Federated Hermes, Inc. (FHI) Earnings Call Transcript & Summary

Good afternoon. I am Chris Donahue, the Chairman, President and Chief Executive Officer of Federated Hermes, Inc., and I would like to welcome you to the Federated Hermes Annual Meeting of Shareholders. Once again, this year, the annual meeting is being held by teleconference rather than in person. The program today will consist of a brief business meeting, to be followed by some comments on the company and then a brief question-and-answer period for shareholders of the company. Before we begin the business portion of the meeting, I would like to introduce certain individuals joining us on the conference line: Peter Germain, Executive Vice President, Secretary and Chief Legal Officer of Federated Hermes, Inc.; Joseph Bartolacci, Director, Federated Hermes, Inc., and President and Chief Executive Officer of Matthews International Corporation; Michael Farrell, Director, Federated Hermes, Inc. and President of Farrell & Co; Marie Milie Jones, Director, Federated Hermes, Inc., Founding Partner, JonesPassodelis, PLC (sic) [ PLLC ]; Thomas Donahue, Director, Vice President and Chief Financial Officer of Federated Hermes, Inc.; John Fisher, Director, Federated Hermes, Inc., President and Chief Executive Officer of Federated Advisory Companies; Paul A. Uhlman, Vice President, Federated Hermes, Inc., President of Federated Securities Corp.; Saker Nusseibeh, Chief Executive Officer, Federated Hermes Limited; Steve Auth, Chief Investment Officer for Global Equity; and Rich Novak, Vice President and Principal Accounting Officer. I would also like to introduce Mike Haver and [ Lea Oakes ], representatives from Ernst & Young, LLP, the independent auditors for the company. In accordance with the bylaws of Federated Hermes, Inc., I will act as Chairman of the meeting, and Mr. Germain will act as Secretary of the meeting and inspector of electors. Mr. Secretary, is there a quorum present?

Mr. Chairman, only the voting shares of revocable trust as the holder of the Class A common stock of the corporation is entitled to vote at this meeting, and the trustees of the voting shares in revocable trust are represented and present on the line.

Thank you. The Secretary's report indicates that a quorum is present for the corporation, and the meeting is now lawfully convened and ready to transact business. The items for today's meeting are: the election of directors to serve until the next Annual Meeting of Shareholders and the election and qualification of their successors. Mr. Secretary, would you please report on the nominations for director?

Mr. Chairman, the Board of Directors has nominated the following individuals for election as directors of the corporation to serve until the next Annual Meeting of Shareholders and the election and qualification of their successors: Joseph C. Bartolacci, J. Christopher Donahue, Thomas R. Donahue, Michael J. Farrell, John B. Fisher and Marie Milie Jones.

Mr. Secretary, the voting shares of revocable trust hereby votes to elect each of the nominees for director. As inspector of elections, would you please report on the votes cast for the election of directors?

Mr. Chairman, in the matter of the election of directors, all of the shares of Class A common stock, which constitute all of the shares entitled to vote, have been voted affirmatively for each of the nominees for director.

Thank you. As all of the shares entitled to vote is voted in favor of the nominees standing for election as directors, the nominees are duly elected.

Mr. Chairman, I move that the meeting be adjourned.

