Manning & Napier, Inc. (MN) CEO Marc Mayer on Q4 2018 Results - Earnings Call Transcript

Feb. 05, 2019 8:47 PM ETManning & Napier, Inc. (MN)
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Manning & Napier, Inc. (NYSE:MN) Q4 2018 Earnings Conference Call February 5, 2019 5:00 PM ET

Company Participants

Nicole Kingsley Brunner - Chief Marketing Officer

Marc Mayer - Chief Executive Officer

Ebrahim Busheri - Director of Investments

Paul Battaglia - Chief Financial Officer

Conference Call Participants

Will Cuddy - JPMorgan


Good evening. My name is Solicia and I will be your conference operator today. At this time, I would like to welcome everyone to the Manning & Napier Fourth Quarter and Full Year 2018 Earnings Conference Call.

Our hosts for today’s call are Nicole Kingsley Brunner, Chief Marketing Officer; Marc Mayer, Chief Executive Officer, Ebrahim Busheri, Director of Investments; 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 tonight. The dial-in number is 404-537-3406, and enter pin number 5697448.

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.

Nicole Kingsley Brunner

Thank you, Solicia, and thank you, everyone for joining us today to discuss Manning & Napier's fourth 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, please allow me to introduce our Chief Executive Officer, Mr. Marc Mayer. Marc?

Marc Mayer

Thank you, Nicole. Before we begin our formal remarks, I'd like to just take a minute to introduce myself. I'm excited to join you today as Manning & Napier's, Chief Executive Officer.

As you may have read in our news release late last week, I joined the firm on Thursday January 30th. I'm honored to be here with the firm that values integrity, close client relationships and a disciplined investment and research process.

It is our intention to begin this and every earnings call with a brief review of how we performed for our clients. As you can see on the fourth page of the earnings release supplement posted to our website, our performance was quite good last year, but it has been mixed over the last several years, and Ebrahim will discuss our performance in some more detail.

The asset management business is a dynamic one and the pace of change has clearly accelerated. The way forward requires thoughtful evolution. So, I intend to partner with the dedicated employees of Manning & Napier as well as with our Chairman, Bill Manning and the Board of Directors to meet the changing needs of our clients.

While our investment philosophies and processes have been time-tested through many cycles, we are committed to continuous refinement and improvement. It is our highest priority to deliver superior results and service to our clients.

I'll now turn the call over to our Director of Investments, Ebrahim Busheri who will provide a market and performance overview. Ebrahim?

Ebrahim Busheri

Thank you, Marc. On behalf of the investment team and the firm, I would like to extend a warm welcome to Marc. Marc shares our commitment to a client-centric organization that is focused on delivering on client objectives, with superior investment return and exceptional client service and we're all excited to work with them.

2018 was a good year for our clients with most of our strategies outperforming. Volatility is often thought of as a source of concern. We look at it from a different perspective and 2018 gave us an opportunity to show that. I will start-off with a review of the market environment. I will then discuss the performance of some of our key strategies as well as provide our view of today's dynamic investment backdrop.

As compared to the nearly decade-long bull run, 2018 was marked by the return of volatility. Beginning with the sharp but short-lived sell-off of late January and early February and ending with the most significant drawdown since the global financial crisis markets were far more volatile last year than investors had come to expect. Volatile markets often result in falling market correlation and rising valuation dispersion providing a potential opportunity for firms that take an active approach.

Active investment management is ingrained in our DNA. Whether that is through a bottom-up portfolio construction process, through top-down approaches or via our quant-based strategies, we are fully committed to providing an array of flexible actively managed solutions to meet our client needs. During the second half of last year both our top-down and our bottom-up investment process let us to the view that the outlook for both equities and fixed income was deteriorating across global financial markets.

In the fourth quarter this outlook manifested in a more conservative positioning across our portfolios. Our multi-asset class strategies represent about two-thirds of our assets under management and enable us to study the asset allocation as well as the security selection in the equity and fixed income parts of the portfolio. Clients in these strategies outperformed last year.

Our long-term growth strategy composite which has the most assets under management of any of our products outperformed its benchmark by 99 basis points net of fee for 2018. About a quarter of the outperformance was a result of our decision to be underweight equities last year. About 40% of the outperformance was the result of our equities outperforming driven by sector selection and about one-third was the result of our outperformance in fixed income.

Our growth with reduced volatility accounts which also enabled us to take advantage of our asset allocation approach along with equity and fixed income security selection outperformed by 59 basis points for 2018. Today's financial markets are highly dynamic and our active investment process will continue to dictate the appropriate positioning as the investment backdrop evolves.

During the fourth quarter, U.S. and international equity fell by more than 10%. The fourth quarter drawdown also led to a reversal of certain recent stylistic trends. For example, U.S. Value outperformed the U.S. Growth over the period, although the relative gains were not significant enough to offset what had been several years of a growth-led environment. In fixed income, broad global bond indices generated positive performance during the quarter rising 1.3%. However, those gains only partially offset losses experienced over the course of the full year.

