Manning & Napier, Inc. (NYSE:MN) Q1 2018 Results Earnings Conference Call May 2, 2018 5:00 PM ET
Nicole Brunner - Director, Marketing Strategy
Jeffrey Coons - Co-CEO and President
Paul Battaglia - CFO
Good evening. My name is Cilicia and I will be your conference operator today. At this time, I would like to welcome everyone to the Manning & Napier First Quarter 2018 Earnings Conference Call.
Our host for today's call are Nicole Kingsley Brunner, Director of Marketing Strategy; Jeff Coons, Co-Chief Executive Officer; and Paul Battaglia, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 8:00 P.M. Eastern Standard Time. The dial-in number is 404-537-3406 and enter pin number 5887868. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]
It is now my pleasure to turn the floor over to Ms. Nicole Kingsley Brunner.
Thank you, Cilicia and thank you everyone for joining us today to discuss Manning & Napier's first quarter 2018 results. Before we begin, I would like to remind everyone that certain statements made during this call not based on historical facts, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Manning & Napier assumes no obligation or responsibility to update any forward-looking statements.
During this call, some comments may include reference to non-GAAP financial measures. Full GAAP reconciliations can be found in our earnings release and related SEC filings.
With that, allow me to introduce our Co-CEO and President, Jeff Coons. Jeff?
Thank you, Nicole. Good afternoon and thank you for joining us today. Before reviewing our results for the quarter, I want to provide some context on what we are seeing in the markets and in the industry.
After several years of strong market performance, made historically low volatility levels, there was a meaningful pickup in volatility during the first quarter. We believe this was a healthy reminder for investors that markets do not go up in a straight line.
While we welcome the return of volatility, as it reinforces the importance of active risk management, these improved market conditions for active managers have not yet impacted business conditions, given that net flow remains challenged and trends towards passive investing continues.
We are pleased with the positive absolute and relative performance experience during the first quarter for our key products and distribution priorities. Our risk-based Life Cycle funds, Pro-Blend Maximum Extended and Moderate, each ranked in the top quintile of their respective Morningstar categories for the quarter.
Similarly, our Disciplined Value Fund ranked in the top quintile of its respective category for the quarter, outperforming its benchmark by 130 basis points. Our Rainier International Discovery Fund was in the top third of its category, outperforming its benchmark by over 320 basis points.
And in fixed income, our high-yield bond fund is off to a strong start, outperforming its benchmark by 44 basis points. Like Disciplined Value and Rainier International Discovery, the high-yield fund continues to exhibit strong ranks relative to peers over trailing time periods.
Turning now to some new initiatives. In the first quarter, we established a relationship with Fi360, the nation's leading provider of fiduciary related education and tools. We are integrating Fi360's fiduciary scoring tool directly into our process for two of our ETF allocation strategies, available as separately managed accounts and Target Date Collective Investment Trust.
These offerings combined active asset allocation with the low cost benefits of ETF, while simultaneously helping advisors streamline the execution of their fiduciary responsibilities.
We believe these solutions are compelling at a time of increasing complexity in the ETF landscape. Our consultative services across our custom solutions, endowments foundations, and family wealth management offerings also had a positive impact during the quarter.
Reinforced by our digital marketing strategy, these remain a major point of emphasis as a means of retaining and enhancing the existing client relationships as well as developing new business opportunities.
For example, with our recently launched Prosper magazine, more than 35% of those who've downloaded the publication were identified by marketing as new business opportunities. This type of content marketing is designed to educate high net worth individuals on relevant topics and mirrors the consultative nature of the firm and the service.
This strategy has not only generated new investment advisory prospects, but it has also secured further interest in our family wealth management offering from both current clients and potential prospects.
As another example, during the first quarter, we launched our Taft-Hartley Focused Publication Foundations, a semiannual magazine geared to our union clients and their members, containing articles on investment and financial planning topics. Our Taft-Hartley relationships date back over 47 years and this publication is yet another example of our dedication to this market.
To that end, during the quarter, we saw increased interest by the Taft-Hartley market for some of our non-traditional offerings, such as our lower cost Disciplined Value strategy, which has provided competitive market returns with downside risk management as well as our Rainier International small cap product, which we find to be one of the most undiscovered and under invested asset classes available in the market today.
Turning briefly to governance, Bill Manning stepped down from his role as CEO in March, but has retained his role as Chairman of the Board. We thank, Bill for his contributions as CEO and look forward to his continued guidance as our Chairman.
While the Board conducts a review for a permanent CEO, we have formed an interim office of the CEO with long standing senior executives, including Executive Vice President, Chuck Stamey; Board member, Richard Goldberg; and me.
Additionally, in late March, the company promoted Paul Battaglia to the role of Chief Financial Officer. Beyond our Executive officers, we have a deep talented management team and an emerging group of next generation leaders to help implement Manning & Napier strategy moving forward.
The challenges that we have faced as a business are evident in our recent AUM trends and P&L results. We have already taken steps to address these trends and believe our business plan and expectations for 2018 should reinforce our commitment to this effort.
