LM - Legg Mason Reports Results For First Fiscal Quarter

BALTIMORE, Aug. 1, 2019 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the first fiscal quarter ended June 30, 2019. 

Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "Legg Mason delivered solid operating results highlighted by long-term net inflows, driven by fixed income and alternatives across a wide variety of geographies and channels. Further, short-term investment performance improved, and we made meaningful progress on our strategic restructuring efforts.  As a result, we remain on track to meet or exceed projected cost savings by the end of FY 2021, even as we invested in growth opportunities, including alternatives and retail distribution.

"We remain focused and have made progress on our four key drivers of value creation:  capitalizing on our investments, with SEC approval of Precidian's ActiveShares; leveraging our centralized retail distribution to drive growth, with a strong quarter of net inflows in the channel; more effectively controlling our costs to improve profitability, as previously highlighted, and thoughtfully allocating capital, including the recent retirement of $250 million of senior notes.

"All in all, we're quite pleased with the results we've delivered this quarter for our clients and shareholders."

Assets Under Management of $780.2 Billion

Assets Under Management were $780.2 billion at June 30, 2019 compared with $758.0 billion at March 31, 2019, with the change resulting from positive market performance and other of $21.9 billion, positive foreign exchange of $0.6 billion, acquired AUM of $0.6 billion and long-term inflows of $1.1 billion, partially offset by $0.4 billion in realizations, and liquidity outflows of $1.6 billion.

At June 30, 2019, fixed income represented 56% of AUM, while equity represented 26%, alternative represented 9% and liquidity represented 9%. 

By geography, 70% of AUM was from clients domiciled in the United States and 30% from non-US domiciled clients.

Average AUM during the quarter was $765.9 billion compared to $748.7 billion in the prior quarter and $749.5 billion in the first quarter of fiscal year 2019.  Average long-term AUM was $699.0 billion compared to $676.1 billion in the prior quarter and $687.7 billion in the first quarter of fiscal year 2019.

Of Legg Mason's long-term U.S. mutual fund assets, 58% were in funds rated 4 or 5 stars by Morningstar.

Operating Results - Comparison to the Fourth Quarter of Fiscal Year 2019

Adjusted net income was $67.0 million, or $0.75 per diluted share, compared to adjusted net income of $59.8 million, or $0.67 per diluted share.  The increase  was driven by an increase in operating revenues, reflecting higher average AUM and one additional day in the quarter which more than offset a 49% decrease in non-pass through performance fees.   In addition, the increase in adjusted net income reflected the impact of savings resulting from the strategic restructuring as well as seasonally lower other operating expenses. 

Net income was $45.4 million, or $0.51 per diluted share, compared to net income of $49.5 million, or $0.56 per diluted share, in the fourth quarter of fiscal year 2019. In addition to the net impact of the factors listed below, the changes were impacted by one additional day in the quarter and higher average AUM.

This quarter's results included:

• Strategic restructuring costs of $32.9 million, or $0.27 per diluted share.
• Affiliate charges of $1.2 million, or $0.01 per diluted share.
• Contingent consideration credit adjustment of $1.2 million, or $0.01 per diluted share.

The prior quarter's results included:

• Strategic restructuring costs of $9.4 million, or $0.08 per diluted share.
• Affiliate charges of $9.2 million, or $0.06 per diluted share, which included Royce management equity plan costs of $2.4 million.

Operating revenues of $705.4 million were up 2% compared to $692.6 million in the prior quarter reflecting:

• An increase in separate account and fund advisory fee revenues of $24.7 million, or 4%, reflecting higher average AUM and one additional day in the quarter.
• This was partially offset by a $9.5 million decrease in performance fees, of which $5.6 million were non-pass through.

Operating expenses of $621.4 million were up 1% compared to $614.5 million in the prior quarter, reflecting:

• Higher compensation of $24.2 million driven by a $28.7 million increase in strategic restructuring costs as well as increased revenues, partially offset by a smaller gain in the market value of deferred compensation and seed investments of $7.0 million, with an offset in non-operating income, as compared to a gain of $16.0 million in the prior quarter.
• A decrease in occupancy expenses of $3.3 million due to strategic restructuring costs in the prior quarter.
• A decrease in other expenses of $14.8 million largely due to the impact of savings related to the strategic restructuring, lower seasonal expenses and lower strategic restructuring costs.

