GAM Holding AG (GAM) Earnings Call Transcript & Summary

Good morning. Thank you for joining GAM's half year results call today. My name is Pete Sanderson, Group CEO of GAM, and I'm joined today by Richard McNamara, our Group CFO. Before we start, please note that there will be time to ask questions at the end of the presentation. [Operator Instructions] I'll start by giving you an overview of the highlights of the first half, and then we'll hand over to Richard who will give you some more detail about our financial results. I will then end with a summary and outlook for the rest of 2020, and then there will be time for questions. I want to cover 4 topics for 2020: GAM's response to the COVID pandemic; our strategic progress; the trends in our asset flows; and then finally, our investment performance. So let's start with the pandemic. In common with many firms with global operations, we were closely monitoring the advance of COVID and the response of the various countries where we have offices and clients. We've increased and adapted our communication with our clients to make sure they have our full and continuous support, and clients have responded positively to this effort. We also took an early decision to move to remote working and protect the health and well-being of our employees, our clients and their families. Our teams have responded well, and productivity has remained high as we've adjusted to this new reality. An employee survey in May showed that employee engagement remains high, which is encouraging. Our operations and technology have proven robust, and our investment teams have maintained the stability of our portfolios in a period of unprecedented volatility. Despite working remotely, we've also managed to accelerate our efficiency program without any negative operational impact. Moving to remote working has proven to be both operationally resilient and has also given us food for thought about future ways of more productive working. We're rolling out a new way of working from the third quarter, which you'll see the whole of GAM working in a more flexible and agile manner. We think this plays well to GAM's entrepreneurial spirit and embracing change positively. In February 2020, we announced our strategy to make GAM fit for the future. This is based on 3 strategic pillars: efficiency, transparency and growth, which taken together are designed to deliver our vision. The first half has seen strong momentum across our strategic pillars as we mobilize for growth. Our efficiency pillar aims to create synergies and enable us to adapt to the ever-changing and challenging industry environment. We want to deliver for our clients quickly and effectively by making it easier to do business with GAM. We're removing unnecessary duplication and taking full advantage of technology. We are doing this by better integrating our business processes and converging on a simpler One GAM operating model. At the heart of this is our new cloud-based SimCorp platform. We've used SimCorp for years in our private labeling funds business as well as in parts of our investment management business. We are now implementing it across the firm to help realize the opportunities for efficiencies and to better service our clients. Despite the challenges of remote working, all of this work is still on track. We accelerated our efficiency program in response to the reduction in our assets under management caused by the market disruption in COVID. As announced in April, we will deliver at least CHF 65 million in cost savings during 2020. Our transparency pillar is designed to deliver better reporting and improved processes based on clarity, accountability and trust. Transparency is critical to building and maintaining trust with clients, employees and investors. We're also making good progress on strengthening the transparency around our ESG processes within our investment portfolios. We've improved our communications with stakeholders, and we've seen encouraging results so far. We continue to make good progress in aligning our resources around our ManCo services business. We believe in the opportunity to create additional value from managing more closely together the services delivered by our management company to both internal GAM funds and our third-party PLF funds. Our efficiency and transparency pillars are designed to help GAM mobilize for growth, and now we have real momentum around these. We are now focusing on all aspects of our value chain to deliver growth. The announcement of Jeremy Roberts as our new Global Head of Distribution is part of my plan to give increased focus on our client segments and to leverage our global distribution platform fully. We're seeing increased appetite for investment teams which transcend the current economic outlook, and GAM is well positioned to provide these with our specialist actively managed strategies. We're having productive conversations with both former clients and potential new clients who are attracted to GAM's core capabilities that have previously been discouraged by the corporate noise which has been a feature over the past couple of years. It's encouraging that we're seeing materially lower net outflows, and the increased engagement with clients that we've seen over the past months is indicative of the opportunity that we have to grow our assets under management. We have a very scalable platform, and once we get some positive momentum, I'm confident that we can leverage it and pursue a number of avenues to growth. The first half of 2020 has seen unprecedented market volatility with the first quarter seeing significant outflows across the industry. As you can see from this slide, GAM has not been immune from these market developments. In investment management, our net outflows in the first quarter were mainly driven by our 2 largest fixed income strategies: credit opportunities and local emerging bonds. In the case of credit opportunities, the outflows mainly reflected the mechanical rebalancing of client holdings invested via structured products issued by third parties on the funds. These outflows from the funds materially reduced as markets stabilized in late March and in the second quarter. In contrast, some of our strategies have had encouraging levels of inflows during the first half with European equities, Swiss sustainable equities, Asian and China equities and other strategies such as U.K. income, emerging market equities, systematic core macro and multi-asset solutions all seeing inflows. Our PLF business was also resilient through the first half with inflows of CHF 1.2 billion in the first and CHF 1.4 billion in the second quarter. We have predominantly attracted these flows from existing clients. The group assets under management stands at CHF 119.4 billion, with investment management declining to CHF 35.5 billion from CHF 35.7 billion in March, and that was down again from CHF 48.4 billion at the end of 2019. PLF is holding up well at CHF 83.9 billion, just slightly below the CHF 84.3 billion seen at the end of 2019. We've seen the good recovery in investment performance of our funds actually impacted the market volatility in March. The weight of our fixed income strategies in our overall portfolio has a big influence on the overall performance but is improving with 34% of assets outperforming benchmarks over 3 years at the end of June, up from 14% at the end of March. The percentage of our assets outperforming their Morningstar peer group over 3 years also recovered well with 52% outperformance at the end of June compared to 22% at the end of March. There's a particularly strong recovery by our fixed income strategies, which recovered to 49% of assets outperforming their benchmark versus 15% at the end of March. As just mentioned, the prominence of our major fixed income strategies mean that any underperformance or outperformance has a disproportionate impact on the overall performance rating across our assets under management. Since our equity strategies are, by and large, smaller in terms of assets under management, the overall performance figures tend to be disguised in their individual performance. For example, our Japan equity and Japan leaders strategies as well as our disruptive growth and the Swiss sustainable strategy have all outperformed their benchmark over 3 and 5 years. In systematic, core macro and multi-strategy are still outperforming over 3 years, despite having gone through a challenging first half with performance below benchmark. Gam has a long track record of strong investment performance, and we're committed to attracting and retaining some of the brightest minds in the industry to continue to deliver for our clients. Now let me hand over to Richard who will cover our first half financial results in detail.