If there is no objection, I declare the meeting duly adjourned. And now at this point, I would like to comment on the past year, after which, I will be happy to entertain questions from shareholders during our brief question-and-answer period. But before beginning my comments, it's my pleasure to announce that the Board of Directors, at a meeting immediately prior to this meeting, declared a dividend of $0.27 per share to be paid on May 13, 2022, to shareholders of record on May 6, 2022. Now if you'd like information on the most recent quarter, our news release announcing the financial results for the quarter is being released this afternoon, and it will be available at the SEC website at www.sec.gov and will be available on our website at www.federatedhermes.com. You're also welcome to listen to our quarterly earnings call, during which, we will report financial and operating results for the quarter ended March 31, 2022. The earnings call will be held tomorrow morning, Friday, April 29, at 9:00 Eastern Time. Shareholders interested in listening to the conference call should dial (877) 545-0523, domestic and (973) 528-0016, international or visit federatedhermes.com for real-time Internet access. To listen online, you can go to the Investors Relations section of the website and the Analyst Information tab at least 15 minutes prior in order to register and join the call. So in 2021, Federated Hermes continued to be among the 4 most providers of actively managed investment strategies as the firm achieved record sales and solid earnings. Overall, year-end, assets under management reached a record $669 billion, up $49 billion or 8% from the previous year. Federated Hermes products in long-term categories, which comprise equity, fixed income, alternative private markets and multi-assets, rose by 11% to a record $221 billion at year-end, with fixed income growing by 16% to reach a record of $98 billion at year-end, and alternative private markets increasing 20% to reach a record $23 billion at year-end. Equity assets were $97 billion as of year-end. Long-term assets drove 80% of the firm's revenues during 2021. Diluted earnings per share were $2.75 on net income of $270 million during 2021. For the year, gross sales of long-term strategies reached another record high in 2021, hitting nearly $70 billion, a 14% increase from 2020. As we grew assets in these long-term categories, our liquidity assets were up $28 billion from the previous year to $448 billion. EOS at Federated Hermes assets under advice were $1.6 trillion as we added 10 new clients during the year. We continue to focus on expanding our investment and stewardship capabilities while growing our global distribution footprint. In the last year, we also made a range of other significant investments in our future, from technology to diversity and inclusion initiatives, that position the company for future success. To complement and broaden our existing Federated Hermes diversified solutions, we launched newly developed investment strategies last year to meet evolving customer needs. Among them, in the fourth quarter, we started our 2 ETFs, the Federated Hermes short-duration corporate ETF and the Federated Hermes short-duration high-yield ETF. These actively managed products benefit from the experience, insights and capabilities developed over our firm's 50 years of managing fixed income solutions for investors. We acquired the remaining 29.5% in Hermes fund managers, now known as Federated Hermes Limited, that had been held by the BT Pension Scheme early in '21. This was building upon the 2018 acquisition of a majority share in our London-based subsidiary and the subsequent rebranding of our entire firm as Federated Hermes, Inc. Federated Hermes continued to employ capital to benefit shareholders last year. The company repurchased 7.1 million shares of Class B common stock and through year-end, paid quarterly dividends to our shareholders for the 96th consecutive quarter. 4 quarterly dividends of $0.27 each brought dividends to a total of $1.08 per share in '21. Extremely low interest rates continued to impact earnings in '21. With short-term rates still at historic lows and money market yields remaining in single digits, significant fee waivers were again necessary in 2021 to keep certain liquidity products at 0 or a positive yield. The operating income impact of these waivers to Federated Hermes was a negative $143 million for last year. During the 3 months ended March of 2022, voluntary yield-related fee waivers totaled $76 million. These fee waivers were partially offset by related reductions in distribution expenses of $58 million, so that the net negative pretax impact to Federated Hermes was $18 million. With short-term rates moving up with the Fed hikes in mid-March and further rate hikes anticipated for the rest of the year, we estimate that the negative impact on operating income from minimum yield waivers on money market mutual funds for the second quarter will improve, such that the negative pretax income would be about $1 million. These estimates are based on our investment team's expectations for portfolio yields and recent asset levels, asset mix and other factors. Revenue in the first quarter of '22 decreased $16 million or 5%, primarily due to lower average equity assets. Yet as markets faced volatility, a slowing economy and higher interest rates in the first quarter of '22, investors saw haven in a variety of our equity products, including the Federated Hermes strategic value dividend strategy, which seeks to provide income by investing in companies that have a history of sustaining and growing dividends. Other strategies in demand in the first quarter of '22 include our high-yield and strategic income bond strategies, which illustrate the case for active management, since the portfolio management teams seek attractive opportunities across sectors while managing risk to navigate these challenging conditions. As we manage through the challenges of '21 and here in the first quarter of '22, we continue to offer responsible investment solutions to more than 11,000 clients to help them grow their business. Looking ahead further in '22 for growth, we will provide these clients with research, thought leadership and investment strategies that have responded well in prior inflationary situations and solutions for our clients. Through it all, responsibility will continue to be central to our client relationships; our long-term perspective; and of course, our fiduciary mindset. That ends my remarks. And now prior to taking questions, I ask Mr. Germain to explain the guidelines that we will follow.

We will conduct a brief question-and-answer period for only shareholders of the company. In order to allow for an orderly shareholder question-and-answer period and to allow time to ask questions within the time allotted, we have established the following guidelines. Questions will only be taken from shareholders of the company. Please indicate to the operator that you are a shareholder of Federated Hermes, Inc. and let the operator to know what your question is. A shareholder's question should not ask for information that has already been discussed. Questions related to the company and its business, results of operations, financial condition or business plans are appropriate. Unfortunately, not all questions may be answered.

So if the operator could now survey for questions, we'd appreciate it.

[Operator Instructions] And there are no questions in queue at this time.

Well, I thank you all for attending, and that will conclude our session together and all the best for the rest of the year. Goodbye.

Thank you. Ladies and gentlemen, this does conclude today's meeting. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.