Invesco Management Discusses Q2 2012 Results - Earnings Call Transcript

Invesco (IVZ)

Q2 2012 Earnings Call

July 26, 2012 9:00 am ET

Executives

Martin L. Flanagan - Chief Executive Officer, President and Executive Director

Loren M. Starr - Chief Financial Officer, Senior Vice President and Senior Managing Director

Analysts

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Michael Carrier - Deutsche Bank AG, Research Division

William R. Katz - Citigroup Inc, Research Division

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Roger A. Freeman - Barclays Capital, Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

Kaimon Chung - Nomura Securities Co. Ltd., Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Christopher Shutler - William Blair & Company L.L.C., Research Division

Matthew Kelley - Morgan Stanley, Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good morning, and welcome to Invesco Second Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to the speakers for today, Mr. Martin L. Flanagan, President and CEO of Invesco; and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Martin L. Flanagan

Thank you very much, and thank you, everybody, for joining us today. I'm on the call with Loren Starr. And I'll be speaking the presentation that's available on our website if you're so inclined to follow and it's our practice. I'll review the business results for the quarter and Loren will spend more time on the financials. And then the both of us will answer any questions anybody might have. So if you happen to be following on the presentation, I'm on the Overview slide.

But before we go into the numbers, I'd like to provide a sense of the macroeconomic environment that our business operate in, in the second quarter. Your, clearly, investor confidence was under pressure with deteriorating economic climate in Europe and sluggish U.S. growth, and even people's perception of the strength of China entered into the psyche of investors. And in this uncertain economic environment, investors naturally were seeking safe havens and acting very defensively like the difference from the first quarter. We're spending a lot of time with our clients as many are trying to navigate the environment. But given our broad range of investment capabilities, we believe we're well-positioned to provide outcome-oriented solution to meet our clients' needs in this challenging environment.

But with that as a backdrop, let me highlight the firm's operating results for the quarter. I'm on Slide 3 now. Long-term investment performance was strong across all time periods for the second quarter. Our investment performance contributed to solid operating results despite of the challenging markets. Invesco's quarterly dividend is now $0.1725 per share, representing the 41% increase of the last year's dividend and reflecting continued confidence in the fundamentals of our business. Return of capital to shareholders totaled $153 million during the quarter. Reflecting the challenge of the operating -- of operating in a volatile market, assets under management ended the quarter at $646 billion versus $672 billion at the end of the first quarter. Total net long-term outflows were $4.9 billion for the quarter. Operating income was $249 million for the second quarter versus $269 million in the first. The operating margin was 35% for the second quarter as compared to 36.6% in the first quarter and earnings per share were $0.41 versus $0.44 in the prior quarter.

Turning into investment performance. A continued focus on investment excellence and our efforts to build and maintain strong investment culture helps us achieve solid investment performance in spite of the volatile market environment during the quarter. And as you can see, 73% of the assets were ahead of peers on a 1-year basis. This is the highest number since August of 2009. 73% of the assets were ahead of peers on a 3-year basis and 77% of assets were ahead of peers on a 5-year basis, so very, very strong investment performance across the organization. And as I mentioned earlier, net long-term outflows were $4.9 billion, clearly reflecting the challenges in the market during the quarter as investors reacted to a barrage of negative economic news. But importantly, in the first few weeks of July, we've seen a sharp turnaround in flows, and we'll talk about that in more detail.

Before I take a look at -- before we look forward, let me highlight some of the movements of the flows in the second quarter. In after a very robust quarter for ETFs, marketplace demand reversed and investors sentiment turned towards risk aversion. Retail asset outflows were composed largely of $2.1 billion and assets related to the PowerShares QQQs and another $900 million in PowerShares DB commodity products. Traditional PowerShares ETF business continued to be less volatile and saw $736 million of inflows during the quarter, at a rate of growth well in excess of our industry market share.

Institutional flows were marked by one-off outflows of $3.2 billion in low fees, stable value, fixed income assets and global equity assets, reflecting the risk of behavior we saw during the quarter. As I mentioned earlier, we saw a turnaround in the direction of flows during July, and we're confident of the future organic growth in spite of the challenging quarter. Contributing to our optimism within the institutional channel is a sharp increase in the number of buy ratings amongst U.S. consultants and a broad number of capabilities by ratings nearly doubled over the past year to an all-time high for Invesco and there still plenty of upside.

We're also seeing very strong RFP activity with a 49% increase in momentum during the second quarter of this year versus the second quarter of the prior year. Specifically, during July, we're already seeing strong demand with flows into real estate, international growth, bank loans, balance risks and stable value. We also saw strong demand in July for Invesco mortgage capital with an equity raise, which will result in $1 billion of assets under management. As importantly, yields on the inflows are significantly higher in the assets that outflowed during -- from the quarter.

Turning to Page 9. Again the depth and breadth of the investment capabilities are strong investment performance, and our focus on client engagement have resulted in solid momentum in our U.S. Retail business during the second quarter.

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