Principal Financial Group, Inc. (PFG) Earnings Call Transcript & Summary

Hello and welcome to the 2020 Annual Meeting of Shareholders of Principal Financial Group, Inc. It is now my pleasure to turn today's meeting over to Dan Houston, Chairman of the company's Board of Directors, President and Chief Executive Officer of the company. Mr. Houston, the floor is yours.

Thank you and good morning and good evening. Will the meeting please come to order? Welcome to the Annual Meeting of the Shareholders of Principal Financial Group, Inc. As result of the COVID-19 epidemic and our respect for everyone's health and safety, we are holding this meeting in a virtual format via live webcast. The agenda and the rules for today's meeting are available on virtual meeting site by clicking on the links located on the left side of the page. I'm Dan Houston, Chairman of the company's Board of Directors, President and Chief Executive Officer. With me is Chris Littlefield, who is Executive Vice President, General Counsel and Secretary of the company. All the members of the company's Board of Directors are participating in today's meeting, as are the company's senior executives, including its executive management group. I want to invite your questions and comments and allow me to give you some guidance on the use of the meeting website for that. You may have submitted those in advance, and you can submit questions and comments during the meeting. Those questions and comments that are related to any proposal will be addressed during the meeting. Other questions and comments will be addressed after the business presentation towards the end of today's meeting. Questions can be submitted by clicking on the message icon in the upper right-hand corner of the web page. To return to the main page, click the i icon at the top of the screen. I'd like to introduce the directors who are standing for election today, Jonathan S. Auerbach, Jocelyn Carter-Miller, Scott M. Mills. The skills and experience of each director candidate brings to The Principal Board of Directors are detailed in the proxy material you've received, but allow me to summarize some of them for you. Jonathan Auerbach has been on our Board since 2019 and serves on our Finance and Nominating and Governance Committees. He is the Executive Vice President, Chief Strategy, Growth and Data Officer of PayPal, Inc. In his role, he leads PayPal's global strategy, data science, business development and M&A initiatives. In addition, he has executive-level experience in international, merger and acquisitions, strategic planning and technology. Jocelyn Carter-Miller has been a director of the company since 2001 and was a director of Principal Mutual Life Insurance Company before that, joining the Board in 1999. She is the Chair of the Finance Committee and serves on our Nominating and Governance Committee. She has been President of TechEd Ventures since 2005, which specializes in the development and marketing of high-performance educational and personal empowerment programming. She has extensive background in marketing leadership as well as executive-level experience in brand management, advertising, sales, multinational companies, international operations, talent management, mergers and acquisitions, product development, project management, strategic planning, technology and leadership development and training. She also has passed her CPA exam. Scott Mills has been a director of the company since 2016 and has been a lead director since January 2020. He is a member of the Audit and Human Resources Committee. He is the President of BET Networks. He has executive-level experience in accounting and finance, asset and investment management, executive compensation, talent management, financial services, marketing, product development, strategic planning and technology. Other members of the Board are also participating in our meeting today. Those directors are Michael Dan, Dan Gelatt, Sandy Helton, Roger Hochschild, Diane Nordin, Blair Pickerill, Elizabeth Tallett and myself, Dan Houston. The Board has appointed Computershare to serve as the inspector of election for the meeting and representatives from Computershare are participating on today, as are representatives from our independent auditing firm, Ernst & Young LLP. Chris, do we have a quorum?

Yes. The Board of Directors set March 25, 2020, as the record date for determining shareholders entitled to vote at this meeting. The representatives of Computershare present today report to us that on the record date, there were a total of 273,288,576 shares of the company's common stock outstanding. The holders of not less than 1/3 of the shares of common stock entitled to vote at this meeting are present today by virtual participation or by proxy. We have a quorum. An affidavit of mailing has been delivered to us by Computershare, the inspector of election, attesting to the fact that the notice of the meeting, the proxy statement and the 2019 annual report were all properly made available to all shareholders of record beginning April 10, 2020. As stated in the notice, the purposes of this meeting are to vote on the proposals as well as any other business that may properly come before the meeting.

