Calamos Asset Management, Inc. (NASDAQ:CLMS) Q1 2016 Earnings Conference Call April 26, 2016 4:30 PM ET
John Calamos - Chairman and Global Chief Investment Officer
John Koudounis - CEO
Bob Behan - President and Head of Global Distribution
Nimish Bhatt - CFO
Adam Beatty - Bank of America
Good day and welcome to the Calamos Asset Management First Quarter 2016 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 first quarter 2016 earnings call. Joining me on today's call is Bob Behan, President and Head of Global Distribution, Nimish Bhatt, our Chief Financial Officer. Also in the room is Christian Helmetag, our Corporate Controller.
To begin today's earnings call, I'd like to take a few minutes to address the issue of succession prior to introducing John Koudounis, our new CEO, who also will join us on the call. In recent years, I’ve taken a number of steps to plan and organize succession through a systematic broadening and deepening of the investment and executive expertise within the firm.
Starting on slide four, a number of steps have outlined a clear succession strategy for the business. On the investment side, we have been executing our strategic plan over the last three or four years going from a one-team to a multi-team approach. I have thought to significantly expand the investment team to fully realize a team-of-teams structure in which investment teams would specialize expertise, collaborate and share insights in a very collegial environment.
Since founding the firm, I’ve always believed in how important team structure is to an organization’s stability and long term performance. The firm now deploys a multi-team based approach to address the expanding investment demands. From this process of expansion, the investment team leaders emerged, who I appointed as Co-CIOs to oversee specific investment strategies and hold the day-to-day team leadership and senior co-PM’s responsibilities.
I remain actively engaged with the investment team in my role as Global CIO, providing the leadership to the four co-CIOs in cheering our investment committee. I’m confident that our team of teams and the co-CIO structure will foster the consistency and stability that we believe can provide the framework for investment excellence, while avoiding the over-reliance on any single individual.
Expanding our executive team, I’m pleased to welcome John Koudounis as our new CEO. He joined the firm earlier this month. John’s principal duties include overseeing the firm’s day-to-day operations, physical function and overall performance. Further responsibilities include managing operations, leading business and corporate development and directing strategic growth initiatives. As CEO, he leads a strong executive management team with extensive capability and industry experience within the respective fields of expertise.
On slide 5, you’ll John’s bio. He has 28 years of financial services experience, including executive leadership in the global securities business and a deep background in global capital markets. Most recently, he served as President and CEO of Mizuho Securities USA, one of the largest full service financial institutions. Together, we believe the firm’s executive and investment leadership teams provide the depth and experience to support the strategic growth of the firm and the investment teams in their pursuit of outperformance.
John, welcome. Great to have you aboard.
Thank you, John. I’m excited to be part of the team. I’m confident that my 28 years of experience on Wall Street will serve me well as we march forward. And with that said, I’m ready to jump right in.
Starting on slide 7 of the presentation, you will see a summary of first quarter financial results. Assets under management for the quarter were $21 billion compared to $21.9 billion at year end. We also had assets under advisement of $531 million as of March 31, 2016 that are not included in our AUM. The extreme volatility we experienced in the markets during the first quarter of 2016 decreased the company’s average AUM slightly to $20.6 billion.
Including in the decline in AUM were net outflows of $426 million for the period. The decline in AUM impacted the company’s revenues and operating margins. Revenues for the first quarter of 2016 were $48.5 million compared to $55.5 million last quarter and $57.4 million in the first quarter of last year. Our operating margin was 8.8% in the first quarter compared with 16.4% last quarter and 17.5% for the first quarter of 2015.
Non-GAAP diluted earnings per share was $0.09 for the first quarter of 2016 compared with $0.18 last quarter and $0.17 a year ago. Nimish will go into further details of GAAP and non-GAAP financial results.
Turning to slide eight, our assets under management are presented by both strategy and product type. By strategy, on the left, US equity represents 33%, multi-strategy or closed-end funds is 29% followed by alternatives at 17%, global equity at 11% and convertibles at 9% of our AUM. By product category, 56% of our AUM mix is in open-end funds followed by 29% in our closed-end funds, 11% in our institutional portfolios and 5% in separately managed accounts.
Turning to slide nine, I will cover the business overview for the quarter. We continue to build out our product breadth to meet the evolving investment needs of our clients. During the quarter, the Phineus Partners LP hedge fund was converted into a 1940 Act fund, the Calamos Phineus Long/Short Fund. The new fund enhances Calamos’ product offerings, enroll as an innovator in liquid alternatives.
We are encouraged about the growth opportunities of the fund, in part because the fund was able to retain its 14-year track record which has outpaced both the S&P 500 and the MSCI World Index since inception in May of 2002. I would also like to note the quarter also marked the one-year anniversary of the Calamos Hedged Equity Income Fund, which placed in the top quintile of its Morningstar peer category for the one year period ending March 31, 2016 further reflecting the firm's focus on the liquid alternatives space.
