Invesco Ltd. (NYSE:IVZ) This fall 2022 Earnings Name Transcript
Invesco Ltd. (NYSE:IVZ) This fall 2022 Earnings Name Transcript January 24, 2023
Operator: Welcome to Invesco’s Fourth Quarter Earnings Convention Name. All individuals will probably be in a listen-only mode till the question-and-answer session. As a reminder, at present’s name is being recorded. Now I wish to flip the decision over to Greg Ketron, Invesco’s Head of Investor Relations.
Greg Ketron: Thanks, operator, and to all of you becoming a member of us on Invesco’s quarterly earnings name. Along with at present’s press launch, we now have offered a presentation that covers the matters we plan to deal with at present. The press launch and presentation can be found on our web site, invesco.com. This data could be discovered by going to the Investor Relations part of the web site. Our presentation at present will embrace forward-looking statements and sure non-GAAP monetary measures. Please evaluation the disclosures on Slide 2 of the presentation concerning these statements and measures in addition to the appendix for the suitable reconciliations to GAAP. Lastly, Invesco isn’t answerable for and doesn’t edit nor assure the accuracy of our earnings teleconference transcripts offered by third events.
The one licensed webcast are situated on our web site. Marty Flanagan, President and Chief Government Officer; and Allison Dukes, Chief Monetary Officer, will current our outcomes this morning. After we full the presentation, we are going to open the decision up for questions. Now I will flip the decision over to Marty.
Marty Flanagan: Thanks, Greg, and thanks all people for becoming a member of us. And I’ll begin on Slide 3 for those who’re following alongside, which is the fourth quarter highlights. The fourth quarter concluded a yr of serious headwinds and volatility in international markets. Seemingly, no geography or asset class was proof against the S&P skilled the worst yr since 2008, NASDAQ Composite declined over 30%, MSCI Service provider Markets Index practically 20%, and bond markets, usually the protected heaven when fairness endure, declined considerably as a result of rise in rates of interest with the worldwide combination bond index declining by greater than 15% for the yr. This resulted within the worst markets we have seen in many years. Rising COVID infections in China and tax loss harvesting in developed economies because the yr got here to a detailed made for a difficult natural development dynamic in our {industry}.
Regardless of {industry} challenges in 2022, we’re happy to see key capabilities in areas with excessive shopper demand continued to ship natural development, offsetting web outflows and capabilities that skilled redemption strain as buyers categorical a choice for risk-off belongings. Key capabilities that delivered web long-term inflows for the yr included ETFs, fastened revenue, Better China and the institutional channel. The agency’s potential to ship these outcomes demonstrates the energy and resilience of our diversified platform within the face of extraordinary market headwinds. Though, market confirmed indicators of stabilization within the fourth quarter, the unsure backdrop continued to weigh on investor sentiment and impacted shopper demand. Invesco separated itself from most {industry} friends by producing web inflows in key functionality areas led by sturdy development in ETFs within the quarter.
Our fastened revenue enterprise and institutional channel continued to construct on our monitor report of natural development, producing web inflows for 16 and 13 consecutive quarters, respectively. The depth and breadth of our funding capabilities that Invesco brings to market that place the agency to return to natural development when investor sentiment improves. Invesco ETFs delivered $4.3 billion in web long-term inflows through the quarter. For the complete yr, ETFs introduced in $28 billion of web long-term inflows, the equal of 11% natural development price. Our ETF lineup stays differentiated for best choices with a deal with increased worth, increased income market segments like good beta, and we proceed to drive innovation in area with merchandise similar to our QQQ Innovation Suite.
Fastened revenue capabilities within the institutional channel have been pillars of natural development for a number of years now and development persevered in each of those areas within the fourth quarter with $800 million and $900 million of web inflows, respectively. As Allison will focus on later, our institutional pipeline stays at wholesome ranges. And as rates of interest stabilize, we now have a big alternative to seize development in fastened revenue capabilities in 2023. Our enterprise in Better China carried out exceptionally effectively throughout 2022, constructing on our main place on this planet’s fastest-growing market class asset managers. We skilled modest web long-term outflows of $600 million within the fourth quarter as a result of considerably increased redemptions in fastened revenue all through the {industry} in China and rising bond yields stroke web asset values for fastened revenue securities decrease.
