Calamos Asset Management's (CLMS) CEO John Calamos on Q2 2014 Results - Earnings Call Transcript

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 |  About: Calamos Asset Management, Inc. (CLMS)
by: SA Transcripts

Operator

Good day, and welcome to the Calamos Asset Management Second Quarter 2014 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 second quarter 2014 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 second 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.

Starting on Slide 4 of the presentation, you will see a summary of our second quarter financial results. While we had $1.1 billion in net outflows for the quarter, separate accounts represented $735 million and funds represented $337 million. We are encouraged by the inflows of our alternative and convertible strategies.

Our non-GAAP diluted earnings per share was $0.22 for the second quarter of 2014 compared with $0.20 last quarter, and $0.22 a year ago.

Revenues for the second quarter of 2014 were $63 million compared with $63.9 million last quarter, and $66.7 million in the second quarter of last year.

Finally, our operating income for the second quarter of 2014 was $16.6 million and operating margin was 26.4%. This is compared with $18.4 million and 27.6% for the same period a year ago. Nimish will go into further details regarding the change in the operating margin.

Turning to Slide 5, our assets under management are presented both by strategy and by product type. As of June 30, 2014, our assets under management were $25.8 billion and our assets under advisements were an additional $781 million.

Beginning this quarter we changed the presentation of the assets strategy to better align with how we view our core business going forward. As you can see on the left, U.S. growth represents 33%, multi-strategy representing our closed-end funds is 25%, followed by alternatives at 16%, and global growth with 13% of our AUM.

By product category, 62% of our AUM mix is in open-end funds, followed by 25% in our closed-end funds, 9% in our institutional portfolios, and 4% in separately managed accounts.

On Slide 6, I will cover the business highlights for the quarter. Beginning with flows in our assets under management, we saw a slowing of net outflows compared with last year. We were pleased with the continued positive flows we saw on our alternative and convertible strategies.

For the quarter, net inflows in these strategies totaled $270 million. Our multi market products also had inflows of $41 million during the second quarter.

We continue to build-out our product breadth to meet the evolving investment needs of our clients. In July, we launched the Calamos Focus Growth ETF, our first actively managed equity exchange traded fund.

We believe that equity ETFs are a logical extension of our long held believe in active management and enable us to serve investors who prefer the ETF products structure and appreciate the benefits of transparency.

As part of our share repurchase program, to acquire up to 3 million shares of the company's common stock, Calamos Investments LLC completed the program with a repurchase of 743,055 shares of Class A common stock for a total cost of $9.4 million in the second 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 earning calls with our disclosures, because of our ownership structure, the related Form 4s were filed under my name. However these share repurchases were made by Calamos Investments as part of the share buyback and are not transactions made by me personally.

The company declared the regular quarterly dividend of $0.15 per share, representing an increase of our dividend of 20%. Our new dividend yield based on our current stock price would be 4.7% on an annual basis.

Slide 7 shows our investment performance. We continue to be encouraged by our one year performance with 79% of the Calamos funds bidding the performance average of the respective Morningstar categories as of June 30, 2014 compared with 15% a year ago.

Our three year investment performance remains challenged however poor results from the fourth quarter of [20] (ph) will roll off later this year.

I would now like to turn it over to Nimish 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 second quarter non-GAAP earnings per share was $0.22 compared with $0.20 in the first quarter and $0.22 in the prior year. The increase in non-GAAP earnings per share is attributable to the decrease in operating expenses.

GAAP earnings per share was $0.17 for the quarter compared with $0.11 in the first quarter, and $0.09 from the same period in the prior year. The change from last year was mainly a result of an increase in deferred tax valuation allowance totaling 900,000 or $0.04 per share and an other than temporary impairment charge of $4.4 million or $0.03 per share during the second 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 AUM. Our AUM decreased slightly during the second quarter with net outflows of $337 million from our funds and $735 million from our institution and managed accounts, which were partially offset by $680 million in appreciation.

AUM was relatively flat compared to the second quarter of last year. Net outflows for the quarter were primarily from our growth strategies. As John mentioned earlier, we did have inflows of $255 million in our alternative strategies and $15 million to our convertible strategies as well as $41 million to our emerging market products for the quarter.

Slide 11 provides a graphical presentation of our revenues and operating income. The revenues for the second quarter were $63million compared with $66.7 million from the same quarter in 2013.

Management fee revenues were $49.7 million for the second quarter. The decrease in management fee revenues was principally driven by declines in average AUM.

For the second quarter operating income of $16.6 million was down 10% from the same period in the prior year mainly due to lower revenues and slightly lower expenses. Operating margin of 26.4% also decreased compared to the same period last year for the same reasons.

On Slide 12 we show operating expenses presented by expense type. Compensation expense for the second quarter was $19.7 million compared with $21.4 million for the same quarter in 2013, and $24 million last quarter.