During the quarter, we repurchased 520,444 shares of Class A common stock for total cost of $4.7 million. As John has mentioned on our previous earnings calls and within our disclosures, because of our ownership structure, the related Form 4s are filled under John Calamos’ name. However these shares transactions are being made by Calamos Investments as part of the share buyback and not being made by John personally.
Finally, the company declared a regular quarterly dividend of $0.15 per share which reflects a 7.1% annual dividend yield.
At this point, I’d like to turn it over to Bob who will discuss our distribution flows.
Thank you, John. My hearty welcome to Calamos. Slide 11 shows our historical flows. Total net outflows were $426 million for the quarter compared with a positive flow of $556 million last year. Positive flows a year ago were benefited by the launch of the closed-end fund CCD which included $530 million in sales along with positive cash flows and institutional clients within our separate accounts.
Although we saw outflows for the quarter we are encouraged by the trends we're seeing and outflows appear to have stabilized across the open-end funds. Furthermore, we are excited by the growth potential of some of our liquid alternative products including the global launch of our product and hedged equity income product that John has just spoke about. In addition we see a timely opportunity in emerging markets where both strong product, constructive outlook and some competitive disruption is taking place and we think that's a great opportunity for us for the rest of year.
On slide 12, we present an annual asset flow since 2012. Total net outflows have slowed and stabilized. We're seeing positive trends when compared to last five year period. While we are experiencing positive flows in our separate accounts, fund net flows are slowing.
I'll turn the call over to Nimish to talk about our financial results. Nimish?
Thank you, Bob. On slide 14 we present both GAAP and non-GAAP results for the first quarter which provide additional transparency in evaluating the core operations of our asset management business.
First quarter non-GAAP earnings per share was $0.09 compared with $0.17 for the same period in the prior year. The decrease of $0.08 per share is primarily attributable to the decrease in revenues which is mainly driven by lower assets under management and an increase in income tax expenses related to the expired employee stock options.
GAAP loss per share was $0.08 for the quarter compared with earnings of $0.01 from the same period in the prior-year. In addition to the changes already noted, non-operating income decreased $0.09 per share. Included in non-operating income is $0.03 per share of additional losses resulting from the adoption of an accounting standard.
ASU 2015-2 was effective for the company beginning January 1, 2016. This standard requires the company to consolidate certain of its open-end investment funds. The additional $0.03 per share of non-operating loss was a result of reclassification of certain investments which we held previously as available for sale to fair value at the beginning of this quarter.
The decrease in GAAP EPS compared to 2015 was offset by an $0.08 one-time expense that was reflected in last year’s first quarter results for the costs associated with the launch of the closed-end fund.
Finally, non-GAAP and GAAP earnings per share were impacted by fewer average shares outstanding as a result of company’s share repurchase program. A reconciliation between GAAP and non-GAAP measures is included in the appendix of this presentation.
Slide 15 provides a graphical presentation of our revenues and management fees. Total revenues for the first quarter were $48.5 million compared with $57.4 million for the same quarter in 2015. Management fee revenues were $39.5 million for the first quarter 2015. The decrease in management fee revenue was principally driven by declines in average AUM.
Investment management fees that we earned as a percentage of assets under management were 78.2 basis points for the period, consistent with the previous quarter and the last year.
For the first quarter, non-GAAP operating income of $4.3 million and operating margin of 8.8% decreased primarily due to lower revenues compared with non-GAAP operating income of $10 million and non-GAAP operating margin of 17.5% last year.
On slide 16, we show operating expenses by type. Compensation expense for the first quarter was $24.4 million compared with $23.4 million for the same quarter in 2015 and $22.7 million last quarter. Compensation expense was higher than the fourth quarter due to increased seasonal payroll taxes recorded in the period as well as year-end compensation adjustment that lowered the fourth quarter compensation costs. Payroll taxes are normally higher in the first quarter of the fiscal year due to the timing of the short-term incentive compensation payments.
Distribution expenses were lower compared with the previous periods presented mainly due to lower open-end fund assets. Marketing and sales promotion expenses were lower than the first and the fourth quarters of the last year. And finally, G&A expenses were lower compared with the prior periods presented. Primary drivers of the decrease in G&A expenses included lower travel and occupancy related expenses. We continue to look for the areas of the company to reduce overhead costs and operate more efficiently.
Slide 17 summarizes the company’s non-operating activities. Our interest expense has remained unchanged as this reflects the cost of our long-term debt. Non-GAAP non-operating loss was $7.2 million for the first quarter compared with $3.6 million last quarter and income of $2 million for the first quarter of 2015. The loss in the current period also includes the impact of the consolidation of certain open-end funds in the quarter, which totaled approximately $3.3 million.
