Good morning. My name is Nicole, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be question-and-answer period. In the interest of time, questions will be limited to one initial and one follow-up question. In today's conference call, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors including, but not limited to those described in the Forward-Looking Statements and Risk Factors sections of the company's most recent Form 10-K and other more recent filings made with the SEC. Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you. And now it is my pleasure to introduce Dick Weil, Chief Executive Officer of Janus Henderson. Mr. Weil you may begin your conference.

Welcome everyone to the second quarter 2019 earnings call for Janus Henderson Group. I'm joined by Roger Thompson, our CFO. As we've said on previous calls and in line with taking a longer-term view of our business, we are using the second quarter call to run through a more robust discussion on the business and our strategy as well as the usual updates on quarterly flow performance and financial results. In today's presentation, Roger will review the quarterly results and the current challenges and opportunities facing our business. I will try to give you a deeper look at our five strategic priorities that we have laid out. Following our prepared remarks, we'll be happy to take your questions as always. Before turning it over to Roger, I wanted to provide my thoughts on the quarter as there are a few important insights I think to highlight. The story for our quarter in my mind has three parts. First, investment performance remains strong. 72% and 80% of the assets are beating their respective benchmarks over three and five year time periods, which is an improvement from the prior quarter and a very strong result. Second net outflows of $9.8 billion are disappointing. However, with strong markets our AUM ended up increasing 1%. Third, the financial results and aggregate are better than prior quarter with EPS of $0.61 compared to $0.56 a quarter ago. Looking a bit deeper at the net flow result there are a few important trends, I'd like to highlight. The first one is that the quarterly result reflects $8.4 billion of outflows from the four areas that we have previously called to your attention as challenged areas at risk for us, which are INTECH, Core Plus Fixed Income, European equity strategies along with our global emerging marketing strategy…

Thanks, Dick. Thank you everyone for joining us. Dick's given you the summary of the results. My comments on the details start from slide 3 with investment performance. Overall, investment performance relative to benchmarks of the quarter was strong with all time periods presented showing improvement compared to the prior quarter. We still continue to strengthen performance of our equity and multi-asset capabilities across the one, three and five year time periods and short-term improvements in our Fixed Income and INTECH capabilities. Year-to-date performance of INTECH has been encouraging but the weakness in the longer-term performance means we still have business at risk. The other notable movement was in Alternatives. The U.K. Absolute Return strategy had some very strong outperformance from 2018 rollout of the one-year measurement period resulting in a switch to underperformance on a one-year basis during the quarter. However, year-to-date performance remains good. On the right-hand side of the slide, you can see that relative performance compared to peers is very strong with more than two-thirds of AUM represented in the top two Morningstar quartiles on a one, three and five year basis. 85% of equity AUM our largest capability is in the top two quartiles on a one year basis, 55% of which is in the first quartile which is just an outstanding result. Now turning to total company flows. For the quarter, net outflows as Dick said were $9.8 billion compared to $7.4 billion last quarter. The increase in net outflows was driven by higher growth redemptions primary from INTECH and our emerging market strategies, which were partially offset by improved redemptions in Fixed Income. Normally, our next slide looks at flows by capability. However this quarter, we've moved that slide to the appendix. I wanted to spend a few minutes breaking down the flow…

Thank you, Roger. In February, I presented our five strategic priorities, and today I would like to provide you with some additional color around each of those. First, our number one priority is producing excellent and dependable investment outcomes for our clients. We do this through a combination of attracting and retaining the best talent, consistently delivering on clear, defined client promises as well as investing in technology and infrastructure that enhances our ability both to deliver alpha and to construct portfolios with strong risk management around the clear promises that we have made. Second, we must drive consistent and continuous improvement in our client experience. This will help us deliver industry-leading client experiences that drive stronger long-term relationships and lead to deeper engagement with our clients. Ultimately, this will lead to longer duration of assets and continued improvement of market share. Third, we need to focus our efforts across all that we do. This means looking closely at our products set, standardizing our global operating model and streamlining and reducing our complexities. Fourth, we have to embed continuous learning and feedback loops in our risk and control environment. Finally, we need to develop new growth initiatives building the businesses of tomorrow. For us this comes in several different areas and is in addition to the execution I've been talking about -- around our core business. By delivering dependable excellence in these five areas, we will be winning for our clients we will be gaining market share in our business and we'll be generating very good returns for our shareholders. Now let's look at each of those pillars individually. Turning to slide 13 and taking a deeper look at what dependable investment outcomes entails for us. Today, we have a legacy of exceptional asset management diversified across asset classes, across…

Thank you. Ladies and gentlemen, at this time we will conduct the question-and-answer session. [Operator Instructions] And we'll take our first question from Dan Fannon with Jefferies.