Non-operating expense was $4.3 million, as compared to $2.8 million in the prior quarter reflecting:  

• Gains on Corporate investments, not offset in compensation, were $3.1 million compared with gains of $10.2 million in the prior quarter.
• Gains on funded deferred compensation and seed investments, as described above.
• A $10.1 million gain associated with the consolidation of sponsored investment vehicles compared to a $4.5 million loss in the prior quarter. The consolidation of sponsored investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.

Operating margin was 11.9% compared to 11.3% in the prior quarter.  Adjusted operating margin¹, was 21.6%, as compared to 20.4% in the prior quarter. 

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $9.7 million compared to $5.7 million in the prior quarter, principally related to Clarion, EnTrust Global, RARE and Royce.
(1)  See "Use of Supplemental Non-GAAP Financial Information."

Comparison to the First Quarter of Fiscal Year 2019

Adjusted net income was $67.0 million, or $0.75 per diluted share, compared to adjusted net income of $74.5 million, or $0.84 per diluted share.   The decline was driven by a decrease in adjusted operating revenues, reflecting lower operating revenue yields for both equity and alternative AUM as well as a 49% decrease in non-pass through performance fees, higher professional fees, FX, annual compensation increases and increased sales commissions. This was partially offset by a decline in lower revenue share affiliate incentives on lower revenues as well as the impact of savings resulting from the strategic restructuring.  

Net income was $45.4 million, or $0.51 per diluted share, compared to net income of $66.1 million, or $0.75 per diluted share, in the first quarter of fiscal year 2019. In addition to the factors listed below, the changes were driven by lower operating revenue yields and lower non-pass through performance fees.

This quarter's results included:

• Strategic restructuring costs of $32.9 million, or $0.27 per diluted share.
• Affiliate charges of $1.2 million, or $0.01 per diluted share.
• Contingent consideration credit adjustment of $1.2 million, or $0.01 per diluted share.

The prior year quarter's results included:

• Regulatory charge of $4.0 million, or $0.05 per diluted share.
• EnTrust Global acquisition and transition-related costs of $1.5 million, or $0.01 per diluted share.

Operating revenues of $705.4 million were down 6% compared with $747.9 million in the prior year quarter reflecting:

• A decrease in fund advisory fee revenues of $16.2 million, principally due to lower operating revenue yields.
• Decreases in both pass through performance fees of $11.6 million and non-pass through performance fees of $5.6 million.

Operating expenses of $621.4 million were flat compared with $622.2 million in the prior year quarter reflecting:

• Compensation and benefits increased by 5%, primarily due to $28.7 million in strategic restructuring costs. Excluding the strategic restructuring costs, compensation and benefits were down 3%, primarily due to lower operating revenues.
• Other expenses decreased by 6% despite $3.7 million in strategic restructuring costs. The lower other expenses were due in part to $6.0 million in savings related to the strategic restructuring program.
• A $7.0 million gain in the market value of deferred compensation and seed investments, which is recorded as an increase in compensation and benefits with an offset in non-operating income, compared with a gain of $1.3 million in the prior year quarter.

Non-operating expense was $4.3 million, compared to $16.6 million in the prior year quarter reflecting:

• Gains on corporate investments, not offset in compensation, were $3.1 million compared with gains of $5.8 million in the prior year quarter.
• Gains on funded deferred compensation and seed investments as described above.
• A $10.1 million gain associated with the consolidation of sponsored investment vehicles, as compared to an $3.7 million gain in the prior year quarter. The consolidation of sponsored investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.

Operating margin was 11.9%, as compared to 16.8% in the prior year quarter.  Adjusted operating margin was 21.6%, as compared to 23.0% in the prior year quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $9.7 million, compared to $9.7 million in the prior year quarter, principally related to Clarion, EnTrust Global, RARE and Royce.