On the basis of the Secretary's report, the meeting is duly convened. Let's turn to the meeting's agenda available to you on the meeting's website. The polls for each matter voted on this meeting are now open and will close just before the inspector's report, and I will announce the closing. If you sent in your proxy, you don't need to do anything else today to vote. But if you do want to vote now or revoke your proxy and change your vote, please click on the Cast Your Vote link on the meeting website. Please vote now. [Voting]

Chris, would you present the proposals, please?

Yes. As to Proposal #1 and on behalf of the Board of Directors, I nominate the following persons, Jonathan S. Auerbach, Jocelyn Carter-Miller and Scott M. Mills, for election as directors to serve in the class with terms expiring 2023 or until each of their respective successors have been elected and qualified. Proposal 2. On behalf of the Board of Directors, I move adoption of the following resolution. Resolved that the Principal Financial Group amended and restated director stock plan is hereby approved and authorized. Proposal 3. On behalf of the Board of Directors, I move adoption of the following resolution. Resolved that the Principal Financial Group employee stock purchase plan is hereby approved and authorized. Proposal 4. On behalf of Board of Directors, I move adoption of the following resolution. Resolved that the compensation paid to the company's named executive officers as disclosed pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, compensation tables and narrative discussion, is hereby approved. Proposal 5, on behalf of the Board of Directors, I move adoption of the following resolution. Resolved that the appointment of Ernst & Young to audit the consolidated financial statements of the company for the fiscal year ending December 31, 2020, be ratified.

Thank you. Are there any questions from shareholders regarding any of the proposals on the ballot? Now is the time to submit questions and comments you may have about any of these proposals. We have reviewed the questions that we have received via the meeting's website and will answer those in a moment. In addition, you may submit a question at the meeting's website by clicking on the message icon in the upper right-hand corner of the page. To return to the main page, click the i icon located at the top of the screen. Okay. There being no further business to come before the meeting and all the ballots have been collected, the polls are now closed. I believe we are ready for the inspector of election to report on the vote. Chris, will you please read the report?

Yes, a substantial majority of shares entitled to vote at this meeting have been voted by proxy. Those results plus the shares voted at this meeting will be tallied and the final results publicly announced within a few days. The inspector of election reports that each of the directors nominated by the Board for election received substantially more than a majority of the votes cast, that the 2020 amended and restated director stock plan was approved by a substantial majority of the votes cast, that the 2020 amended and restated employee stock purchase plan was approved by a substantial majority of the votes cast, that the advisory vote on the company's executive compensation program indicated approval of the program by a substantial majority of the votes cast and that a substantial majority of the votes cast were in favor of the ratification of the appointment of Ernst & Young.

