WDR
#Good morning.
With me today are <UNK> <UNK>, our Chief Marketing Officer; <UNK> <UNK>, our Chief Financial Officer; and <UNK> <UNK>, our VP of Investor Relations.
<UNK>, would you please read the forward-looking statements.
During this call, some of our comments and responses will include forward-looking statements.
While we believe these statements to be reasonable based on information that is currently available to us, actual results could materially differ from those expressed or implied, due to a number of factors, including but not limited to those we reference in our filings with the SEC.
We assume no duty to update any forward-looking statements.
Materials relevant to today's call, including a copy of today's press release, as well as supplemental schedules, have been posted on our website at Waddell.com, under our corporate tab.
Thank you, <UNK>, and good morning, everyone.
Thank you for joining us today, and welcome to our third-quarter earnings call.
Since this is my first time hosting this call as CEO, I would like to start by sharing some thoughts with you before we get into the recent results of the business.
The past couple of months have given me an opportunity to gain additional perspectives on our business.
It is clear that we have both tremendous resources and the potential to perform better than we have, but also face some near-term and intermediate challenges that require careful focus and attention.
We are facing a number of industry headwinds, including significant regulatory change, fee pressures, and lower demand for actively managed projects.
This is happening at a time when we are experiencing some near-term investment performance issues in several of our key products.
Fortunately, our biggest asset is an employee base that is tremendously talented, ready to think differently, and highly committed to our success.
As we work toward addressing the issues we face as an organization, I am confident that we are up to the challenge, and will rigorously evaluate our model, our process, our growth opportunities, and our alternatives.
Our balance sheet remains exceptionally strong, thereby affording us the time and financial flexibility to work through these headwinds.
First, and chief among our challenges is the impact of the new requirements and regulations facing our industry, stemming from the DoL's fiduciary rule.
While we continue to assess and prepare for its impact on our business, we are committed to meeting the regulator's requirements within the timeframe specified.
And although the eventual solution may involve modifications to parts of our business model, we are committed to delivering conformance to the rules in the best way possible, for all of our stakeholders.
This remains a top priority for our Company.
We understand that there may be questions around this topic.
We are entering the final stages of our evaluation process, and expect to reach some final decisions in the next couple of months, and look forward to sharing our strategy at the appropriate time.
We believe success under the new DoL construct will require a more institutionalized process for both investment management and the sales and marketing parts of our organization.
By institutionalized, I mean the ability to clearly articulate a product's investment philosophy and process, with all relevant data analytics related to portfolio construction, risk parameters, attribution analysis, sources of alpha generation, et cetera.
This will be required across our product line, and include everyone to varying degrees, from portfolio managers to client service personnel.
With respect to investment management, we continued to make progress in this regard by strengthening our risk management capabilities and resources, making the Director of Research a fully dedicated position, without portfolio management responsibilities, and increasingly moving toward a team managed approach across our product suite.
We all know that delivering strong and consistent investment performance is essential, and we are confident these changes will prove beneficial in meeting this objective.
As our industry evolves, it is also clear that the sales and marketing function must adapt to the new realities of more targeted points of sale, with higher levels of due diligence.
We understand that performance is essential for sales, but believe that it alone near defines the ability to generate sales or to sustain assets.
In today's increasingly competitive environment, where professional buyers are ever more demanding and sophisticated, we need to provide our sales force with the tools to adapt and excel.
In recognition of this, we are implementing some structural changes to that part of our organization, that <UNK> will explain in further detail.
We are also examining our product line to make sure it is responsive to ever-evolving investor preferences.
For the market, the past quarter was a solid performance period across most asset classes, and a generally better environment for the performance of active management.
And while one quarter does not make a trend, we are encouraged by this, as we benefited across a number of our portfolios.
2016 investment performance has gradually improved across the complex, as the year has progressed, but we understand that this is a process, and it will take some time to get back to our historical levels of success.
I will note, however, that the improved investment performance of active managers industry-wide did not translate into active management flows regaining traction versus passive.
Any progress here will likely take some time, and a more sustained period of outperformance for active managers.
This morning, we reported net income of $53.8 million, or $0.65 per diluted share, which on a GAAP basis rose 60% compared to the prior quarter.
It should be noted, however, that each quarter contained a number of items that distorted the underlying operating results.