Hi. Good morning. This is actually James Steele filling in for Dan. I just wanted to know if you guys could maybe provide some idea as to what the fee rate is on the at-risk revenue. Understand that the quant stuff is cheaper than the EM. Sounds like a big mandate. So, just kind of any guidance there?

Yeah. Hi, James, it's Roger. Like I said, it's a mix of higher and lower. Actually on average the total comes out pretty much exactly the same as our average fee rate.

Understood. Thank you.

And we'll move onto our next question from Ken Worthington with JPMorgan.

Hi. Good morning. I'll wrap all my question my follow-up into one on INTECH. So gorse sales essentially non-existent this quarter, gross redemptions were elevated. I guess maybe, first, how concentrated were the INTECH outflows this quarter? Was it sort of one customer, two customers? Or was it most broad-based? Maybe part two can you give us asset levels for the biggest INTECH strategies to kind of help us level set where things are? And then the ultimate question do this indicate that the wheels are finally falling off INTECH. Are the limited sales and big redemptions indications that there's really more bad news to come? And maybe how would you gauge the risk of elevated gross outflows as we look to the second half of the year?

Thanks. It's quite a set of questions. I'll do my best. In terms of the composition of the outflows, just over half the flows came from the U.S. Enhanced Plus strategy with the remaining outflows spread across a number of different strategies. I don't have it on a client-by-client basis, I have it on a strategy basis for you. In terms of INTECH's concentration of business, which I think was underlying a bunch -- some of your other question. The five largest strategies at INTECH make up about 60% of its business. And it does have really large individual clients whose single decisions can move a whole lot of AUM. Those tend to be lower-revenue products, but they certainly can make a huge splash on the AUM change line. In terms of whether this is some indication that in some fundamental way the wheels are off the cart at INTECH, I think it's less grand than that. We've been transparent with you all on a quarterly basis about the performance challenges and the volatility they've experienced, and we've been trying to call your attention to the fact that we think that that volatility has generated risk across this client base. And because of the nature of their clients where small numbers of decision-makers can move large amounts of AUM, we've tried to call your attention to the fact that quarters like this they are possible. On the other hand, INTECH has put up year-to-date better investment performance. They continue to do what they do. They're learning from their experience and improving over time. They have a multi-decade track record that shows that what they do is really good and valuable. They're smart very professional people doing a good job on the portfolio management side and on the client communication side. So I don't see any reason to believe that somehow this is a fundamental issue of wheels coming off the cart, but I do think their business is challenged by the performance record they've put up in the last few years. It's challenged by a client base in institutional space that has been heavily moving towards passive as opposed to active. And they're going through a tough period. And looking ahead, I don't think they're out of the tough period. Their positive performance is not yet long-standing enough to heal the risk that we've called your attention to as Roger said earlier, but now I don't agree with the characterization that the wheels are off the cart. These guys have been doing this very successful for a long period of time, and they'll come back around, but it's a tough period. And it's really hard to project exactly on a quarter-by-quarter basis what the flows are going to look like. But I think you can say that they need continued good performance to heal from here.

And we'll take our next question from Nigel Pittaway from Citi.

Hi, guys. Couple of questions. First of all, just trying to understand the equities flows. When we went through first quarter, there were a few one-offs that were annunciated there like the initial emerging markets and the closure of the Australian business. You're talking about U.S. equity market share improving, European equity flows -- outflows falling and yet there still seems to be a deteriorating trend in those equities flows quarter-on-quarter. Where is the missing bit of the jigsaw there in terms of what's going worse. I mean obviously there's a $2.5 billion emerging market, but that doesn't explain it completely.

It's Roger. So yes, as you said the biggest part of -- as we had about $6 billion of outflows in equities in the quarter of which we've said about $2.5 billion is GEM, so it's about $3.5 billion elsewhere. $800 million is in Europe which we said is improving. The rest is sort of a bit of a mix, a bit of resources in Australia as you know one larger client in the U.S., but it's a blend across the rest of the business.

All right. Okay. So there's a large client outflow in the U.S. which is a big component. All right. And then moving on -- just on your comments on the compensation ratio, I think you said you're still targeting the low 40s, but it'll be at the higher end of the range. What range is that you're actually talking about? In other words, what number would constitute the high end of that range -- the highest end of that range?