Quarterly Business Developments and Recent Announcements

• On July 15, 2019, Legg Mason repaid $250 million in Senior Notes.
• On July 5, 2019, Legg Mason announced a strategic minority investment in Embark Group, a UK retirement solutions provider.
• On June 11, 2019, Legg Mason and Corporación Actinver announced a strategic alliance that will allow Actinver to manage and make available to its clients in Mexico funds using investment advice provided by Legg Mason affiliated asset managers.
• On May 21, 2019, Legg Mason announced that it appointed Nelson Peltz and Ed Garden of Trian Fund Management, L.P. ("Trian Partners") to the Company's Board of Directors, effective immediately.
• On May 20, 2019, The U.S. Securities and Exchange Commission (SEC) granted exemptive relief for Precidian's non-transparent exchange-traded fund (ETF) intellectual property, ActiveShares®.

Balance Sheet

At June 30, 2019, Legg Mason's cash position was $643.6 million.  Total debt was $2.2 billion, and stockholders' equity was $3.7 billion.  The ratio of total debt to total capital was 38%, in line with the prior quarter.   Seed investments totaled $216.6 million.

The Board of Directors has declared a quarterly cash dividend on the Company's common stock in the amount of $0.40 per share.  The dividend is payable on October 28, 2019 to shareholders of record at the close of business on October 10, 2019.

Conference Call to Discuss Results

A conference call to discuss the Company's results, hosted by Joseph A. Sullivan, will be held at 5:00 p.m. EDT today. The call will be open to the general public.  Interested participants should access the call by dialing 1-800-447-0521 (or for international calls 1-847-413-3238), confirmation number 48836784 at least 10 minutes prior to the scheduled start to ensure connection.  A live, listen-only webcast will also be available via the Investor Relations section of https://www.leggmason.com. 

The presentation slides that will be reviewed during the conference call will be available on the Investor Relations section of the Legg Mason website shortly after the release of the financial results.

A replay of the live broadcast will be available on the Legg Mason website, https://www.leggmason.com, in the Investor Relations section, or by dialing 1-888-843-7419 (or for international calls 1-630-652-3042), enter pass code 48836784# when prompted.  Please note that the replay will be available beginning at 8:00 p.m. EDT on Thursday, August 1, 2019, and ending at 11:59 p.m. EDT on Thursday, August 15, 2019.

About Legg Mason

Guided by a mission of Investing to Improve Lives,^TM  Legg Mason helps investors globally achieve better financial outcomes by expanding choice across investment strategies, vehicles and investor access through independent investment managers with diverse expertise in equity, fixed income, alternative and liquidity investments.  Legg Mason's assets under management are $780.2 billion as of June 30, 2019.  To learn more, visit our web site, our newsroom, or follow us on LinkedIn, Twitter, or Facebook. 

This release contains forward-looking statements subject to risks, uncertainties and other factors that may cause actual results to differ materially. For a discussion of these risks and uncertainties, see "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Legg Mason's Annual report on Form 10-K for the fiscal year ended March 31, 2019 and, in the Company's, quarterly reports on Form 10-Q.

Supplemental Data Regarding Quarterly Performance

Strategy Performance

For purposes of investment performance comparisons, strategies are an aggregation of discretionary portfolios (separate accounts, investment funds, and other products) into a single group that represents a particular investment objective.  In the case of separate accounts, the investment performance of the account is based upon the performance of the strategy to which the account has been assigned.  Each of our asset managers has its own specific guidelines for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the performance comparison for all of the assets is based upon the performance of the separate account.

Approximately 89% of total AUM is included in strategy AUM as of June 30, 2019, although not all strategies have three-, five-, and ten-year histories.  Total strategy AUM includes liquidity assets.  Certain assets are not included in reported performance comparisons. These include: accounts that are not managed in accordance with the guidelines outlined above; accounts in strategies not marketed to potential clients; accounts that have not yet been assigned to a strategy; and certain smaller products at some of our affiliates. 

Past performance is not indicative of future results.  For AUM included in institutional and retail separate accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. Funds-of-hedge funds generally do not have specified benchmarks. For purposes of this comparison, performance of those products is net of fees, and is compared to the relevant HFRX index.  These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ.  The information in this presentation is provided solely for use regarding this presentation and is not directed toward existing or potential clients of Legg Mason.

Long-term US Fund Assets Beating Lipper Category Average

Long-term US fund assets include open-end, closed end, and variable annuity funds. These performance comparisons do not reflect the actual performance of any specific fund; individual fund performance may differ.  Past performance is not a guarantee of future results.  Source: Lipper Inc.