Waddell & Reed Financial Inc. ( WDR)

Q3 2011 Earnings Call

October 25, 2011 10:00 am ET

Executives

Henry J. Herrmann – Chairman of the Board, Chief Executive Officer

Nicole McIntosh – Vice President, Investor Relations

Daniel P. Connealy – Chief Financial Officer, Senior Vice President

Thomas W. Butch – Executive Vice President, Chief Marketing Officer

Michael L. Avery – President, Chief Investment Officer

Analysts

Cynthia Mayer – Bank of America/Merrill Lynch

William Katz – Citigroup

Michael Kim – Sandler O'Neill & Partners L.P.

Robert Lee – Keefe, Bruyette & Woods

Craig Siegenthaler – Credit Suisse

Roger Freeman – Barclays Capital

Jeffrey Hopson – Stifel Nicolaus

Marc Irizarry – Goldman Sachs

Macrae Sykes – Gabelli & Company

Daniel Fannon – Jefferies & Company

Presentation

Operator

Good morning. My name is [Stephanie] and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 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 Instructions) Thank you. I would now like to turn the conference over to Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed. Please go ahead, sir.

Henry J. Herrmann

Thank you, Stephanie. Good morning everyone. With me today are Mike Avery, President; Tom Butch, Chief Marketing Officer; Dan Connealy, our Chief Financial Officer; Mike Strohm, our Chief Operations Officer; and Nicole McIntosh, our VP of Investor Relations. Nicole, would you read the forward-looking statements please.

Nicole McIntosh

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 Securities and 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 corporate tab.

Henry J. Herrmann

Thank you, Nicole. Early this morning we reported our third quarter results. Net income for the quarter was $39.8 million, or $0.46 per diluted share, which represented a decline of 20% compared to the previous quarter and 2% compared to the same period last year, earnings per diluted share declined at a similar rate.

Operating income of $75 million declined 5% compared to the June ended quarter and improved 26% compared to the same period last year. This quarter’s operating margin of 25.2% was essentially flat compared to the previous quarter and showed good improvement compared to last year’s third quarter margin of 23.5%.

Importantly, operating margin remained near multi-year highs. Assets under management finished the quarter at $77.5 billion, a 16% decline compared to the end of the June. The decline in asset level was entirely attributable to market erosion as we generated positive inflows during the quarter. Keep in mind when building models the most of the market pressure came during the month of September.

Quarterly inflows of $1.3 billion helped by the win of a large sub-advised mandate in July. Flows were positive in equities, fixed income and money market asset classes. By channel flows are positive in wholesale and institutional, while slightly negative in Advisors. Assets levels have recovered from the steep losses incurred in September and now approximately 85 billion in AUM’s.

Gross daily sales volume in October is up slightly from September’s daily average and net flows are essentially flat. Through September as noted in our press release, relative investment performance declined on a one and three-year basis. Extreme volatility cause our rankings to swing up and down abnormally with risk-on/risk-off market moves.

Recently, relative performance has improved. The Advisor channel had sales of $867 million in the quarter compared to $1 billion during the previous quarter. The client gross sales push flows into negative territory for the first time this year nonetheless our Advisors ability to retain assets during the period of client market uncertainty once again prove the valuable asset for our company.

The redemption rate during the third quarter was essentially unchanged sequentially at 10% remaining par below the rate of redemption experienced by the rest of the industry. Gross sales of $4 billion in our Wholesale channel declined slightly compared to the second quarter, inflows were at positive $515 million. Flows decreased sequentially in for quarter, but remained positive in each of the three months.

Our institutional channel has a strong quarter with sales of $1.6 billion and net flows of $900 million. Business in this channel remains healthy due to steady stream of inflows from advisory relationships and solid performance underlying the various strategies available on the platform.

Our overall assets have shrunk nearly 16% during the quarter, flows remain positive at $1.3 billion. Our organic growth rate of 5.8% during the quarter remained one of the best among our peer group of publicly traded asset managers and again, ahead of the industry’s estimate of the 2% rate of decay.

Given our firm’s larger percentage of equity assets relatively this was a strong endorsement for the quality of our product in our distribution team. Strong market sentiment overhang seemingly have cleared up recently, most notably economic double-dip worries however there remains significant uncertainty surrounding Europe’s struggle to find solutions to their sovereign debt crisis. Volatility is likely to remain until we get greater clarity.

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