Thank you, Chris. Based upon the preliminary report of the inspector of election, I declare that Jonathan S. Auerbach, Jocelyn Carter-Miller and Scott Mills are elected directors, that each of the 2020 amended and restated director stock plan and 2020 amended and restated employee stock purchase plan was approved by a substantial majority of the votes cast, that the advisory vote on executive compensation indicates approval of the company's executive compensation program as set forth in the proxy statement and that the appointment of Ernst & Young as independent auditors for 2020 is ratified. The meeting is now adjourned. I'd like to thank you again for taking the time to join us here on this call. On behalf of the Board of Directors and all of The Principal employees, thank you for your continued loyalty and support. I will now share with you the results from last year and discuss our long-term strategy. Following that, we will address any additional questions that you might have. Thank you for joining us telephonically. I'd much rather have done this in person, but we all know that we're dealing with the issues of COVID-19. We continue to operate in a very significant way and continuing to serve the needs of our customers. During my shareholders' letter this year, I talked about what makes us stronger, what makes us better and for our customers, employees and shareholders as well as all of our stakeholders. In hindsight, that statement was written in the fall, and it couldn't be any more true following this first quarter of 2020 as we have all battled the COVID-19 challenges set forth in front of us. So with that, I would like to very briefly talk about 2019 but frankly, focus most of our attention on matters looking forward. You'll note in the materials the forward-looking statement, which you can read at your leisure. I will then turn to Slide 9, which discusses the 2019 financial results and the diversification of the business. The results for the 2019 year were actually quite strong with $1.6 billion of non-GAAP operating earnings, our record AUM at $735 billion and net cash was a very respectable $17.3 billion. I'd also note on the right-hand side of the page that diversity continues to serve the organization well. We divided them up among risk, spread and fee. It's been this combination of businesses that have helped us do an outstanding job for shareholders by having diverse sources of revenue as well as our ability to continue to be relevant for our customers. On the next slide, we talk about operating from a position of strength. If I looked at the first quarter, we had 2 very good months on a very poor month, driven in large part by macroeconomic factors. Clearly, a focus has been placed on financial strength, and Principal will continue to manage its capital and liquidity accordingly. You can see here that our risk-based capital measure is in excess of 400% and we have no debt maturities until the year 2022. So again, from -- both from a perspective of adequacy of capital as well as liquidity, the company is in a very good and favorable position. In 2019, our capital deployment was across the board, again, very deliberate and very balanced with over $600 million paid out in the form of a common stock dividend. We did repurchase roughly $0.25 billion of share repurchases throughout 2019. And also, we deployed $1.2 billion in the acquisition of the Wells Fargo Institutional Retirement & Trust business, which I'll talk about in more detail. In the first quarter of 2020, we deployed an additional $372 million of capital. We suspended our share buyback program in March of 2020 and we would expect to deploy somewhere between $800 million and $1 billion in the remainder -- I'm sorry, for -- in total in 2020. We are continuing to remain in a very strong capital position with a great deal of liquidity in 2020, recognizing the uncertainties related to the COVID-19 and when this might pass the organization. As it relates to our acquisition of the Wells Fargo Institutional Retirement & Trust businesses, we feel very good for the reasons in which we acquired this, partially for the new capabilities that they brought to the organization. It gives us significant scale in the trust and custody business as well as in our retirement business. It allowed us to expand to additional locations, including North Carolina and Minnesota where they had sizable operations in addition to the Philippines, and we continue to work towards integrating these organizations into The Principal family. Our results are tracking with what our expectations were on the retirement business and perhaps slightly behind related to the trust and custody business in large part because of low interest rates. From a strategic perspective, we feel very good about this acquisition. We look forward to onboarding that -- those plans over the course of the next 12 months and remain very enthusiastic about what that gives us long term. I want to slip -- or I want to then go to the customer and it's remaining at the focus of our business enterprise. And I want to remind you that whether it's pre or post COVID-19, our responsibility remains the same: helping 33 million customers and 200,000 small to medium-sized businesses achieve lifetime financial security. Nothing about the current stressed environment changes that, except it focuses more importance on individuals to save and prepare for retirement and to make sure that they have proper protection on their life or should they become disabled. So again, we think about how we differentiate ourselves in the marketplace. In large part, it is to create solutions that are relevant. For 140 years, we continue to remake the organizations, its products and services that we can help people solve their biggest problem. And again, that focuses back on financial security. We continue to make significant investments in technology, both in our back office, middle office and front office to be relevant to our customers. We know that brand increasingly is important. We've done a lot of recruiting to the organization to strengthen our ability, to have stronger brand visibility and to continue to be relevant around the world, the 80 countries in which we do business. And also, the importance of distribution. And I think we're all witnessing firsthand why technology is not only important to your back office, but how it can be leveraged in working with various distributors, both those that have been around for literally a century and those that continue to evolve. One of the areas that's not new to Principal is our commitment to social and responsible investing. We continue to make that a priority for Principal. This is not new for us. It is not a fad, it's not a buzzword. It's core to our strategy and to strengthen our business as well as to advance our mission. We have, in previous years, as we have in the current year, been recognized by Ethisphere Magazine as one of the world's most ethical companies and have been so the last 10 years. We've also earned third-party recognition as one of the most sustainable, responsible and just companies. We not only think it's important to serve the needs of our customers and our employees but to get back to the communities in which we do business. Our not-for-profit foundation gave more than $15 million to 1,500 different organizations in this past year and 450 communities in which we do business. I think you'd also be proud of the fact, I know that I am, that our employees logged in over 56,000 volunteer hours around the world through our paid volunteer time-off program. We also have an annual Principal Charity golf tournament, which in the course, since 20 -- sorry, 2007, has raised over $23 million for charities. And again, this is