In the U.S. specifically, aggregate fixed income did well in the fourth quarter rising 1.6%, but produced essentially zero total returns for the year as income gains were offset by unrealized capital losses due to the rising interest rate environment. Within this environment, I'd like to take a moment to discuss the performance of a number of our strategies for the quarter and the year.

As I mentioned earlier, our balance account outperformed for the year. In addition each of our Pro-Blend, Life Cycle funds ranked in the top third of their respective MorningStar peer ranking categories for both the quarter and the year.

Our strong relative performance in multi-asset class strategies carried over with the strong full year results for both suites of our Target Date funds. All vintages from both suites of Target Date solutions performed in the top quartile of their respective MorningStar peer group ranking.

From a single asset class standpoint, our equity series composite outperformed its Russell 3000 benchmark for the year by approximately 175 basis points and is outperforming on a 3-year basis by 83 basis points.

On the other hand, we were disappointed with the underperformance of our Overseas Series as well as from our top-down international equity strategy, the International Series. A number of our specialty strategies again posted strong performance for 2018.

Most notably, our 5-star, Disciplined Value fund significantly outperformed its benchmark by approximately 400 basis points and is in the top best size aisle for the year. The fund has now established a 10-year track record.

Our equity income fund a compelling strategy during market volatility also outperformed its benchmark during the fourth quarter drawdown. Our Real Estate fund slightly underperformed its benchmark across both the fourth quarter and the full year, but remains in the top quartile of its MorningStar peer group ranking over 3 and 5 year time period.

Elsewhere our 5-star high-yield fund outperformed its benchmark for the quarter and year and ranked in the top quartile of its MorningStar peer group for each time period. The strategy is also outperforming on a 3-year basis.

Lastly our Rainier International small-cap fund outperformed its benchmark again this year although a challenging fourth quarter for International small-cap asset classes broadly weighed on an absolute returns.

Going forward and before I hand the call over to Paul, I want to reiterate that today's investment environment is incredibly dynamic. And as an active manager we will try to take advantage of the opportunity as it provides.

And with that I'll turn the call over to Paul.

Paul Battaglia

Thanks Ebrahim. Good afternoon everyone and thanks for joining us today. Looking at our financial results and starting with assets under management, AUM decreased from $23.1 billion as of September 30 to $20.2 billion on December 31. The 13% decrease was the result of $1 billion of net client outflows and market depreciation of approximately $2 billion.

AUM decreased by $4.9 billion during 2018, including approximately $3.6 billion of net client outflows for the year. Despite overall net client outflows, we were encouraged to report net inflows in the strategies we'd identified as sales priorities at the start of the year. Specifically Disciplined Value gathered approximately $180 million in net inflows in 2018 and Rainier International small-cap achieved net inflows of $245 million.

We maintained at-risk ratings for several client relationships. And as a result our service efforts continue to be an important part of our distribution strategy. Our continued commitment to client service is best measured by our separate account retention rate which improved to 86% in 2018 compared to 80% last year.

Our value-added consultative solutions also contribute to our client retention and during 2018 we focused on the continued enhancement and distribution of our custom solutions offering. By the end of the year approximately $400 million of client AUM was utilized in this solution and this remains an area of focus as we start 2019.

Turning to the fourth quarter P&L, we reported revenue of $37.4 million for the quarter, down 8% from revenue of $40.5 million reported last quarter with overall revenue margins of 69 basis points.

With respect to our revenue margins, our longer-term trend line shows a decline from the low 70 basis point range in prior years to where we are today. This is largely the result of changes in our business mix with lower fee offerings like Disciplined Value growing within our overall mix along with fee reductions to certain offerings in our mutual fund lineup designed to increase sales opportunities and improve client retention efforts.

Operating expenses were $32.2 million in the quarter, a decrease of $3.9 million compared to the last quarter and a $5.2 million decrease compared to the fourth quarter of last year. Compensation and related costs decreased by $4.3 million or 18% in the quarter, primarily because of a decrease in employee severance charges compared to the third quarter when we saw a 33 employee reduction in our workforce.

As a percentage of revenue, compensation and related costs for the fourth quarter were 50%, compared to 52% in the fourth quarter of last year and 57% in the third quarter of 2018.

Distribution, servicing and custody expenses, which represent approximately 25 basis points of average mutual fund and collective trust assets decreased by 3% during the quarter, while average assets decreased by 6% in the period. The variance in the rate of decrease can be attributed to changes in our asset mix and most notably increases in AUM within our newly-created zero revenue share mutual funds.

Other operating expenses were $8.9 million in the quarter, representing approximately 24% of revenue. Our fourth quarter results include approximately $500,000 of new charges towards the necessary technology enhancements that we identified during our 2018 business review and have discussed -- have addressed on prior calls.

Pretax income for the quarter was $5.9 million and economic net income for the quarter was $3.5 million, or $0.04 per adjusted share. And with that, I'll summarize our full year results.