Compensation expense was lower than the first quarter due to seasonal payroll taxes which are normally higher than the first quarter of the fiscal year due to short term incentive compensation payments as well as lower compensation recorded in current quarter as a result of overall lower management fee revenues.

The change in second quarter 2014 compared to second quarter 2013 was due to lower incentive compensation expense partially offset by the costs associated with the resource additions we have made in the investment team.

Distribution expenses were lower compared with previous periods presented mainly due to lower open-end assets. Marketing and sales promotion expenses were higher than previous periods presented mainly due to increased seminar and broker sales expenses. G&A expenses were flat compared to the previous periods.

Slide 13 summarizes the company's non-operating activities. We recorded investment income of $10.3 million compared with $1.5 million for the first quarter, and $2 million from the same quarter last year. As previously mentioned, we had smaller investment gains and other than temporary impairment charge in the second quarter of 2013 that reduced non-operating income.

On Slide 14 you will see our liquid investments consist of cash and investments totaling $492 million compared with $92 million of outstanding debt as of June 30, 2014. On July 15, 2014 $46.2 million of this debt was repaid as scheduled which brings our debt to $45.8 million.

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 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 represent the 57% payout ratio on our non-GAAP earnings and a dividend yield of 3.7%.

On a go-forward basis using quarterly dividend payment of $0.15 per share of our non-GAAP payout ratio and dividend yield would be 69% and 4.7% respectively using the 12 months earnings and our current stock price.

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 remains our highest priority of the firm. We remain focused in investing back into our business, while also increasing our product breadth to better serve our clients.

Management is committed to maintaining a strong balance sheet to support the product expansion and future growth and creating long term shareholder value. In the second quarter, Calamos Investments repurchased 743,055 shares of Class A common stock totaling $9.4 million completing the share repurchase program.

We also increased the regularly quarterly dividend by 20% to $0.15 per share. Our competitive dividend yield in the recent share repurchase program are examples of initiatives we have undertaken to enhance shareholder value.

Our current outlook remains positive, we expect 2014 GDP growth to be increasing here. We think we're in the middle inning of our recovery and we think to case for equities and even growth equities remain strong in here.

Obviously with markets bouncing all up new highs, there'll be volatility in here. But looking little bit further out, we feel the bull market has more room to run and we're still cautiously optimistic going forward.

Convertibles in their hybrid characteristics are an interesting area for the current market environment as people want to preserve capital but still have equity participation. And convertibles have had a history of performing well even when interest rates rise.

In the buy market we're still a bit negative. We think rates could go up and when they do it, it won't be as – it'll be a bit of a surprise.

So with that, we'd like to lead you to our outlook which is in our website navigating complacency in our growth regime, so you can look at that in the markets insight tab.

I would now like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question today comes from John Dunn with Sidoti & Company.

John Dunn - Sidoti & Company

Good afternoon, guys.

John Calamos

Good afternoon.

John Dunn - Sidoti & Company

Hi. Maybe, could you talk about the process of navigating through getting an actively managed ETF launched? How did you find the process and maybe, is it, what's outlook for more of that type of products from you guys?

John Calamos

Well, I think one of the first, if not the first actively managed ETF, so the process is quite complex. It took a lot of effort to get it done. So we were very encouraged by our team here at Calamos, they've worked hard to get it done.

So, it's any of these products there is a lot of legal requirements that we had to go through and we had to abide by. So we're pleased that we got it launched as quickly as we did quite frankly. So, we're pleased with the timing of that.

John Dunn - Sidoti & Company

And then, moving on to expenses, sort of the level of marketing spend now that we're at. Was that more one time or is that what you expected to stay at that level? And then maybe some color on other expense run rates for the back half of the year?

Nimish Bhatt

Sure. The marketing expenses we expect those to remain at the same levels going forward. And as you can see that G&A expenses being flat quarter-over-quarter. I think I mentioned about the compensation expense being lower for this – sorry, being lower for this quarter essentially for two reasons.

One, as compared to prior quarter and the first quarter we have the seasonality of the payroll taxes as it relates to the incentive compensation. And secondly it was lower because of an accrual adjustment to our incentive compensation keeping inline with management fee revenues.

And we expect our compensation expenses to track somewhere in between the first quarter and the second quarter.

John Dunn - Sidoti & Company

Got you. And then last one. Have you guys talked about sort of like a target of where you'd like your operating margin to get to?

Nimish Bhatt

No.

John Calamos

I'd just add, what we've done in the past couple of years is really invested in the future here by broadening our product base. So, our margins have come down but we feel the investment in the future will be very beneficial going forward.

So, obviously, if we can get the floors back and obviously we're really focused on performance, that would have a positive impact on our margins as it has done in the past.

John Dunn - Sidoti & Company

Great. Thank you very much.

