Invesco Ltd (IVZ) — Q2 2018 Earnings Call Transcript

Thank you very much, and on behalf of Loren and myself, thank you for spending time with us today. If you're so inclined, you can follow the presentation which is on our website and I'll spend a few minutes reviewing the business results for the quarter, and Loren will go into more depth into the financials. And then today, we're going to talk about our competitive positioning in the context of industry trends and our key focus areas before we open it up for questions. So I'm on slide 5, if you happen to be following and here are the highlights of our discussion today. During the second quarter, gross sales were up 32% from the same quarter a year ago, redemptions were up as well, however, which led to the outflows during the quarter. And I'll get into the details about the outflows in just a few minutes here. We completed two acquisitions during the quarter: Guggenheim Investments' ETF business and Intelliflo, the number one technology platform for financial advisors in the UK, which further strengthens our digital advice capability. We also continue to invest in growth drivers which are meaningfully strengthening our business and contributing to growth now and in the future. And Invesco is a highly differentiated investment management organization with numerous competitive advantages. As you can see on slide 6, the outperformance of growth versus value stocks has expanded rapidly over the past 12 months, which is very typical at this stage of our market. This market dynamic places near-term pressure on fundamental active value-based equities and in turn client demand for these capabilities and flows, which we are seeing in our value-based equity capabilities. Importantly, however, the current conditions have hampered the value-based equity strategies in the short-term, but long-term investment performance as measured across the full market cycle remains solid. The depth, breadth and tenure for investment teams combined with the consistency of their investment philosophy and approaches give us a high degree of confidence that these capabilities will see significant and rapid improvements in performance when markets normalize. As mentioned earlier, gross flows were up 32% versus the second quarter of 2017. This is a near record for the organization. We saw continued strength in gross flows across retail and institutional as well as active and passive, all of which were meaningfully higher than the same period a year ago. During the quarter, demand for ETF capabilities was robust. More specifically, we saw particular strength in our commodity ETFs, with nearly $400 million in flows for the quarter and year-to-date flows of $1.5 billion. We are highly confident the flow trend will improve assuming more favorable market dynamics.

Great. Thank you, Marty. Quarter-over-quarter our total AUM increased $29.1 billion or 3.1%, which is driven by the acquisition of the Guggenheim ETF business which added $38.1 billion. We saw market gains of $10.3 billion, inflows from non-management fee earning AUM of $0.9 billion, inflows from institutional money market products of also $0.9 billion and then we also had reinvested distributions of $0.7 billion. These factors were somewhat offset by negative foreign exchange translation of $13.8 billion and then, as Marty mentioned, long-term net outflows of $8 billion. Our average AUM for the second quarter was $973.9 billion, that was up 2.4% versus Q1. Looking at the net revenue yields for the quarter that came in at 40 basis points and our net revenue yield excluding performance fees was at 39.5 basis points. The acquisition of Guggenheim ETF business and the impact of foreign exchange on our AUM mix reduced the yield by 0.9 basis points and 0.3 basis points respectively. The tax rate for the quarter held steady at 20.6%, which brings us to our adjusted EPS of $0.66 and our adjusted net operating margin of 38.7% for the quarter. I also just wanted to point out that our headcount increased by 181 employees to 7,315. Before turning things back to Marty, I just wanted to quickly provide a couple of updates, and the first is on current month flows. Overall, the July flow picture remains rather choppy with strong sales and pipeline opportunities offset by elevated redemptions, many of which feel one-off in nature. Through the month of July, we've experienced net outflows of approximately $3 billion. This result is largely explained by two separate account terminations and a sell-off in commodity ETFs in the U.S. and Europe.

Great. Thank you, Loren. I'm now on slide 15. And as I've said a few minutes ago, I want to highlight the macro trends that are transforming the industry. The point that's important is that the pace of change or pace of adoption of these macro trends is accelerating and it's literally creating winners and losers in the industry today. I'm highly confident in our strategy, our ability to execute, and the results they will generate in the near-term and long-term. Our investment platform’s comprised of a broad diversity of high-quality, well-tenured teams with high conviction in their philosophy and processes.