In light of this, the office of the CEO is working with senior leaders throughout the firm in a comprehensive review of our existing investment products, distribution strategies, service offerings, and supporting resources.
Our goal is for the business to operate efficiently, while capitalizing on the growth opportunities available to us. And we believe that a holistic review of our business will drive these initiatives and enhance value for our clients, shareholders, and our employees.
To provide more details, I'll now turn the call over to our Chief Financial Officer, Paul Battaglia. Paul?
Thanks Jeff. Good afternoon and thank you for joining us today. Before reviewing our first quarter results, I'd like to provide additional color regarding our business plan and the work ahead of us in 2018.
As Jeff mentioned, we are underway with a comprehensive review of our business, with our immediate priorities being; first, to maintain focus on the strong execution of our investment process and high level client service; second, to concentrate our distribution resources on our most impactful products and services; and third, to review our supporting resources and infrastructure to ensure that they're operating efficiently and positioned to support future growth.
Successfully executing our strategy has required investment in our platforms and our workforce. Whether that's through compensation or through other investments, so that we have the necessary tools and expertise to service our clients.
As an example, we have continued to invest in our traditional distribution strategies, such as direct sales, where we maintain deep relationships with clients by providing customized, consultative solutions.
At the same time, we've made considerable investments in new distribution strategies, including our robust CRM system, our digital marketing strategy and other distribution relationships, including Fi360, as Jeff mentioned earlier.
As we have said before, the way we stay connected to our clients is changing, as is the way we are opening new doors with prospects. We are committed to investing in both the people and the technology required to provide best-in-class service to our existing clients and to gather new assets.
However, our review of the business must also include an assessment of distribution strategies that may no longer be effective and product offerings that are no longer competitive.
We are currently evaluating whether additional investment is warranted to enhance distribution strategies and products that are operating effectively and whether we should exit certain strategies and incur the cost necessary to do so. Finally, our review includes a continued assessment of our corporate structure in light of the recent changes from the Tax Cuts and Jobs Act and our dividend policy.
As Jeff mentioned, our review will be comprehensive and will be informed by inputs from key resources throughout the firm, so that we can ensure that our updated business plan is concentrated on the strategies and initiatives that will be most impactful to our business. We'll provide updates as they become available.
Now, turning to our first quarter results and beginning with assets under management, AUM decreased from $25.1 billion as of December 31st to $23.4 billion as of March 31st. The decrease in AUM was the result of $1.5 billion in net client outflows and $250 million of mutual fund asset disposed via transaction during the quarter.
While client flows remain challenged in many of our traditional investment strategies, we reported gross client inflows of approximately $900 million in the quarter and continue to see good traction in several other strategies that we have recently prioritized.
Most notably in the first quarter, we had approximately $60 million in net inflows into the Rainier International Discovery series and continue to see strong interest in the field for this in strategies like Disciplined Value, our ETF allocation strategies, and high yield bond.
Looking at outflows, the most notable redemption during the quarter was from GAM, where we were a subadvisor on $300 million in our Global Quality strategy. Our annualized separate account retention rate for the first quarter was 80%.
Moving to our first quarter financial results, we reported revenue of $42.2 million for the quarter, down 8% from revenue of $45.7 million reported last quarter with overall revenue margins of 70 basis points, in line with last quarter.
Operating expenses were $35 million in the quarter, a decrease of $2.3 million compared to the previous quarter and a $3.8 million decrease compared to the first quarter of 2017. Compensation and related costs were in line with the previous quarter, however, as a percentage of revenue increased to 56% for the quarter, given the decrease in revenue.
Distribution, servicing, and custody expenses decreased by 25% during the quarter, in line with changes in assets and revenues and represent approximately 24 basis points of average mutual fund and collective trust assets.
Other operating expenses were $6.5 million in the quarter, a $700,000 reduction from the fourth quarter. Included in other operating expenses is an expense reduction of approximately $2.1 million, resulting from the proceeds recognized on the sale of the Rainier U.S. mutual funds completed in January.
Pretax income for the quarter was $7.8 million and economic net income for the quarter was $5.6 million or $0.07 per adjusted share.
Turning to equity ownership, the adjusted share count decreased slightly from $79 million adjusted shares outstanding at the end of 2017 to $78.8 million adjusted shares outstanding as of March 31st, with the changes resulting from the annual exchange process that was completed in the first quarter. As part of that process, legacy shareholders exchanged approximately 580,000 Class A units of Manning & Napier Group for $1.9 million.
And finally, with respect to the balance sheet, we continue to maintain a debt free capital structure, with cash and cash equivalents of approximately $70 million and another $70 million in short-term investments, which includes $5 million invested in seeded products as of March 31st. And during the quarter, we declared an $0.08 per share dividend to our Class A shareholders.
That concludes our formal remarks, we'll now turn the call back over to the operator and we'll look forward to any questions. Operator?
Thank you. This does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.
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