to help youth and recognize some of the challenges in which they're facing. It also has been a hallmark of the organization to embrace diversity and inclusion. It's part of the DNA. It starts at the very top, with our Board of Directors comprising of 55% women and people of color. It also is on our C-suite with over 50% representation of females. Last year, Forbes recognized us as one of America's Best Employers, placing us at #5 on their list of Best Employers for Women and including us among the Best Employers for Diversity. We also earned a 2020 Military Friendly employer designation by Victory Media. Sustainability of our environment continues to be important not only to us as a corporation, but oftentimes to our customers. By the end of 2021, we will have reduced our direct and indirect greenhouse gases emissions by more than 30% compared to the same period 10 years ago. Principal Real Estate Investors has reduced energy consumption by properties within its asset portfolio by over 15% since 2008, avoiding $60 million of energy cost as of the third quarter of 2019. And we continue to reposition our corporate campus here in Des Moines to be LEED certified. 2 are in the certification process at the end of 2019. And we continue to invest responsibly. Our global investment management company, Principal Global Investors, integrates environmental, social and governance investing principles into its approach to portfolio management. PGI manages more than $10 billion in custom screened, ESG-related assets for our clients. Principal Real Estate Investors uses a unique framework to integrate ESG considerations into every aspect of investment process for its $11 billion in assets. In Indonesia, we have a first of a kind philanthropy fund, which allows investors to donate their returns to an array of approved charities. This is not a fad. This continues to be welcomed and well received by investors. I've spoken last year and throughout -- our updates throughout 2019, and these roll into 2020, its areas of focus, starting with our enterprise strategy. It's what unites our very successful business units around the world as we look to continue to leverage these resources and truly be a global asset management and provider of financial security for all. Principal future ready is what we have tagged as 6 major initiatives for the organization. And if you want to boil it down into one initiative, to me, it's what's next in terms of customer experience, how do we do that at the lowest possible cost, have the richest experience, but most importantly, generate great outcomes for our employer plan sponsors, our institutional customers as well as our retail customers. We talked over 2 years ago about the investment we are making in our digital platform to become more efficient, more convenient, more effective, to allow us to do business for our customers in a very easy manner, and we continue to make great strides. Also, we look forward to successfully onboarding the Wells Fargo Institutional Trust business. And then lastly, as we can all appreciate, we will have to adapt to a new working environment. We know that many of our employees may very well choose to work in a remote environment. Fortunately, we've made significant investments in technology that will allow us to do that well. We also know that we have many employees that are anxious to get back to the office in a more traditional setting. So again, 5 major areas for us to continue to focus on, and we look forward to building upon our core values in order to deliver that value for our shareholders and our customer. Like many other organizations, we continue to see a very organized approach to succession. I'd like to welcome several new members of our team. You heard one of them speak earlier. Chris Littlefield, Executive Vice President, General Counsel and Secretary. Also welcoming Beth Wood, our Senior Vice President and Chief Marketing Officer. And literally, our newest member of our team, Kathy Kay, Senior Vice President and Chief Information Officer. These individuals are stepping into some really big shoes here at Principal, starting with someone who has served the organization for over 38 years. Karen Shaff has been an invaluable member of our executive management group. She's been Executive Vice President. She was our former General Counsel and Secretary and someone who we're going to miss dearly when she retires on July 1. On June 2, Gary Scholten, our Chief Information Officer and Chief Data Officer, will celebrate on the day he retires 40 years with the Principal Financial Group and the 17 recent years as our Chief Technology Officer and Chief Information Officer. And again, someone who has done an outstanding job as a member of our executive management group as well as someone who has advanced the organization's technological capabilities. And then I'd also like to recognize our Board members retiring. Just this morning, Dan Gelatt, who's been our longest-serving board member with over 32 years, has worked with the 7 last Chief Executive Officers. He's our longest-serving board member. He's a former lead director. He's made a significant investment in Principal with his own dollars in what I would call critical times during the Great Recession and within the last 3 months. He always asked the right questions and someone who we'll miss, and we said goodbye to Dan this morning. Also retiring from the Board is Betsy Bernard after 21 years of service, who was a very strong board member, very insightful on change and transformation and helped lead us in our diverse and inclusion efforts and will be missed. Also, what you may have noticed in our annual shareholder letter and report was a stepping down of Liz Tallett, who was our lead director from 2007 through 2019. Liz was an amazing leader for me personally and helping me on board as the new Chief Executive Officer in 2015. She's guided the independent directors with grace and focus as our lead director, and she's always represented the entire views of the Board, and now she will lead our Human Resources Committee. With that, it creates a great opportunity for Scott Mills, who took effective on -- effective January 1, 2020, as our new lead director. And I very much look forward to working with Scott to represent the interest of our independent directors and our shareholders in advancing the company's strategy. What I'd like to do now is just make a couple of closing comments on COVID-19 and what we're doing for our customers and our employees before opening up to questions, if there are any. The first of which was to recognize -- our highest priority was making sure that we were able to successfully move our employees into a safe and secure environment. We moved, over the course of roughly 3 days, 95% of our workers into their respective homes. We have now roughly 98% of our workers around the world working in a remote environment. And frankly, the customer service scores and the feedback continues to be very positive. Having said that, we now look for ways to successfully return to the traditional work site. A group of professionals here at The Principal are leading that charge. We would anticipate that sometime over the course of the summer, as many as 10% to 15% of our employees would start the process of voluntarily working back towards occupying our buildings again, not only here in Des Moines but all of our locations around the world. We'll also take very close direction from governmental bodies, the WHO and other organizations who will have a huge influence in our thinking about how to successfully reoccupy our buildings to the extent that we can and look forward to doing that. So with that, operator, I'm very open to questions that our investors might have.