Hi. Thanks. Good morning. I guess, first, I mean, Marty, you mentioned being highly confident about flows improving and we look at slide 22 and some of the performance challenges you talked about with regards to where we are in the cycle. Can you give us a little bit about whether it's product region? We heard what's going on in July. What gives you the confidence around flows improving in this kind of more immediate time period?

Yeah. So, Dan, it's a great question. The impact that you're seeing is because of the great success of these capabilities over the last number of years. Clients have very high demand for these capabilities. Now, the exact opposite happens when you get to structured periods, and the point that we're really trying to make is that high-quality teams, even though there may not be demand for the capability right now, that's driving a large part of the current flows. But I think our point is the depth and breadth of interest in capabilities around the world is very strong. And that tends to offset these factors. However, the magnitude of the change has not been seen for over 10 years and the concentration in the market impact is what is driven here.

Okay. And I guess just to follow up on that institutionally, you guys mentioned a backlog and we've heard this before. Is there any differentiation from previous periods or is there an acceleration in certain products or regions that you could highlight?

Good point. The pipeline of opportunities is at an all-time high in terms of fee rate, it's about 65 basis points across the entire pipeline which is well in excess of our overall fee rate. So again, when you look at it on a revenue adjusted basis, we should feel and we do feel very optimistic about what the pipeline is bringing to us.

Thanks, Dan.

Thanks. Good morning.

Hey, Craig.

Just given the detail around Jemstep on the last call with six financial institutions going live this year and I think it was five banks and one insurer. When should we expect Jemstep to start contributing to net flows? How large is the underlying advisory AUA in the platforms that will go live this year or have already gone live?

We continue to look to 2019 for the beginning of a level of contribution that would start to be interesting. So our confidence around that continues to strengthen. I don't have the AUA number of the institutions right now, but it's significant.

And just as a follow-up, did any financial institution sign up since the April call?

We are in the process of adding some financial institutions and we're in the contracting period, nothing finalized at this moment.

Hi, thank you. Good morning. The IGW consolidation, is that $6 billion you mentioned the total AUM that's been consolidated or new flow? And how should we think about the fee rate impact from consolidating that AUM?

The $6 billion is new flow at 100%. We would be consolidating 100% of the AUM inflows going forward, bringing the joint venture to about $22 billion in size. The immediate opportunity is in money markets, but active products could also be included moving forward.

Hi. Good morning, and thanks for taking my question. First on outflows, obviously, elevated this quarter and you mentioned market conditions is a factor. Do you see it as more of a boom and bust cycle for Invesco occurring?

I think it's driven by client demands during different parts of the cycle. Clients tend to build their portfolios accordingly, so in this case they're seeking out the alternatives and growth capabilities, it does not mean we're in a boom and bust model.

Great. Thank you.

Ken that was a fairly small asset base that got adjusted, so it was not material to any real revenue impact. The adjustment was made because there was a discrepancy between similar products in the U.S. and Canada.

Thanks, guys. Just wondered if you could dig in a little bit more on the retail side of flows. It looks like that was a big driver here in the quarter...

It is indeed driven by investor demand. Retail flows are pressured by high performance and redemption dynamics, and significant outflows can occur if these challenges persist.

The July flow picture remains choppy, with strong sales opportunities offset by elevated redemptions.

Good morning, guys. Thanks for taking the question. Loren, at the last quarter, you updated an outlook for revenue yield before performance fees of being 40 basis points. This quarter came in a bit below that. Should we revise that?

I would say you can expect some fluctuation due to day counts. The guidance of 40 basis points remains a safe estimate but could trend toward 39 in 2019 given mix dynamics.

I wanted to come back to investment performance because it is obviously so important. Just wondering why you think that might be and if there's anything you can do to perhaps address that?

It's challenging because we have a large value bias and have grown in size due to good performance. Relative underperformance can occur, but it's important to look at individual mandates rather than simplified style boxes.

Just curious how you see the industry evolving in response to those challenges you've outlined, what changes could we see? Do you think we could see more consolidation broadly?

The way we've built the firm addresses these directly. We see broad investment capabilities as key, along with technology to meet client needs. Scale is important to be competitive moving forward.

Great. Thank you very much for joining Loren and I. We'll be in contact next quarter and before that in various conversations. Thank you.