Calamos Asset Management, Inc. (NASDAQ:CLMS)
Q4 2015 Earnings Conference Call
February 09, 2016 04:30 PM ET
John Calamos - Chairman and CEO
Bob Bahen - President and Head of Global Distribution
Nimish Bhatt - SVP, CFO, Head of Fund Administration
Adam Beatty - Bank of America Merrill Lynch
Good day and welcome to the Calamos Asset Management Fourth Quarter and Year End 2015 Earnings Call. Today’s conference is being recorded. Please now listen to the following disclosure.
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.
Good afternoon and thank you for joining us on the Calamos Asset Management fourth quarter 2015 earnings call. Joining me today on the call is Bob Behan, President and Head of Global Distribution; Nimish Bhatt, our Chief Financial Officer. Also with us is Christian Helmetag, our Corporate Controller.
I will start the presentation with an overview of our financial results for the fourth quarter followed by a business update. Bob will discuss our asset flows and Nimish will provide details with respect to our financial results for the fourth quarter and full year. I will then conclude the formal presentation and we’ll open the call to questions.
Starting on slide four of the presentation, you’ll see the summary of our fourth quarter financial results. Assets under management for the quarter were $21.9 billion. We also had assets under advisement of $609 million as of December 31, 2015 that are not included in our assets under management. The decline in AUM for the period is in part attributable to the macro events we saw in the financial markets for the U.S. and non-U.S. investors. Volatility increase while equities declined resulting in a challenging environment for investment performance and mutual fund flows.
Our non-GAAP diluted earnings per share was $0.18 for the fourth quarter of 2015 consistent with $0.18 last quarter and $0.19 a year ago. Revenues for the fourth quarter of 2015 were $55.5 million compared with $57.6 million last quarter and $60.5 million in the fourth quarter of last year.
Finally, operating margin was 16.4% in the fourth quarter compared with 15% last quarter and 24.2% in the fourth quarter of 2014. Nimish will go into further details on the GAAP and non-GAAP for the full year of financial results for the company later in the presentation.
On slide five, I’d like to provide a brief overview for those who may be new to our firm. Calamos Asset Management Inc. represents a publishers outstanding owns 22.2% of the operating company Calamos Investments LLC and the remaining 77.8% is privately-owned by Calamos Family Partners Inc. It is important to note that our public market capitalization only reflects the 22.2% owned by Calamos Asset Management and not the entire market capitalization of Calamos investment LLC. Calamos Investments is a diversified global investment manager committed to excel in investment performance and client service.
Our experienced investment teams are specialized by investment discipline offering U.S. equity, global equity, convertible, multi-asset and alternative strategies. The firm is based in Chicago metropolitan area with offices in New York, London and our newest office in San Francisco. Company was founded in 1977 and has been serving institutional and individual investors for more than 35 years. We’ve been a pioneer in utilizing convertible securities to manage risk since the 1970s and we launched one of the first convertible mutual funds in 1985. The firm launched the UCITS platform in 2007 for non-U.S. investors. Finally we employ 348 people, including 67 investment professionals.
Turning to slide six, our assets under management are represented by both strategy and product type. By strategy on the left U.S. equity represents 33%, multi-strategy or closed-end funds is 29% followed by alternatives at 17% and global equity with 11% of our AUM. By product category 56% of our AUM mix is in open-end funds followed by 29% in our closed-end funds, 10% in institutional portfolios and 5% in separately managed accounts.
Slide seven, I will cover the business overview for the quarter and the full year of 2015. In regard to our investment performance across our key strategy we are encouraged by the continued improvement in investment performance. We believe the evolution of our investment team, the over side of the investment committee and the additional resources we have made over the past few years has directly contributed to this overall improvement.
With respect to our investment offerings we continue build out our product route to meet the evolving investment needs of our clients. In March, we launched the Calamos Dynamic Convertible and Income Fund. This was the first convertible closed-end fund in the industry since 2007 and was also the industry’s first closed-end fund launch of 2015. Also during 2015 the Calamos International Growth Fund marked its 10 year anniversary and the fund’s 10 year annualized return break number one in its peer group in the Morning Star for enlarged growth category at the time of that anniversary.