Yes, Dan. We have currently 2 questions in the queue. The first question is, has the Board and management taken a pay reduction to help the cause?

Yes, that's a great question. And ironically enough, the Board unanimously passed just this morning. Not only approving management's proposal put forth to reduce our compensation, but the Board of Directors voluntarily reduced their compensation as well. You may very well remember the fact that the Board took a very similar action aligning with management back in 2008 when we had the previous global recession.

Okay, Dan. Second question is, what exposure does the company have to potential adverse actions from the Chinese government?

Well, the first thing I would say is we've enjoyed a really strong and healthy working relationship with the Chinese for nearly 20 years. We've had a representative office in China. We continue to work very closely with China Construction Bank, who has always been a good partner. We look to expand our business in China. We respect each other a great deal. We continue to work with various governmental entities to ensure that we are in compliance, of course, in all of our dealings and working closely with China. China represents a huge opportunity for Principal and frankly, many other providers of products and services and again, an opportunity that we need to continue to build upon.

No other questions. Thank you.

No other questions? Okay. Well, again, I appreciate your continued support for The Principal and what you do for the organization as a shareholder. Certainly, I want to say thank you to our employees who have worked tirelessly, 18,000 individual professionals around the world, to meet the needs of our customers. We certainly appreciate our customers' patience as we have worked through this difficult environment. And we continue to look to make all the necessary adjustments as we deploy capital, as we create liquidity, as we provide products and services, to still meet the needs of our customers. So with that, have a wonderful day and look forward to talking to you again soon. Thank you.

This concludes the meeting. You may now disconnect.