Regardless of these challenges, we raised over $3 billion from new product launches through the quarter in China. For the complete yr, our China three way partnership delivered $7 billion of web inflows, the equal of 11% natural development price. Market sentiment in China will probably be blended for the following few months because the nation works by way of the transition interval of upper COVID an infection, stabilizing rates of interest and redemptions turned to extra average ranges. That mentioned, there are additionally indicators that the outlook for the rest of 2023 is bettering, and I am optimistic for a return to natural development price all through 2023 in China. Though, we keep momentum in key capabilities, the agency skilled web long-term outflows this quarter of $3.2 billion. Energetic international fairness stays the most important drag on natural development with $6 billion of web outflows within the fourth quarter, together with $3 billion in our growing markets fund.
As we mentioned beforehand, shopper urge for food for these belongings have been decrease than previously, however I am optimistic, redemptions will gradual this prime shopper urge for food for threat belongings will finally return. We entered 2023 with a robust stability sheet, giving us the wanted flexibility to function strategically on this setting. Lengthy-term debt stays at low ranges, the bottom in 10 years, and our money stability elevated to over $1.2 billion at year-end. As we mentioned final quarter, we proceed to be disciplined in our strategy to bills, tightly managing discretionary spending and limiting increased roles which are essential to assist the group and future development. We’re thoughtfully managing market headwinds whereas investing for the long-term.
We stay targeted on figuring out areas of expense enchancment that can ship constructive working leverage because the market recovers and natural development resumes. We’re being extraordinarily considerate about capital useful resource allocation on this setting, and we will probably be effectively positioned to take care of investments in areas that ship future development. Wanting forward, we’re partnering with our shoppers to fulfill essentially the most urgent wants on this dynamic setting. We have devoted the previous decade to construct a breadth of funding capabilities and options mindset and working scale at Invesco that few within the {industry} can match. I am happy with our gifted what our expertise staff have completed in 2022 on behalf of shoppers and stakeholders, and I am optimistic for return to natural development when market sentiment eases.
Market path could also be unsure, however I am assured that Invesco is ready to fulfill challenges that can come up in 2023 and effectively positioned for future development. With that, Allison, I will flip it over to you.
Allison Dukes: Thanks, Marty, and good morning, everybody. I’ll begin with Slide 4. General, funding efficiency improved within the fourth quarter with 61% and 63% of actively managed funds within the prime half of friends or beating benchmark on a three-year and a five-year foundation, up from 57% and 62% within the third quarter. These outcomes replicate energy in fastened revenue and balanced methods the place there’s sturdy shopper demand. Efficiency lacks benchmark in sure fairness methods, however we skilled enchancment over the previous quarter in a number of key funds and short-term efficiency is trending positively in a number of U.S. and international fairness methods. Transferring to Slide 5. We ended 2022 with $1.41 trillion in AUM, a rise of $86 billion from the top of the third quarter as most market indices partially recovered from prior quarter lows.
International market will increase, overseas change actions and reinvested dividends elevated belongings underneath administration by $61 billion, and whole web inflows had been $25 billion, inclusive of $30 billion into cash market merchandise. As Marty talked about earlier, the agency skilled web long-term outflows of $3.2 billion this quarter, equal to a 1% annualized natural decline. Regardless of some stabilization in international monetary markets, {industry} development remained subdued within the fourth quarter and Invesco’s web circulation efficiency was among the many greatest in our peer group. Passive capabilities returned to web inflows this quarter was $7.3 billion, whereas web outflows had been $10.5 billion in lively methods. A number of of our key functionality areas continued to ship constructive natural development, together with ETFs and glued revenue in addition to the institutional channel.
These capabilities additionally delivered constructive natural development for the complete yr together with our Better China enterprise, which enabled Invesco to offset outflows and techniques that skilled web redemptions as buyers sought risk-off commerce all through 2022. Invesco’s ETF lineup was as soon as once more a driver of web long-term inflows within the fourth quarter with $4.3 billion. Internet inflows had been inclusive of $2.4 billion in maturing BulletShares ETFs, that are included in our gross redemptions. Progress this quarter was broad-based. Our top-selling ETFs included the S&P 500 Equal Weight, the NASDAQ 100 QQQM and Invesco Senior Mortgage ETF. For the complete yr 2022, web long-term inflows into our ETF capabilities had been $28 billion, equal to an 11% natural development price and we gained market share.