For the full year we saw positive flows in our separate accounts with fund net out flows slowly in stabilizing. We are pleased with the evolution of our investment team in 2015, which included naming of the four Co-Chief Investment Officer, who along with myself, maintain a continued emphasis on the team of team structure and investment process.
Slide eight continues the business overview. On September 30, 2015 we completed the acquisition of Phineus Partners LP a global long short manager based in San Francisco. The acquisition enhances Calamos product offerings in a role as an innovator in the liquid alternative space.
We continue to look at the alternative space a growth opportunity for the company. During the quarter we repurchased 353,637 shares of Class A common stock for a total cost of $3.3 million. As I mentioned on previous earnings call within our disclosure because of our ownership structure the related four forms are filed under my name. However these share transactions are being made by Calamos investments as part of the share buyback and not being made by me personally.
Finally the company declared a regular quarterly dividend of $0.15 per share. Our new dividend yield based upon our current stock price would be 6.3% on an annual basis. Later in this call Nimish will provide greater detail on the financial results for the quarter and full year.
I now like to turn it over to Bob who will discuss our distribution inflow. Bob?
Thank you, John. As John mentioned, net outflows were $1 billion for the fourth quarter essentially flat compared with last year. For 2015, net outflows were $1 billion compared with $3.5 billion last year or in 2014. But we saw outflows for both the quarter and the full year remain in line with industry trends which have been challenging to active managers.
Funded outflows for the fourth quarter were $683 million compared with $757 million last year. Separate account net outflows were $317 million for the fourth quarter compared with net outflows of $296 million last year. For the fourth quarter we saw positive flows in our separate accounts of $852 million compared with outflows of $1.8 billion last year.
On slide 11, we present the annual asset flow trend since 2011. As you can see from the slide, total net outflows have slowed and stabilized. We were seeing positive trends when compared over the last five year period with $1 billion of total net outflows in 2015 compared with $3.5 billion last year. We’ve experienced positive flows in our separate accounts and fund outflows are slowing, which is a tremendous trend.
Now I’ll turn the call over to Nimish to discuss the financial results. Nimish?
Thank you, Bob. On slide 13, we present both GAAP and non-GAAP results for the fourth quarter, which provide additional transparency in evaluating the core operations of our asset management business.
Fourth quarter non-GAAP earnings per share was $0.18 compared with $0.19 from the same period in the prior year. The decrease in non-GAAP earnings per share is primarily attributable to the decrease in operating income, which is mainly driven by lower assets under management. GAAP earnings per share was $0.05 for the quarter compared with $0.25 from the same period in the prior year.
In addition to the decrease in operating income, which effects both GAAP and non-GAAP earnings, GAAP earnings decreased $0.08 per share as a result of lower non-operating income, which includes $7.6 million or $0.05 of other than temporary charges on available for sale investment securities for the quarter. GAAP earnings per share was also impacted by a change in the company’s deferred tax valuation allowance attributable to its capital loss carry forwards in the fourth quarter of last year, which resulted in higher earnings in 2014.
Slide 14 covers the full year earnings per share results. Full year non-GAAP earnings per share was $0.74 for 2015 compared with $0.84 for 2014. GAAP earnings per share was $0.18 for the full year 2015 compared with $0.71 for the full year of 2014. The decreases in both non-GAAP and GAAP earnings are primarily a result of the items I just discussed on the previous slide.
In addition GAAP earnings includes an increase in operating expenses of $0.08 related to the closed-end fund launch in early 2015. Finally, non-GAAP and GAAP earnings per share were impacted by fewer average shares outstanding as a result of company’s share repurchase plan for both the fourth quarter and the full year of 2015. A reconciliation between GAAP and non-GAAP earnings per share is included in the appendix of this presentation.
Slide 15 provides a graphical representation of our revenues and management fees. Total revenues for the fourth quarter were $55.5 million compared with $60.5 million for the same quarter in 2014. Management fee revenues were $45.2 million for the fourth quarter 2015. Total revenues for the year were $230.9 million compared with $251 million in 2014. Management fee revenues were $186.8 million for the year.