The comp ratio is a little high this quarter at 44.4% and we were 45.4% in the first quarter. So, I did want to address that. So why is this? So I think, there's a couple of reasons in there. The first is LTI. In the first quarter and the second quarter, you've got seasonal cost of vestings and you've also got mark-to-market on the awards as markets have gone up which as we said is largely offset in the investment gains line which doesn't drop into the comp ratio. So LTI in the first quarter was $48 million and second quarter is $49 million. But on slide 41, we've given you the full year estimate of that. That's $186 million, so which means in the second half, we're expecting it to be $88 million or $44 million a quarter. Yes, $44 million a quarter puts the comp ratio all other things being equal at about 43%. The second part is sort of a denominator. We've got lower P fees in the second quarter as we've talked about and that would affect the full year obviously, the second quarter being a quarter where we have a large opportunity to earn P fees. So without the increase in performance fees, you'd expect say that the comp ratio to be at the higher end of the low 40s. And I guess that I'm calling that out to be say 42% to 44%. And as I said once you strip out the LTI piece, we were at 43% in the second quarter. I think that's not -- I want to be very clear; we have not taken out our costs in any way at all. We've got a business we're managing on an ongoing basis. That means investing in it; it also means continuing to drive efficiency in it. But that's the answer on the comp ratio and I guess the narrow answer to you question is 42% to 44%.

We'll take our next question from Mike Carrier with Bank of America.

Hi, guys. This is actually Shaun Kelley on for Mike. So we understand the INTECH and EM challenges, but in the other core areas, you're still seeing some outflows, so we're just wondering how you're planning on turning these around going forward.

Yes. Thanks. So you understand GEM you understand INTECH we've talked about. The next piece is we've had some underperformance we've talked about in some of our largest fixed income strategies, the core plus fixed income strategy. It hasn't been terrible performance by any means, but it's been sort of modestly challenged compared to peers and sometimes compared to index for a bit of an extended period. And it’s weighed on its client confidence and we've seen significant outflows in that area. So we're working with that team to make sure that we're doing everything we can do to support the return of their investment results to stronger numbers. There isn't an easy quick fix to something like that. But as we also called out in our comments, a lot of the really smaller products in Fixed Income are starting to gather momentum. So, what's the plan to help there is get some better performance out of their core plus team and stabilize that product and then capture growth in a lot of those smaller pieces. And working with those managers in that leadership, Jim Cielinski our CIO of Fixed Income is working towards that result. But there's no magic switch or solution for that. It's working with that portfolio management team to make sure we're doing everything we can to support their work. I don't know what else I can say that would be responsive to your question. Roger, anything you want to add?

I guess the other things that I just wanted to make sure you picked up, we've got a number of areas which we're pretty excited about and whether that's things that look like they're starting to turn and that's obviously always a dangerous thing to say but flows in our Continental European business as we said have markedly improved and June was the first positive month for 18 months. If you go down individual product lines, the overall performance – just look there's a slide in there of our top 20 funds, 17 are in the top two quartiles. I think 12 of those 17 are in the top quartile. That makes some things pretty exciting the Forty Fund. That can be very big and we're getting back on the front foot. There are areas like we continue to call out around health care, technology, the balanced funds selling all the way around the world. So there are areas which we're pretty pleased with and we're wanting to see it run further and run faster.

And we'll take our next question from Andrei Stadnik with Morgan Stanley.

Good morning. Can you hear me okay?

Yes.

Fantastic. First question I just wanted to asked about the ETF strategy. Can you explain a little bit more about how you're planning to compete here because in passive it seems scale is very important, so how much confidence do you have in your passive ETF strategy versus your active ETF strategy?

Yeah. We're really not shooting for a passive ETF strategy at all. We're really focused on active. We've tried something's in smart beta, which reasonable people can argue about how active or passive that is. But fundamentally, we're an active manager and we're focusing on active management in our ETFs. We have launched this year our JMBS ETF. It's crossed over $100 million. We see what competitors are doing in that space and we actually think our product is significantly better. And we need to make more progress and grow that. VNLA continues to grow. We have plan to launch some ETFs in Australia. So we're not going to be a colossal ETF very broad, very complete platform anytime soon. But we see the opportunity to offer good products that make a material difference for our clients and grow meaningful amounts of assets and revenues, but not probably double-digit billions. I mean small numbers of billions is certainly possible. It's – we do not – let me just be extra clear we do not have an intent to enter the passive space.

Thank you. Look – and my second question just. I wanted to follow-up on cost in particular. What kind of further cost opportunities or maybe I'm taking a step back do you see opportunity for the cost efficiencies given what you have just outlined simplification being one of the five priorities. And also in the light where just looking very simplistically two quarter 2019 versus two quarter 2018 revenue was down around 10% but costs are largely unchanged and that's despite the synergies of the merger coming through in a more meaningful way. So from that point of view are you remaining confident that you can deliver more efficiency and simplification?