Thanks, Pete, and good morning to you all. Before I start, let me highlight that the actual half year results we are presenting today are in line with the estimates we provided in mid-June. Today, I'll start off by giving you an overview on our financial performance in the first half and then focus on management fee margins, our expenses as well as our efficiency program before touching on the IFRS numbers, including the intangible impairment communicated in mid-June. I will finish by taking you through our cash and capital position. So starting with the financial summary. Pete has already touched upon net new money and our AUM. The level of our AUM in the investment management business has impacted our overall net management fees and commissions, which reduced by 26% compared to the first half of last year at CHF 123 million. Given most of the performance fee-eligible funds did not reach their high watermarks, our performance fees decreased to CHF 0.8 million. Performance fee-eligible assets now stand at CHF 3.7 billion, down from CHF 5 billion as at the end of 2019. This was mainly driven by the decline in GAM's systematic AUM. We have accelerated our efficiency program in response to the market environment. This has enabled us to quickly adjust our expenses and thus, offset some of the headwinds we are encountering on the top line. Our total expenses came in at CHF 124.5 million in the first half, down some 25% compared to the first half last year. Our underlying pretax result is a loss of CHF 2 million and in line with our mid-June guidance. Reporting a loss is disappointing. However, keeping profits broadly flat period-on-period demonstrates our efficiency program has proved effective. This has impacted the operating margin now to minus 0.6%. So now turning to management fee margins in our investment management business. Our blended investment management fee margin declined to 51.3 basis points in the first half compared to 54.2 basis points in full year 2019. As previously stated, the largest impact on margin is the impact of net flows and asset mix. As shown on this chart, most capability margins remained stable, which demonstrates we are not engaging in material repricing. But note that the margins in each capability are again a weighted average and thus, are also impacted by the asset mix in that capability. The main driver for the decline in the average management fee margin were outflows in higher-margin strategies such as credit opportunities and local emerging bonds. Our exit margin as at 30th of June is in line with the average for the first half. We continue not to be immune to the market-wide fee pressure, but we continue to see our growth potential in strategies mostly priced between 50 to 100 basis points. Now looking at expenses in more detail. Personnel expenses, typically around 60% to 70% of our total expenses, were 23% lower period-on-period. The main driver was a reduction in variable pay, reflecting reduced business performance through lower contractual and discretionary bonus accruals. In addition, our head count reduced by 13% period-on-period. This is reflected in the reduced fixed personnel expenses, which came in at CHF 62.6 million, down 15% compared to last year. Our compensation ratio at 64.8% is reflective of the decline in the revenues being greater than the cost reductions. We are focused on managing costs in line with our top line with simplification and efficiency steps continuing in the second half. Our target compensation ratio by 2022 of between 45% and 50% remains in place, and this will be driven by managing costs tightly and revenue growth. Our general expenses came in at CHF 35.1 million, 33% lower than last year. This was driven by our efficiency program. In addition to these efforts, the pandemic has resulted in reduced travel and marketing spend. Summarizing, our total expenses are down by 25% and came in at CHF 124.5 million compared to CHF 165.2 million for the first half last year. Let's turn to the next slide so I can put this into context with regards to our efficiency program targets. By accelerating our efficiency program, we expect a total cost reduction of at least CHF 65 million this year compared to total costs of CHF 315.7 million in the full year 2019. So just pointing out, our total expenses came in at around CHF 125 million. This is more than CHF 40 million below our expenses in the first half of last year. We've made good progress and we are on track to deliver the at least CHF 65 million for the full year, which means our total expenses will be no more than CHF 250 million. Our efficiency program means we have seen a reduction of approximately 70 roles in the first half, with our head count now standing at 747, down some 13% compared to June 2019. Further simplification is planned at the end of the second half of this year. This is linked to the SimCorp project, which is progressing well and is planned for completion by mid-2021. With this, further efficiency gains can be expected in the financial years 2021 and 2022, but to be clear, our focus is on actual cost reductions, not specific head count numbers. Turning to our IFRS numbers. We recognized a CHF 390.1 million net loss after tax compared to CHF 49.7 million net loss for the first half 2019. Please note, to reflect the financial liability related to 40% of future Cantab performance fees, last year's number has been restated. As always, we deduct 2 items from the underlying profit: acquisition-related and nonrecurring items. This year's IFRS loss was mainly caused by the recognition of an impairment charge related to goodwill, which was primarily created by the acquisition of GAM by Julius Baer in 2005 and UBS in 1999. I will look at this impairments and other items on the next slide. Before that, our underlying effective tax rate is less meaningful given our results are negative. Given the substantially lower profitability, nontax deductible costs have a disproportionate impact on the effective tax rate. Until profits normalize, these types of costs will continue to have this impact. Acquisition-related items in the first half include credits of CHF 29.2 million, reflecting a reduction in the financial liability for the 40% future Cantab performance fees and the CHF 2.9 million remeasurement of the deferred consideration liability relating to Cantab. Nonrecurring items include the CHF 377.7 million (sic) [ CHF 373.7 million ] impairment, reflecting the legacy goodwill being fully written off and a CHF 4 million reduction in the brand intangible. In addition, we recognized CHF 27.4 million impairment on Cantab investment management and client contracts. Given the reduction in the investment management AUM through the COVID crisis, under IFRS, we had to assess the value of these intangibles at the half year, in line with our regular procedures for impairment testing. The remaining intangible on our balance sheet is the GAM brand at CHF 269 million. The other main nonrecurring item was a CHF 4.2 million pension plan curtailment credit as a result of the redundancies in the first half of this year. Finally, turning to capital. It is important to highlight that our balance sheet remains debt-free. Our cash position did decrease since year-end to CHF 272 million. However, this reflects the typical seasonal effects such as compensation payments. Adjusted tangible equity reduced, mainly driven by an increase in the pension liability as bond yields reduced and also the impact of foreign exchange movements. Our dividend policy with a payout ratio targeted at, at least 50% of underlying net profit is unchanged. We remain focused on capital allocation, and we will continue to invest in the business to generate organic growth. This year's AGM approved a new 3-year share buyback program, but no shares have been bought back in the first half. Once capital buffers are enhanced and in the absence of other opportunities for organic investment, the new program provides future flexibility in how to return excess capital to shareholders. With that, thank you, and let me hand you back to Pete.