On slide 18, you will see our liquid investments consists of cash and investments totaling $360 million compared with $46 million of outstanding debt as of March 31, 2016. 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 company’s investment securities since the year-end is attributable to sales that occurred in the corporate investment portfolio.
The change in cash and investment securities from the end of 2015 is mainly due to equity and tax distributions and purchases of our stock under the share buyback program. 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 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 19 shows our dividends, payout ratio and yield for the last three years and trailing 12 months ending March 31, 2016. The $0.60 per share we have paid during the last 12 months represent a 91% payout ratio on our non-GAAP earnings and a dividend yield of 7.1%. 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 Calamos for his concluding remarks. John?
Thank you, Nimish. The changes we have made this quarter reflect another step in our strategic plan to enhance our investment capabilities and strength in our firm. The appointment of John Koudounis as the company’s Chief Executive Officer deepens our executive expertise.
The Calamos Phineus Long/Short Fund with its long-term track record, provides opportunities for growth in a product what we believe reflects the firm’s focus on liquid alternatives. 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.
Before I turn the call over to the operator for questions, I would like to provide some brief comments on the market and our economic outlook. We are in a position that we feel that the US is in a modest growth role, not a recession and we feel there is tailwind to support that US growth, the Fed seems accommodative right now and the growth is not robust, but slow. There are headwinds to a more robust expansion.
I think one of the main headwinds is really a lack of physical policy, obviously volatility is still out there, the election uncertainty and the constraint on growth due to increased regulations has really slowed the economy down. In the global world, Europe is still mixed data but it seems like it's a bit more positive. Obviously, Brexit is a big deal, so we’re watching that very carefully.
We remain a bit more positive on emerging markets here, highly selective but positive of going forward. So our position is cautious but not defensive. We are emphasizing increased quality characteristics, stronger balance sheets, some technology consumer opportunities and looking at companies less subject to the over regulation. We do see opportunities in lower volatility, our strategy especially in this volatile environment that we are plying ourselves in including emerging markets. Convertible strategies, we think alternatives make a lot of sense in here. I think there is probably more risk in the bond market than people realize at this point. So, having alternatives like our market neutral income fund, our hedge equity fund, long/short equity are all ways in which to help quickly manage interest rate risk. Also the closed end funds we think are providing excellent value here. With this comp and the distribution really provides a good opportunity here. So we feel that's an area that some investors should be focused on.
At this point, I'd like to open the call for questions.
[Operator Instructions] We'll take a question from Adam Beatty of Bank of America. Your line is open.
First just a couple of questions on expenses, it looks like you've taken G&A down somewhat. Do you expect that to be something like the run rate going forward and how much leverage is there additionally to the extent that AUM might remain under pressure? And also either for Nimish or maybe Bob on the marketing and promotion, it looks like that have been tightened up somewhat but you are increasing some marketing activity and you have some more products go to market with, do you expect that to increase in the future? Thanks.
Thanks Adam, and this is Nimish, I'll answer both of those questions and Bob you can still chime in here. So with respect to G&A, yes we are watching our expenses closely and we do expect that run rate to be around $9 million a quarter going forward. As it relates to marketing, there will be some lumpiness there because of timing of the due diligence meetings and other things but having said that if you back out the $10 million from the first quarter of 2015 with respect to the launch of the closed end funds, given that last year we were at $26 million, we expect this year, our run rate to be at about for the next three quarters at about $3.5 million each going forward.
And then just on the inflows on the separate accounts side, I was wondering if maybe I could get some color on what products are driving that and given the volatile market where you see the most interest? Thanks.
So, we are - two questions there, we’re seeing a lot of interest in the low volatility strategies especially on the global side as John mentioned, also on the convertible strategies and emerging market strategies. We have a large client based out of Japan that has a big commitment to our growth strategy, so if you think about it from their perspective it's basically long dollars or JPY and long US growth. So that's been a big winner for us recently.
[Operator Instructions] We'll go next to Robert Lee of KBW.
Hi guys, this is actually Andy standing in Robert. I had a quick question just regarding the dividend; the dividend payout ratio is kind of fully climbing up. And do you expect it to kind of remain elevated or would you look to cut the dividend if it’s trying to get a little bit away from where the actual earnings are or just dip into the cash on the balance sheet?
Our dividend policy is to have a stable dividend going forward and we feel with the capital that we have on our balance sheet that we can maintain a stable dividend going forward.
If there are no more questions, I want to thank you all for joining us on the call this afternoon, thank you so much and we'll be talking to you in a few months. Thank you.
This does conclude today's conference. You may now disconnect your lines and everyone have a good day.