Matsumoto - Goldman Sachs

And then just one last one for me. On the operating expenses, you've touched on the comp and benefits being higher with the new teams and the new talent that you bought in. What about any thoughts on marketing and G&A that we should expect anything in 1Q that may have been a little bit more one time-ish or is this a good run rate for the rest of the year?

John Calamos

Well, we expect those expenses to remain flat for the rest of the three quarters.

Operator

Thank you. And at this time, we have no further questions in the queue. Mr. Calamos, I will turn the conference back over to you for any additional or closing remarks.

John Calamos

Okay. Thank you very much. And thank you for joining us on this call. If you do have any questions feel free to contact us. And we look forward to talking to you. Thank you very much.

Operator

Thank you. And again, ladies and gentlemen, this does conclude our conference. We thank you for your participation.

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