Excluding the QQQs, Invesco captured 3.8% of {industry} web inflows, increased than our 3.1% share of whole {industry} belongings underneath administration. Institutional channel has been a gentle supply of development and that continued within the fourth quarter because the channel has now achieved 13 straight quarters of web inflows. For calendar yr 2022, the channel achieved web inflows of $13 billion or a 4% natural development price. We sustained new fundings throughout geographies, asset courses and the danger return spectrum all year long, regardless of the very difficult market backdrop. This demonstrates the various vary of shopper relationships we now have nurtured in addition to the differentiated set of capabilities that we carry to the market. Retail web outflows had been $4.1 billion within the fourth quarter, a meaningfully decrease tempo of outflows than the prior quarter because the channel achieved constructive flows in Asia-Pacific and ETF flows improved in each the Americas and EMEA, regardless of an uptick in buyers harvesting tax losses because the yr ended.
Photograph by Mathieu Stern on Unsplash
Transferring to Slide 6. Internet outflows declined quarter-over-quarter in Americas and EMEA, primarily as a result of enchancment in ETF web flows. Internet inflows in Asia-Pacific had been $3.3 billion, led by Japan and Australia. Our China three way partnership skilled modest web long-term outflows of $400 million within the fourth quarter as fastened revenue merchandise skilled a significant industry-wide spike in redemptions all through China and a fast rise in COVID-19 circumstances impacted the Chinese language economic system and monetary markets. Regardless of that, we raised over $3 billion within the fourth quarter from new merchandise and buyers confirmed indicators of shifting again into fairness merchandise the place we garnered $1.8 billion of web long-term inflows. Taking a look at full yr 2022, our China three way partnership delivered $7 billion of web long-term inflows, an 11% natural development price, and we’re gaining market share.
Constructing on Marty’s factors from earlier, the Chinese language market could stay in transition within the short-term and thru the primary few weeks of 2023, the upper redemptions we skilled within the fourth quarter have persevered pushed by fastened revenue. This dynamic could also be a drag on web flows in China by way of the rest of the primary quarter, although we count on to be launching new merchandise after the Chinese language New 12 months, and there’s rising optimism for the remainder of 2023. Long term, we stay among the finest positioned asset managers, and what’s anticipated to be, the world’s fastest-growing marketplace for asset administration. Fastened revenue capabilities sustained natural development within the fourth quarter with $800 million in web inflows. The agency achieved web inflows on this space, regardless of the heightened redemptions on the Chinese language fastened revenue merchandise in addition to a $2.4 billion outflow associated to BulletShares ETFs that reached their deliberate maturity final month.
As rates of interest stabilized, we now have a various platform of fastened revenue choices with sturdy funding efficiency throughout the complete vary of threat appetites and durations which are positioned to seize future development. Alternate options skilled web outflows of $3.6 billion within the fourth quarter. Liquid alts accounted for greater than two-thirds of the online outflows pushed primarily by commodity targeted ETFs. These methods skilled web inflows for the complete yr, however gave again good points from the primary half of the yr. Personal markets web outflows had been $1.6 billion, primarily as a result of outflows and financial institution mortgage methods. Internet outflows within the lively fairness methods have been concentrated in international and growing markets equities, which expertise $6 billion of web outflows within the quarter, together with $3.1 billion from our growing markets fund.
Transferring to Slide 7. Our institutional pipeline was $30 billion at quarter finish, a rise from $23 billion final quarter. Regardless of the difficult setting, we’re profitable new mandates, notably in fastened revenue and lively fairness within the fourth quarter, which contributed to the rise. Our pipeline has been operating within the mid-$20 billion to mid-$30 billion vary courting again to late 2019, and we’re happy to see the pipeline this strong given the unsure market setting. As we have famous beforehand, that uncertainty is inflicting some mandates to take longer to fund and we’d estimate the funding cycle of our pipeline has prolonged into the three to 4 quarter vary versus the 2 to 3 quarters previous to the market downturn. Our options functionality enabled one-third of the worldwide institutional pipeline within the fourth quarter, and it stays a differentiator with shoppers.
The pipeline displays a various enterprise combine that has helped Invesco maintain natural development within the channel all through the complete enterprise cycle. Turning to Slide 8. Markets partially recovered within the fourth quarter, however the vital market declines that we skilled within the third quarter, particularly in September, drove belongings underneath administration decrease initially of the interval. Internet income of $1.1 billion $1.11 billion and the fourth quarter was flat the prior quarter and 19% decrease than the fourth quarter of 2021. That is primarily as a result of decrease lively belongings underneath administration. Whole adjusted working bills had been $769 million, a rise of $28 million from the prior quarter, and a lower of $27 million as in comparison with the fourth quarter of 2021.