We finished the year with revenue of $161.3 million and overall revenue margins of 70 basis points for the year. Operating expenses were approximately $138 million, a decrease of $12 million or 8% from 2017 as decreases in distribution expenses and compensation were offset by increases in other operating expenses.

Compensation decreased by over $4 million, despite one-time severance charges of $3.7 million during the year resulting from our early retirement offering and other changes. Compensation and related costs of $87.4 million in the year represented 54% of revenue. We achieved approximately $6 million of run rate savings as a result of the actions taken during the year stemming from our business review, only a fraction of which are reflected in our 2018 results.

Additionally, we saw a decrease in the overall size of our workforce, down from 433 at the start of the year to 366 as of December 31. The 7% year-over-year increase in other operating cost is again primarily driven by the IT restructure with over $1 million of incremental expense during the year resulting from this initiative. As a result our pretax income for 2018 was $25.6 million with economic net income for the year of $17.4 million, or $0.22 per adjusted share.

Regarding equity ownership the adjusted share count increased from approximately 79 million shares outstanding at the end of 2017 to approximately 80 million shares outstanding as of December 31, with the increase attributable to new awards granted to employees during the fourth quarter under the firm's long-term incentive plan.

With respect to the balance sheet, we continue to maintain a debt free capital structure with cash and short-term investments of approximately $150 million including $6.1 million invested in seeded products as of December 31. And during the quarter, we declared a $0.02 per share dividend to our Class A shareholders. That concludes my prepared remarks.

I'll now turn the call back over to Marc for a few closing comments. Marc?

Marc Mayer

Thank you, Paul. As always, we are focused on delivering excellent investment results, exceptional client service, and innovative solutions that help our clients achieve their financial goals. This forms the foundation upon which our business is built.

In 2019, we will continue to rigorously examine and evaluate our business in pursuit of opportunities for improvements, balancing a sense of urgency with our open-minded and thorough approach. We believe this provides us with the optimal path forward.

In closing, I'd like to thank our Interim Office of the CEO for their dedication and leadership over the past months. And I look forward to speaking and meeting with all of you in the future. So this concludes our formal remarks.

We'll now turn the call back to Solicia and we look forward to your questions. Solicia?

Question-and-Answer Session


Thank you. The floor is now open for questions. (Operator Instructions) Thank you. Our first question comes from the line of Ken Worthington with JPMorgan.

Will Cuddy

Good evening. This is Will Cuddy filling in for Ken. So first congratulations on the role Marc. In your prepared remarks you had mentioned Manning & Napier's integrity close client relationships and research process as attractive elements of the firm. Could you please elaborate on these other characteristics of Manning & Napier that attracted you to the role? And I recognize that it's early but given these characteristics how can you think to position Manning & Napier for future growth?

Marc Mayer

Okay. Great. Thank you. There are many things that attracted me to this organization and that's one that I've known for 30 years. So a substantial portion of the firm's existence. The DNA is great. It is the same DNA that's been in place for close to 50 years. It's the same DNA that I experienced when I first got to know this firm three decades ago. And that is really built around the following elements outstanding people with a singular focus on delivering for clients.

And that I think it speaks to what's special about the firm is that the object – the people are the right people and the objective is the right objective. Yeah, so then the question is well what are the processes for getting there and for delivering great investment results great outcomes for clients and what's the model the service model for delivering that? And I think there are many differentiated elements of what the Manning & Napier does going back to its earliest days.

I think there is the strong regional concentrations in many of the clients, which is a strength. The ability to provide comprehensive investment solutions across asset classes for those clients, I think is a strength. A long and deep history in multi-asset management, with dynamic asset allocation, which is something that is increasing importance as we enter near, sort of, post the great bond bull market of the last 35 years.

The ability to figure out how to allocate assets in a dynamic way to manage drawdown risk, which is the permanent loss of capital, is the great risk that all investors face. These are strengths of the firm that have been tested through many, many cycles. So building around these, I think, is a very, very promising opportunity for us. And there are steps we have to take to get here to the future, but I think when the DNA is strong, it makes the work very, very doable.

Will Cuddy

Great. So you mentioned towards the end that the steps that you'd have to take the firm forward, and again recognizing that it's still early. But what areas you think are the nearest opportunity for improvement to help take those steps and move the firm forward from here?

Marc Mayer

Yes. It's premature to comment in any detail, but my philosophy, which is a very, very simple one, is in the asset management business, in a fiduciary business like ours the job number one is delivering for clients. So understanding what it is we do well for our clients from both an investment and a client service standpoint and really understanding that, that's the most important analysis that I will undertake.

Then it's, sort of, understanding what more could we do for those clients or how could we do those great things for other clients, and how do we identify and pursue those new clients. I mean, this is all very simplistic. But then the other part of the analysis is, well, are there things that are not adding to that experience and how should we think about those? Very premature for me to say what those might be, I don't know. And it's certainly premature to say what steps we should take.

Will Cuddy

Great. Well, Marc, that was very helpful. Thank you.

Marc Mayer

Thank you.

Will Cuddy

I'll reach you.

Marc Mayer

Thank you.


Thank you for participating. This does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.

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