Nonetheless, adjusting for these items, both net income and earnings per diluted share rose quarter over quarter.
Assets under management declined 2% during the quarter.
Redemptions declined to their lowest level since the second quarter of 2015, however, sales remained weak, and market appreciation in our portfolios could not entirely offset outflows.
While we see some initial signs of encouragement in our results, we are still in the early results of returning the Firm to his former footing.
I will now turn it over to <UNK>.
Thanks, <UNK> and good morning, everyone.
As <UNK> mentioned in his opening remarks, there were a few items in the quarter, although not material in the aggregate, that need explanation given their impacts to various line items on the income statement.
We included a table on page 8 of our press release to assist readers' understanding of the line item impacts.
These adjustments include a non-cash curtailment gain of $8.5 million, recorded as a reduction in both underwriting and distribution and compensation costs.
This gain resulted from an amendment made to our post-retirement medical plan.
Benefits under the plan will no longer be offered to employees who retire after December 31 of this year.
Current retirees will be grandfathered under the current plan.
In addition to the $8.5 million gain, this change will result in lower benefit expenses of approximately $1 million per year.
The quarter also included an impairment of an intangible asset of $5.7 million, resulting from a decline in assets under management related to a sub-advisory relationship.
This intangible has a remaining balance of $2.7 million.
Continuing efforts related to Project E contributed an additional $1.3 million in expenses during the quarter.
To date, we have spent approximately half of our $8 million budgeted for 2016.
Finally, as we digest the implications of the DoL rule on our business, we expect to incur increased expenses over the next several months for consulting, legal, and technology enhancements, in order to comply with the rule.
We expect implementation expenses to be at least $5 million over the next 12 to 18 months.
The current quarter included $700,000 in spend towards this effort.
As announced previously, the conversion of a load-waived A shares to I shares in our advisory accounts, beginning in the third quarter, resulted in a reduction to underwriting and distribution revenues and expenses, and shareholder service revenues.
The impact of this change were in line with our prior guidance.
During the third quarter, we extended an offer for a lump sum distribution to terminate invested participants in our Company-sponsored defined-benefit pension plan.
Reducing the number of participants in the plan will reduce future plan obligations and administrative costs, and reduce volatility.
The window for election closes next Monday, and distributions will occur by year-end.
As such, the fourth quarter will include a non-cash settlement charge between $15 million and $30 million, depending on the ultimate level of participation.
Our forecasting shows we remain ahead of schedule, as we work to reduce our run-rate expenses by $40 million.
Areas where we have seen favorable spending, following the reset of the cost structure have been in compensation, travel, and advertising.
We continue to look for efficiencies and opportunities to reduce costs, without inhibiting our ability to move the Company forward.
At its recent meeting, the Board of Directors decided to continue our current dividend payout rate.
Assuming a normal market environment and a modest deceleration of outflows, we are comfortable that we can support the current dividend and still maintain the flexibility to do buybacks to offset dilution from future equity grants.
It likely would not be our intention to support the dividend with our excess cash for an extended period of time, if our earnings power were to materially differ from our current expectations.
I will now turn it back to <UNK>.
Thanks, <UNK>.
Since I took the helm on August 1, our team has been diligently working on identifying strategic priorities, and looking at the range of alternatives to address each of our challenges.
We are united in our priorities to meet DoL compliance requirements, improve investment performance, reinvigorate sales, and continuously evaluate product opportunities to meet client needs.
We know we have a lot of work to do to return our firm to the growth path we enjoyed in years past.
Waddell has a long heritage of success, and a culture of winning.
We haven't forgotten that.
We are united and committed in our desire to make the changes to help reposition the firm for renewed growth and profitability.
With that, operator, we would like to open the call for questions.
Yes, Rob.
I did mention a $5 million incremental spend related to DoL.
That includes for consulting, legal, and then some of that IT implementation costs that will come along with that.
So that is our best estimate at this time.
We will incur some more in the fourth quarter, and then probably about half of the $5 million, I would expect, into the first and second quarters of next year.
This is <UNK>.
I will start, and maybe <UNK> might want to add a little bit.
I think what we are really trying to do here is structure the Firm for longer-term success, and establish the framework that basically positions us to be successful in the evolving industry landscape we see.
I talked about the institutionalization of the investment management process.
I think that is definitely happening.
This was underway prior to the DoL, but I think it's being exacerbated by the DoL and accelerated.
