Waddell & Reed Financial Inc. (WDR)

Q2 2010 Earnings Call

July 28, 2010 10:00 am ET

Executives

Hank Herrmann - CEO and Chairman

Nicole McIntosh - EVP of IR

Mike Avery - President, CIO and Portfolio Manager

Dan Connealy - SVP and CFO

Tom Butch - EVP and CMO

Analysts

Jeff Hopson - Stifel Nicolaus

Bill Katz - Citigroup

Michael Kim - Sandler O'Neill

Cynthia Mayer - Bank of America/Merrill Lynch

Robert Lee - KBW

Craig Siegenthaler -Credit Suisse

Roger Freeman - Barclays Capital

Mac Sykes - Gabelli & Company

Marc Irizarry - Goldman Sachs

Dov Hellman - Sidoti

Presentation

Operator

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the Waddell & Reed Financial Inc. Second Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. (Operator Instruction). I would now like to hand the program over to Mr. Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed Financial Inc. Please go ahead sir.

H ank Herrmann

Thank you operator. Good morning, with me today are Tom Butch our Chief Marketing Officer, Mike Strohm our Chief Operations Officer, Dan Connealy our Chief Financial Officer, Mike Avery our Chief Investment Officer and Nicole McIntosh our EVP of Investor Relations. Nicole, would you read the forward-looking statements?

Nicole McI ntosh

During this call, some of our comments and responses will include forward-looking statements. While we believe these statements to be reasonable, based on information that is currently available to us, actual results could materially differ from those expressed or implied due to a number of factors including but not limited to those referenced in our public filings with the Security & Exchange Commission. We assume no duty to update any forward-looking statements. Materials relevant to today’s call including a copy of today’s press release as well as supplemental schedules have been posted on our website at waddell.com under the investor relations tab.

Henry Herrmann

Thank you Nicole. This morning we announce our company’s second quarter results. Given significant headwinds created by difficult markets, results were solid. Earnings per share of $0.40 declined less then 5% sequentially.

However, the decline was due to higher non-operating costs mainly losses on our investment portfolio and related higher tax rate offsetting these effects, earnings per share would have been on operating basis $0.43 per share. Let me back up here pretax income rose 3% on a sequential quarterly basis and operating income rose 6%.

Our operating margin expanded the 24.2% compared to 23.3% in the first quarter, net flows were positive across all three distribution channels, equity net flows were positive while the industry experience significant equity outflows. Long term front performance was solid, year-to-date relative performance improved. For the first six months ended June 55% of equity funds and 62% of all of our portfolios beat their Lipper peers this compares with 47% of equity funds and 51% of all funds with the three months ended March 31.

I should note that top to bottom dispersion of results in Lipper Groups is fairly narrow at this juncture. A condition that could well persist. The performance of our flagship fund the Ivy asset strategy improved and closed ahead of the S&P index by the end of the quarter. After being several hundred basis points or so behind earlier in the quarter. Within the wholesale channel, we continue to make progress in diversifying sales. During the quarter 26% of sales went to products other than our two lead funds.

Next looking at the individual parts of our business, sales on our Advisors channel are near historic highs. The quarters $954 million represents an 8% sequentially increased and a 22% improvement compared to the same period in 2009. That close of a $100 million were positive for the fifth consecutive quarter.

Advisor productivity continues to improve and while we have significantly reduced Advisor headcount over the past few years, those remaining are meaningfully more productive. Our headcount has shrunk roughly one third from it's peak.

Production is consistently exceeding the volumes achieved when the growth was larger. Market turmoil has had a more significant impact on our wholesale business. Sales of $3.5 billion declined 20% sequentially and 14% compared to the same period last year. Flows of $388 million remained positive however. Reduction pressure from a combination of poor investor sentiment and weak equity markets impacted overall flows.

Few things are worth noting, first equity flows were positive and as we mentioned in our release provided accurate levels with the 1.9% organic growth while the industry suffered a 1.4% organic decay.

Second, the challenges in the equity market provided us with an opportunity showcase, a solid line up of fixed income products. With 83% of our fixed income funds beating the Lipper Peers year-to-date, we are able to gain traction in the number of fixed income products and further diversify sales in the channel.

Finally, our institutional channel delivered positive results largely due to sub-advisor relationships. Sub-advisory mandates were responsible for $662 million of the $768 million in gross sales during the quarter and essentially all of the net flows.

The more traditional defined benefit side of our institutional planner channel remains positive. Post the quarter we won a sizable large cap growth mandate. During the quarter, we won several mandates but the net benefit was offset by Pictet outflows.

Overall, our financial and operational results during the quarter were inline with our expectations despite market action which was not. I am confident that in the strength of our investment process in the parallel well diversified challenges distribution will allow us to continue to increase share. Operator at this time I would like to open the call for questions.

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