Operator

And next we'll move to Adam Beatty with Bank of America-Merrill Lynch.

Adam Beatty - Bank of America-Merrill Lynch

Thank you and good afternoon. First question I guess or maybe a couple on the institutional side, it looks like you net flows tick down a little bit quarter-over-quarter. So, just I want to get your insights on first of all may be the cause of that. If there were any lumpy redemptions or what have you during 2Q.

And then also maybe more importantly the outlook on that, how the pipeline works right now? And which products clients are most interested in?

Nimish Bhatt

Yeah. I can talk about the lumpiness. You're absolutely right. On the institutional side, we did have one large redemption there which caused our redemption for the second quarter on managed accounts to jump up.

But as you know it's going to be choppy and I'll let John answer the other question.

John Calamos

Yeah I think we're - we feel we do have a good opportunity in the institutional area. We have restructured our products. Part of the negative outflows was really the structure in our products a little bit different.

So, I think right now we're in a very good position going forward. So, hopefully we can see some positive aspects of our institutional business going forward. We are working hard on that.

Adam Beatty - Bank of America-Merrill Lynch

Thank you. Was the product restructuring as a result of some client feedback or client comments? Or was it more internally developed?

John Calamos

It as a bit internally developed. But, we've kind of fix that going forward here.

Adam Beatty - Bank of America-Merrill Lynch

Got it. Thank you. Just one last one. Thanks for taking my questions. On the ETF side. Number one investment process, how does the actively managed ETF fold-in with your sort of traditional actively managed products?

And also on the marketing side, are there – is there a different marketing approach or infrastructure that you're going to use with the ETF or does it otherwise fold-in with the rest of your products? Thank you.

John Calamos

It folds-in very well with the rest of our products. It's growth, - it's focus growth, so we do have growth strategy so folds very well within that.

And I think our present marketing effort and our sales effort will be – this will be just an added product that our team can be talking about.

So, I don't see a very specific additional marketing to that other than obviously letting people know that we have that out there.

Adam Beatty - Bank of America-Merrill Lynch

Great. Thanks very much. That's all I had today.

John Calamos

Thank you, Adam.

Nimish Bhatt

Thanks.

Operator

Next from KBW, we'll hear from Robert Lee.

Andrew Donnantuono - KBW Equity Research

Hi guys, this is actually Andrew Donnantuono filling in for Rob. Thanks for taking our questions.

The first question we had was on capital management. I guess firstly, given that you finished your existing share repurchase authorization, would you expect kind of a similarly sized, authorization going forward? Or maybe the – perhaps the increased dividend that you announced kind of indicates that dividends going forward will be your preferred method of capital return. Would you be able to just kind of comment on some of those topics?

John Calamos

Well Andrew on both those issues whether it's a dividend or a buyback in managing our dilution, those are ongoing discussions that we have at the Board level.

We have not made any decision at this point on either going forward on those. Obviously we're very focused on making sure we increase shareholder value but we have not made any determination right now moving forward.

Andrew Donnantuono - KBW Equity Research

Okay. All right, that's fine. Thank you. And then just kind of shifting gears a little bit. Wanted to ask you about the key employee and director ownership program that that you announced. I think it was last December whereby employees and directors would be able to buy ownership in Calamos Family Partners.

So, just wondering if you kind of had any updates there whether this opportunity had been exercised by any of your employees up today?

John Calamos

Andrew, we continue to work on that. Obviously we have a very active long term incentive program in place right now. But on the Calamos Partners, that's still a work in progress. We haven't announced anything formally but we continue to work on that.

Andrew Donnantuono - KBW Equity Research

Okay. All right, thank you for taking our questions.

John Calamos

Thank you, Andrew.

Operator

And next we'll hear from Craig Siegenthaler with Credit Suisse.

Ryan Sullivan - Credit Suisse

Hi, good afternoon everybody this is actually Ryan Sullivan filling in for Craig Siegenthaler. I was just wondering if you could give us a quick update on the focus growth ETF efforts, after it's first two weeks in the market flows and/or interest we're seeing from anybody? Thank you.

John Calamos

I am sorry Ryan, we don't have much information at this point. It's really, it's so just, - we just launched it, just been a few days. So, I don't have any of that information and Nimish I don't know if you have.

Nimish Bhatt

Yeah, it's just a seed investment that has been gone into that fund so far.

John Calamos

Yeah. We've seeded it to get it going in off the ground here.

Ryan Sullivan - Credit Suisse

Great. Thank you.

John Calamos

Thank you.

Operator

And gentlemen we have no further questions. I'll turn it back to you for any additional or closing remarks.

John Calamos

Hey, well, I want to thank you all for participating in our call this afternoon. Thank you very much. And we look forward to talking to you next quarter. Thank you.

Operator

Once again, this does conclude today's presentation. We thank you for joining us.

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