The decrease in management fee revenues for both the quarter and the year was principally driven by declines in average assets under management. Investment management fees that we earned as a percentage of assets under management were 78 basis points, slightly higher than last year primarily as a result of an increase in the average closed-end fund assets.
Slide 16 provides a graphical presentation of our operating income and margin. For the fourth quarter operating income of $9.1 million was down 38% from the same period in the prior year, mainly due to lower revenues and an increase in operating expenses. Operating margin of 16.4% also decreased due to the combination of lower revenues and higher compensation expenses offset by decrease in distribution expense recorded in the period.
For the year, non-GAAP operating income was $41.9 million and non-GAAP operating margin of 18.1% decreased from 2014 mainly due to lower revenues and an increase in operating expenses. GAAP operating income of $30.3 million and operating margin of 13.1% was primarily due to lower revenues and an increase in operating expenses, which includes a $10 million charge of structuring fees related to closed-end fund launch in early 2015. While we continue to monitor our expenses closely, we expect to see continued pressure on our operating margin until we return to positive net flows.
On slide 17, we show operating expenses by type. Compensation expense for the fourth quarter was $22.7 million compared with $20.6 million for the same quarter in 2014. For the year, compensation was $93.3 million the increase in compensation expense in 2015 is primarily due to the closed-end fund sales incentive payouts earlier in the year and the impact of transition costs related to the departure of certain personnel.
Distribution expenses were lower compared to the previous periods presented mainly due to lower open-end fund assets. Marketing and sales promotion expenses increased in the fourth quarter, primarily due to non-reimbursed fund expenses and product promotions. As mentioned earlier the increase for the year was primarily due to the $10 million of structuring fees related to the launch of the new closed-end fund in early 2015.
G&A expenses were lower in the fourth quarter compared with the prior year quarter, but increased slightly for the full year 2015. Primary drivers for the increase in G&A expenses in 2015 includes fees for legal and other professional services.
Slide 18 summarizes the company’s non-operating activities. Our interest expense decreased in 2014 after the repayment of a portion of our long-term debt in July. Interest expense is expected to remain at the current rate until the next partial repayment scheduled in 2017. We recorded non-GAAP non-operating loss of $3.6 million for the fourth quarter and $8.6 million for the full year compared with the income of $1.3 million for the same quarter last year and $12.5 million for the full year in 2014. The loss includes $7.6 million in the fourth quarter and $12.9 million in 2015 of other than temporary impairment charges for certain available for sale investment securities that offset realized gains that occurred during the respective periods.
On slide 19, you will see our liquid investments consist of cash and investments totaling $395 million compared with $46 million of outstanding debt as of December 31, 2015. Our investment portfolio consists of seed capital in many of our products across many different strategies, which provide a diversified portfolio for the company. The decrease in the company’s investment securities since last year is attributable to the sales that occurred in the corporate investment portfolio.
The change in cash and investment securities from the end of 2014 is mainly due to equity and tax distributions as well as the purchases under the share buyback program. These balances represent the consolidated strength of our organization. We feel these levels of liquid is 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 and invest in other corporate strategic initiatives.
Slide 20 shows our dividends payout ratio and yield for the last three years and 12 months ending December 31, 2015. The $0.60 per share we have paid during the last 12 months represent an 81% payout ratio on our non-GAAP earnings and a dividend yield of 6.2%. The company’s dividend policy is an important component to the overall objective of creating long-term shareholder value.
Now, I’d like to turn it over to John for his concluding remarks. John?
Thank you, Nimish. The changes we have made this year reflect another step in our strategic plan to enhance our investment capabilities. Our investment professionals are organized as teams within teams, allowing us to capitalize on the diverse opportunities of the global economy in an environment of close collaboration. We believe our collegial environment enhances our ability to serve our clients and strengthen our investment organization as a whole.
Our main priorities focused on continue improvement in the investment performance and we are encouraged by the improvement we are seeing across a number of our key strategies. We believe the evolution of our investment team in the addition of resources we have made over the past three years had directly contributed to this overall improvement and the firm is well positioned for the future.
The regular quarterly dividend of $0.15 per share provides a competitive dividend yield. This and the ongoing share repurchase program are examples of the initiatives we have undertaken to enhance shareholder value. Our assets under management as of January 31, 2016 were $20.6 billion and assets under advisement were an additional $555 million. We continue to see the challenges in the financial markets for the U.S. and non-U.S. investors.