Yeah. I'll take on a couple of pieces Andrei. Year-on-year as I said we're flat non-comp once we strip out that $12 million legal fee in the first half in Q2 last year, which we had called out at the time. So we're flat year-on-year despite continuing to invest in the business. And our fixed – our staff cost fixed and variable is low single-digit growth. And again, we're investing in the business and we're finding efficiency safe. So we are tight on the costs. I continue to be an unpopular CFO internally. The other piece is – are the more efficiencies defined? And the answer is yes. And again there's nothing changed here whether that be in how we work with our service providers and continuing to make that as efficient as possible you say around – focus around products. You've seen us – you've seen the actions that we've taken there and continue to take the most obvious ones being around closing non-economic areas but also opening things. So we continue to seek the efficiency in the business and growing the important areas. That focus as Dick's talked about is something that – it's not just around product areas it's around everything what we do. But yeah, there are things that we will continue to do in the long run. Again, we don't react to things on a very short-term basis we're running a long-term business. And we don't – a bit like our capital philosophy we will do things. We won't make that bigger noise about it, but if we say we're going to reduce costs we'll reduce them and they won't pop-up somewhere else. So I reiterate the guidance flat non-comp year-on-year, and a comp guidance, I've given you which if you were back into it is exactly what we said which is very low single-digit growth.

[Operator Instructions] We will take our next question from Alex Blostein with Goldman Sachs.

Hey, good morning guys. Thanks for taking the question. So just building on that last point and maybe we can expand this conversation kind of a little bit beyond 2019. Dick, you've outlined a number of kind of growth initiatives and things you guys are doing to invigorate growth in the core franchise, presumably that will take some investments. So maybe help us think about what the kind of underlying core expense base could grow over the next couple of years for you to achieve these investment goals. And obviously. the constructive equity market backdrop has been helpful, but if equity markets get a little softer, what are some of the areas where you could pull back on? Thanks.

The growth areas that we've laid out don't require huge investments out of line with sort of normal reinvestment in the business. The stuff that really takes significant longer-term investment is sometimes systems infrastructure, but a lot of that expense is amortized and so it's spread out over a long period of time. So at the moment, as we think through the plans, we don't see a big bubble in expenses coming. And as Roger pointed out, we're working very hard to avoid such a thing and trying to keep it under tight control as possible. But we're not in a position to give guidance beyond the period that Roger has already given. So I guess the most helpful thing I can say is we're not planning for some large bubble and we've given you our best guidance for the period we can.

And we'll take our last question from Ed Henning from CLSA.

Thank you. Just a quick question for me and a follow-up back on INTECH. You talked about before allocation away from the strategy. Can you just expand on that a little bit? Is this a major concern to you guys as a headwind going forward or just something eating away the strategy with the soft performance?

Good question. The characterization of a major concern is a little hard to turn into math or numbers. This quarter is a disappointing quarter for INTECH. It's not what we were hoping for. Could it happen again? I suppose it could. But what we really need for -- we're not very good at predicting their flows, because of the lumpy nature of their client base. What I think we all recognize is they are putting on some significantly improved investment performance results. And for them to get back to where we need them to be that has to continue. And if that doesn't continue, they will continue to be a story of risk and concern. That's kind of how we think about it. And their asset base is $48 billion I got it wrong apologies $48 billion. That's a really -- that's a very important piece of our business and so we care a lot about that. And certainly, this quarterly flow out of over $4 billion was disappointing as we've said. We're not shirking that message either. So it depends what they do from here. They've put on better returns. We need that to continue. Otherwise, we'll continue to see some material outflows from them that we don't want to see. That's the reality. At a higher level, they do stuff very well. And they have done it for decades. They communicate it very well. There are super-high-quality group of folks. And we expect that they will win in time. But obviously, we're sitting on the edge of our seat saying, let's not win in time, let's win now and nobody wants it more than they do. Nobody is more dedicated to that outcome than they are. So it's a tough spot they're in. They're digging their way out and that's probably all we can say.

Just might be expanding on that a little bit. If you look at competitors around with similar strategies are you seeing outflows from them comparing to yourselves?

Well, it's always a little tough to compare quantitative strategies. I don't want to pretend, I know more about the guts of some of these other quantitative processes than I do. But certainly it's noticeable that AQR had difficult returns and difficult flows and they've previously been super high quality competitor and there are others out there who had similar results. So yes, I think the class of investing they do has been challenged. They are certainly not the only ones. But frankly, I care a lot less about those other people than I do about Intech. So I tend to focus more narrowly on Intech and they have the capability of delivering excellent returns. They just need to keep going and I think they will.

And we have no further questions in the queue. At this time, I would like to turn the conference back over to Dick Weil for any closing remarks.

Well, thank you everybody for your time. I hope our messages have been clear. We tried very hard to break down the net flow number for your benefit not because we are trying to distract you from the overall number, but because I think underneath the covers there is a lot good going on that we look at internally and that drives how we feel about the results. But clearly the headline is a disappointing number and we look forward to improving that for our clients for our owners as well. So thanks for your time and attention. We'll talk to you next quarter.

And once again, ladies and gentlemen that does conclude today's conference. We appreciate your participation today.