Thanks, Richard. Before I sum up and we move to Q&A, I want to spend a moment to talk about the conviction that I have in GAM. I've been at GAM for almost a year. I joined the firm because I believe it had a unique place in our industry and the opportunity to grow if we could remove the obstacles and allow us to realize the full potential that the firm has to deliver for clients. As I mentioned at the beginning of this presentation, we're seeing strong momentum under each of our strategic pillars, which are key steps as we mobilize the firm for growth. Of course, there have been challenges over the past 6 months and the extraordinary events of COVID, but what has not changed is my conviction that GAM's role in the industry is to attract and empower the brightest minds and provide a platform for the investment leadership, innovation and sustainable thinking which is needed to protect our clients' financial future. Clients are looking for investment themes which transcend the current economic outlook. And as I said, GAM is well positioned to provide these with our specialist actively managed strategies. I believe that our products, together with our modernized platform and the continuing client engagement that we have offer significant avenues for GAM to grow. Finally, turning to our outlook. We expect the market environment to remain volatile and investors to remain cautious over the coming months. However, GAM is well positioned to satisfy client appetite for actively managed specialty strategies supported by our global distribution platform. Our efficiency program is on track, and we expect further simplification of our business through SimCorp. We maintain our consistently high levels of client engagement with current and future clients as we continue to mobilize the firm for growth. Thank you all for your time and attention on the call today. That concludes our presentation, and we'll now open up the call to Q&A.

[Operator Instructions] I think we have one question.

Can you hear me?

Yes, we can.

Yes. So this is Pascal Boll from MainFirst. I have some questions. First of all, regarding the credit opportunities, you said in Q1 that outflows of credit opportunity funds follow the mechanical rebalancing. However, in my imagination, this would also mean that in under normal circumstances, that there is some kind of a mechanical reversion of this mechanism. This did obviously not take place, right? What's the reason behind that? That's my first question. Second, you say -- you continuously say that you record high client interest in your products. But what exactly do those clients keep from investing into products of GAM? Because, obviously, we still see net outflows in GAM products. And finally, on the midterm targets, how feasible do you still believe in those targets, especially the CHF 100 million pretax profit?