Just a quick overview of the markets in here. Our view is that what we’ve seen one of the worst starts in a year here is more of a correction not a bear market, the debate between deflationary scenario and inflation continues to confuse the market and cause increase in volatility. It seems unlikely that the federal be raising rates very soon here. We’ll know probably for sure tomorrow. But economic factors still are looked to be a more of a slow growth for the U.S. and the global economy rather than a risk of recession.
So we remain cautious, but it definitely will be a very selective market going forward. We see opportunities in lower -- the low volatility strategies, the convertible strategies, the convertible structure as you know allows for upside equity capture in down side protection. Also the alternative area are market neutral income fund in long short equity and hedge equity are areas that we think in this current environment will be attractive.
High yield, although we expect defaults to increase the widening spreads have already more than priced in these headwinds. So we’ve seen a level of opportunity there that we haven’t seen in many years. And again the closed-end funds with this volatile market environment the discounts make these areas of investment very, very attractive in our opinion.
So with that I’d like to now open the call up to questions.
[Operator Instructions] We’ll take our first question from Adam Beatty of Bank of America. Your line is open.
Thank you and good afternoon. Appreciate the comments from John toward the end there about the markets and how your products play into that. I wanted to dig into the institutional flows a little bit, particularly the large redemption and whether the cause of that was something around performance I know your global strategies typically do fairly well or maybe a client reallocation or what have you? And then maybe the outlook on the institutional pipeline and whether you are seeing the opportunities for new business or maybe additional redemption? Thank you.
Yeah I think we are seeing opportunities for new business our pipeline has become a bit positive. I think it’s some of the outflows on the institutional side. Quite frankly it wasn’t due to performance and it’s a little upsetting from our point of view that people would reallocate it at this point. But we have no control over that.
That’s good, thank you. And then wanted to dig into the comp a little bit, the comp came up a little bit in the fourth quarter and just to understand how much of that was maybe in annual true up I know your flows have gotten better maybe there is some incentives in there? And then what the outlook is for maybe some seasonal expenses in 1Q? Thanks.
Sure. So the comp if you look at just compared to the prior quarter to current quarter, it was lower than the third quarter. And mainly because some of the severance expenses were accrued in the third quarter. In total, it came up year-over-year $93 million versus the $86 million or so. And that was again mainly $6 million of that was as a result of increased sales incentive with the closed-end fund that I mentioned earlier as well as the miscellaneous earnings of severance related with some of the employees have departed during the year. Most of that occurred in first and third quarter. So as you go forward into 2016 we expect it to be at to be at the fourth quarter level.
Having said that in March as you know that there is some seasonality of the payroll taxes because all the incentive compensation gets paid out in the first quarter. So you’ll see some uptake there, but otherwise it should track fourth quarter in ‘16.
Thank you, Nimish. Appreciate that color. And then just one last one, thanks for taking all my questions. Maybe John from you an update on the Phineus acquisition, how you are integrating that? And when we might see some products and flow opportunity there? Thank you.
Yeah we are -- Bob you want to go into that?
Yeah, sure. So thanks Adams. So we are -- we have an application filed for a fund on filed with the SEC and you can have a look at that if you like so we anticipate something happening with that in the next few months and we’ll be able to market that product when it’s ready. We completed all the accounting and necessary due diligence on bringing those numbers of employing the track record. So pretty soon here I would say we’ll start to really glide to market that product. And I would say it will be a few quarters until we ramp up we’ve seen some pretty good interest in folks we’ve previewed with and of course the markets are extremely volatile and folks are looking for solutions that potentially can take advantage on both sides of the trade.
Got it, appreciate that Bob. Thanks, again all.
And there are no further questions at this time. I’d be happy to return the call back to Mr. Calamos for any concluding comments.
Well we appreciate you’re taking the time this afternoon to be with us and if you do have any questions please feel free to contact us we’ll be glad to discuss with you. Thank you so much for being on the call.
This does conclude today’s conference. You may disconnect your lines. And everyone have a great day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!