Compensation bills elevated by $8 million as in comparison with the third quarter, inclusive of incentive comp paid on the $56 million of efficiency charges earned on this quarter. As we have mentioned, we handle variable compensation to a full yr consequence in keeping with firm efficiency and aggressive {industry} practices. Traditionally, our compensation to web income ratio has been within the 38% to 42% vary on an annual foundation. In periods of income decline, as we skilled in 2022, the ratio tends to maneuver in direction of the higher finish of this vary. For the complete yr 2022, our compensation to income ratio was 41%. At present AUM ranges, we’d count on the ratio to development in direction of the upper finish of the vary for 2023. As a reminder, seeking to the primary quarter, we count on seasonally increased compensation taxes and advantages of $20 million to $25 million in line with prior yr traits.
We’d count on this to be largely offset by decrease incentive compensation on efficiency charge income after seasonally excessive revenues obtained within the fourth quarter. Advertising and marketing bills had been $4 million increased than prior quarter, in line with the seasonally increased exercise we usually see within the fourth quarter. Although advertising bills had been $9 million decrease than the fourth quarter of 2021. Property, workplace and expertise bills had been $6 million increased than the prior quarter. As we have talked about beforehand, we’re within the means of shifting to our new Atlanta headquarters, which we count on to be full by the center of this yr. Nonetheless, we could expertise average delays because of flooding that happened when bitterly chilly temperatures trigger pipes to burst round Atlanta in December, and we’re working with related events on a decision.
In fourth quarter, we additionally incurred $2 million of bills associated to the decommissioning of our present workplace constructing. These bills will not be repetitive in nature. Know-how bills within the fourth quarter included funding in ongoing expertise applications that can profit future scale, similar to upgrading our human assets working setting and the transfer of our monetary techniques to the cloud. G&A bills had been $10 million increased than prior quarter, influenced by $4 million of overseas change price revaluations related to the impression of foreign money actions on our stability sheet, and an extra $2 million of worth added taxes paid in non-U.S. jurisdictions. As I discussed earlier, we’re investing in foundational expertise initiatives that can allow future scale in our working platform.
These bills span SG&A and property, workplace and expertise bills, and they’re included in our outcomes. We’re investing in our key development capabilities, whereas balancing the necessity to diligently handle bills on this unsure setting. We have now targeted near-term hiring within the development areas that we have outlined and deferred hiring for many different positions. Over the longer-term, we’re constructing a platform that can quickly and effectively scale, delivering constructive working leverage and margin growth as markets recuperate. Now shifting to Slide 9. Adjusted working revenue was $339 million within the fourth quarter, $30 million decrease than the prior quarter as a result of flat web revenues mixed with increased working bills. Adjusted working margin was 30.6% as in comparison with 33.3% within the third quarter and 42% within the fourth quarter of 2021 previous to the steep market declines that we skilled in 2022.
Earnings per share was $0.39 as in comparison with $0.34 as a result of increased non-operating revenue pushed by good points on our seed capital and co-investment portfolios as markets elevated from third quarter lows. The efficient tax price was 26.9% within the fourth quarter decrease than 28.7% within the prior quarter as a result of losses and decrease tax jurisdictions final quarter that didn’t recur. We estimate our non-GAAP efficient tax price to be between 25% and 27% for the primary quarter of 2023. The precise efficient tax price could differ from this estimate as a result of impression of non-recurring gadgets on pre-tax revenue and discreet tax gadgets. I’ll conclude on Slide 10. Sustaining a robust stability sheet stays a prime precedence, additional underscored by the risky setting that we now have been navigating.
Whole debt was managed decrease to $1.5 billion as of December 31, which is the bottom stage in 10 years. We constructed money within the fourth quarter as we ended the yr with over $1.2 billion in money and money equivalents, a rise of greater than $200 million from September 30. Our leverage ratio as outlined underneath our credit score facility settlement was 0.8x on the finish of the fourth quarter, barely increased than the 0.7x the third quarter as declining markets have led to decrease EBITDA. Our leverage ratio was flat within the fourth quarter of 2021. If most well-liked inventory is included our fourth quarter leverage ratio was 3.2x. Within the face of one of the difficult markets of the previous half century, Invesco continues to seize shopper demand in excessive development areas, and our web circulation efficiency has been among the many greatest in our peer group.
In the meantime, we have been constructing stability sheet energy and monetary flexibility wanted to navigate these unsure instances. We will probably be extraordinarily disciplined in expense administration and useful resource allocation, whereas guaranteeing that we’re assembly the wants of our shoppers and positioning the agency for long-term development. With that, we will go forward and open it up for Q&A.
Operator: Glenn Schorr with Evercore, your line is open.
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