Invesco Ltd (IVZ) — Q3 2017 Earnings Call Transcript

This presentation, comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market condition, AUM, geopolitical events and their potential impact on the company, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products or other aspects of our business or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future conditional verbs such as will, may, could, should and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent forms 10-Q filed with the SEC. You may obtain these reports from the SEC’s Web site at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Thanks very much and thanks everybody for joining us. I’m going to spend a couple of minutes just on the results for the quarter. Dan is going to spend time to give further context around the acquisition of Guggenheim’s ETF business, and Loren will go into the financial review. And of course, we’ll open up to Q&A. So let me touch by hitting a few highlights for the third quarter results, which are on Page 4. Long-term performance continued to be very strong in the quarter. 67% and 75% of assets were ahead of peers on a three and five-year basis. This resulted in very strong long-term flows, $6.3 billion during the quarter. We saw this both in retail and institutional channels, and this resulted in an organic growth rate of 3.4%, so all very strong during the quarter. The adjusted operating margin was up meaningfully during the quarter. It came in at 40.7% and adjusted operating income increased 10% quarter-over-quarter and up 18.5% compared to Q3 2016. We did see solid demand for both active and passive capabilities during the quarter, and as many of you know, we completed the acquisition of Source ETF business in August. Source has contributed to net inflows since the close of the acquisition, and it is going to continue to be a meaningful addition to our ETF business, our competitive positioning in EMEA and the greater ETF business globally. If you take a look at the active capabilities, growth sales and net flows were the strongest since the third quarter of 2016. We saw solid flows with taxable fixed income, international equities as well as alternative capabilities. Taking a look at passive, we also saw strong flows in fixed income commodity currency and international equity. So literally, both active and passive saw a very broad set of capabilities being in demand by clients. On Slide 9, again very strong on both channels. This was the fifth consecutive quarter we saw net positive flows in EMEA, driven by nearly $3 billion of cross-border retail flows and strong institutional demand. Demand for risk mitigating strategies remains strong, particularly among institutional investors. The pipeline of one but not funded institutional mandates also continues to grow and remain very robust. We did see strong flows into global target return led by institutional investors, and we also saw solid flows into European equities, taxable fixed income, and fixed income ETFs. Let’s spend a few minutes putting context around the acquisition of Guggenheim Investments, and I’m on Page 11, if you happen to be following. We are intensely focused on helping clients achieve their investment objectives. The investments we make in the business are designed to position us ahead of client demand. We’ve continued to expand our range of capabilities, resulting in a broad and deep set of active, passive and alternative strategies. An example of this would be our factor investing capabilities, we have over $200 billion in factor capabilities and have 40 years of experience. It is a strong part of the organization and continues to grow. We also focus on enhancing our client experience. Our Jemstep is an example of that, which is our digital advice platform for advisers. Demand for Jemstep continues to be very strong and robust. It’s really our ability to draw on our comprehensive range of capabilities to provide solutions for our clients that differentiates Invesco in the marketplace and positions us for long-term growth. Turning to the Guggenheim acquisition, the ETF business from Guggenheim strengthens Invesco’s global ETF platform while accelerating our growth in the quarters and years ahead. The acquisition will expand the depth and breadth of Invesco’s traditional and smart beta ETFs, further diversifying our offering while firmly placing us as the number two smart beta provider in the United States. We will also provide additional scale that will strengthen our competitive position in the U.S. while enhancing our relevance in the growing ETF business marketplace globally.

Thank you, Marty. The Guggenheim ETF business has always stood out to us as complementary to Invesco, something that’s been of interest to us for some time. The current franchise with Guggenheim’s ETF business is about $37.3 billion in assets under management. About 60% of that is in the smart beta product suite. Overall, they have 79 ETFs on the platform and their top five flagship products hold about half of those assets. This acquisition brings us multi-asset class ETF capability across equities, fixed income and alternatives. The performance of the products – around three quarters of their ETFs have Morningstar ratings of 3 or higher, and we continue to see good flows. We had net inflows across the platform since we announced the transaction a few weeks ago. This is where the addition brings a lot of synergies. If you look at Invesco’s global ETF platform, with a high focus we have on smart beta and factor investing, Guggenheim has had one of the flagship ETF products in smart beta for a number of years, which is the S&P 500 Equal Weight. This will give us a leadership position in that category. Overall, we feel that this acquisition is going to be very strong for us to leverage at Invesco. Particularly a number of key factors that we think will help accelerate the already fast growth of the Guggenheim ETF franchise, including our distribution capabilities around the world. Our consulting business can help educate clients around asset allocation and the utilization of important vehicles like ETFs. The strong secular growth in fixed income ETFs suggests that many investors who previously didn’t really look at ETFs, particularly in some institutional segments, are starting to see the benefit of ETFs as a single solution for rebalancing a portfolio with individual bonds. Overall, we believe that our experience when it comes to smart beta ETFs and the four years of factor experience Invesco has built will complement this acquisition very well.

Thank you very much, Dan. Quarter-over-quarter, you’ll see that our total AUM increased $59.2 billion or 6.9% driven by the acquisition of Source ETF, which added $26 billion, including approximately $18 billion of Source-managed AUM and $8 billion of externally managed AUM. We also benefited from market gains of $15 billion. We had long-term net inflows of $6.3 billion, positive FX translation of $6.7 billion, and inflows into our money markets capability of $5.4 billion. These factors were somewhat offset by a small outflow from the QQQs of $0.2 billion. Average AUM for the third quarter was $890.8 billion, up 4.9% versus the second quarter. Our annualized long-term organic growth rate in Q3 came in at 3.4% compared to negative 0.3 in the second quarter. Our net revenue yield came in at 43.9 basis points and our net revenue yield, excluding performance fees, was 41.9 basis points. That was an increase of 0.1 basis points over the second quarter. SO we had sold one additional day in Q3 that added 0.4 basis points and we also saw the positive impact of FX and mix added 0.2 basis points. On the adjusted GAAP presentation, net revenues increased by $70.3 million or 7.8% quarter-over-quarter to $976.6 million, which included a positive FX rate impact of $13.4 million. The adjusted investment management fees decreased by $54 million or 5.3% to $1.08 billion. Foreign exchange increased our adjusted investment management fees by $16.2 million. The adjusted service and distribution revenues increased by $6.3 million or 3%, reflecting higher average AUM in the quarter. The adjusted performance fees came in at a much higher level, obviously, $43.3 million in Q3. They were earned by various investment capabilities, but most notably $37 million from Invesco’s mortgage recovery fund. The adjusted other revenues in the third quarter were $16.7 million and that was a decrease of $0.6 million from the prior quarter. Adjusted operating expenses at $579.2 million increased $29.4 million or 5.3% relative to Q2. The adjusted employee compensation came in at $383.9 million, an increase of 6.5% due to higher variable compensation and a non-cash charge related to the company’s UK defined-benefit plan. Adjusted marketing expenses in Q3 increased slightly by 1.3% to $30.1 million. We believe that our tax rate should drop to roughly 27%. That brings us to our adjusted EPS of $0.71 and adjusted net operating margin of 40.7%. We continue to see very strong net inflows from Europe as well as from the Asia Pacific, offset by outflows in the U.S. on the institutional side. In summary, quarter-to-date, net flows through October are roughly flat, but we feel very good about the flow picture.

Operator, we’ll open up to Q&A please.