So increasingly, the points of sale are more limited, and the bar of due diligence is rising, as I said.
So I think it is a more technically-driven sale.
I think what the industry is the demanding is more team-based management, with well-defined risk parameters, clearly articulated philosophy and processes, and so we're making those changes.
We were partly there, I would say, within the investment division, prior to all of this, but we're driving that throughout, across the whole organization.
But it is not investment management alone.
There is also, I think, other aspects of this.
It involves the sales and marketing part of our organization, as well.
There is an evolution that is taking place in that aspect of our business.
And so I think the restructuring that <UNK> had described in detail was really to get try to the right people in the right place, get us positioned to be successful, so when performance turns, we have the right people in place to execute and finish the sales.
Client service demands a higher level of caretaking and communication and that thing.
So it is really a gradual but intentional restructuring of the firm, in terms of establishing the framework for success and building it for the long term future of how the organization, or the industry is evolving.
I don't know, if <UNK>, you want to add anything to that.
Yes, in terms of that cash balance question, the cash balance did go up during the quarter, and that was due to taking out some of the seed money, so it was just the shift between the investment balances and cash.
We would expect in the fourth quarter that might move ---+ some of that might move back to the investment side, as we see the next year's funds and a couple of other mandates on that side.
So up about probably $30 million will go the other way.
And in terms of the dividend, <UNK>, do you want to.
Yes.
This is <UNK>.
I would just say, really reiterate what <UNK> made in his opening comments.
I think the way we is looking at this is, we are fortunate we have extremely strong balance sheet.
We have the flexibility to pay the dividend for a period of time while we sort through some of these issues, and try to right the ship and face some of these headwinds we're facing.
Obviously over the long term, we have to generate the earnings power to pay the dividend on a sustainable basis, and that's the approach we are taking.
We've got some time here, we've got some financial flexibility, and that's how we're positioned.
But ultimately, our intent would be to pay this, but ultimately we have the earnings power to support the dividend in the long run, but we don't see it as a near-term threat.
This is <UNK>.
Again, I think longer term, there are a lot of moving parts to this, and considerations in terms of sales or products or other actions, market action.
I think our approach has been pretty clear.
We have the financial flexibility to sustain this dividend for a period of time, but obviously, our expectation is that we will need to have the earnings power as a Firm to support it over the long-term and that's how we're approaching it.
<UNK>, this is <UNK>.
I will take the first part of that.
I think the difference in the payout of what you're seeing in the retail broker/dealer, the affiliated, relates to the DAC write off.
If you remember in the second quarter, we took a DAC write off of about $6 million.
So the ongoing expense that would have amortized related to that write off is not in there.
So that's why the elevated expenses in the second quarter compared to the third quarter.
And then I will let <UNK> take your second question.
<UNK>, this is <UNK>.
I think it is our best guess at this time.
Again, it just includes what we have been through so far, and our expectations around what implementation might bring.
Now, as we talk about other items and how we deal with conflicts and other things, there will be ups and downs, you could say, in terms of revenues and expenses.
It will have to be evaluated as our plan comes together.
But at the present time, we know that it is going to take some resources to implement some of the changes that are coming, and those will include some IT-type items that will need to be put in place, that will take some contracting work to add to our resources here in the near term, to meet the deadline for the rule.
That is the one-time cost, the build out for the rule.
It does not include any ongoing costs at this time.
Yes, we could expect that there probably would be some ongoing costs of compliance and other things, as we work through our decisions, and how we plan to manage to this.
I would expect some, but at this time we cannot really put a number on it.
<UNK>, this is <UNK>.
I would just say that we have a pretty strong capital return program relative to our peers, I think.
That has historically been the case, and continues to be the case, when you combine the dividend and share repurchase.
We have substantially met our commitments for the year already on our share repurchase program.
I would say though that capital allocation is obviously something that we continue to review, and we are not ruling out additional share repurchases or more aggressive share repurchases.
We are trying to be thoughtful about this, but it is not off the table, it is something we are ongoing to review.
Just to reiterate, in total, the capital return program of the Company historically and continues to be very strong relative to our peers.
We use 5% to 6% market action.
Okay.
Well thank you, everybody, for joining us today.
We appreciate your engagement, and we look forward to catching up to you in a few months down the road.
Thank you very much.
