Legg Mason Reports Results For Second Fiscal Quarter

BALTIMORE, Oct. 30, 2019 /PRNewswire/ -- Legg Mason, Inc. LM today reported its operating results for the second fiscal quarter ended September 30, 2019. 

"Legg Mason delivered strong financial results in a volatile quarter for the markets," said Joseph A. Sullivan, Chairman and CEO of Legg Mason.

"More specifically, this quarter's results reinforced the benefits of diversification, as strong inflows across alternative products mostly offset equity and fixed income outflows.  Further, we continued to make meaningful progress on our strategic restructuring efforts driving a significant improvement in adjusted earnings and margins, and we remain on track to meet or exceed projected cost savings by the end of fiscal year 2021.   

"Looking ahead, we will continue to focus on the evolving needs of our clients, encouraging innovation across investment strategies, vehicles and distribution to increasingly leverage the company's durable competitive advantages to drive growth and long-term shareholder value."

Assets Under Management of $781.8 Billion

Assets Under Management were $781.8 billion at September 30, 2019 compared with $780.2 billion at June 30, 2019, with the change resulting from positive market performance and other of $8.7 billion, partially offset by liquidity outflows of $3.5 billion, negative foreign exchange of $3.2 billion, long-term net outflows of $0.2 billion and realizations of $0.2 billion.

At September 30, 2019, fixed income represented 57% of AUM, while equity represented 26%, alternative represented 9% and liquidity represented 8%. 

By geography, 71% of AUM was from clients domiciled in the United States and 29% from non-US domiciled clients.

Average AUM during the quarter was $779.8 billion compared to $765.9 billion in the prior quarter and $750.2 billion in the second fiscal quarter of 2019.  Average long-term AUM was $716.6 billion compared to $699.0 billion in the prior quarter and $690.0 billion in the second quarter of fiscal year 2019.

Of Legg Mason's long-term U.S. mutual fund assets, 68% were in funds rated 4 or 5 stars by Morningstar.

Operating Results - Comparison to the First Quarter of Fiscal Year 2020

Adjusted net income was $85.6 million, or $0.95 per diluted share, compared to adjusted net income of $67.0 million, or $0.75 per diluted share.  The increase  was driven by an increase in operating revenues, reflecting higher average AUM and one additional day in the quarter as well as a $7.1 million increase in non-pass through performance fees.   In addition, the increase in adjusted net income reflected the impact of strategic restructuring savings as well as seasonally lower compensation and benefits expenses. 

Net income was $67.1 million, or $0.74 per diluted share, compared to net income of $45.4 million, or $0.51 per diluted share, in the first quarter of fiscal year 2020.  In addition to the items noted above, the changes were impacted by $13.2 million in reduced restructuring costs and losses on corporate investments not offset in compensation, compared with gains in the prior quarter.

Operating revenues of $743.3 million were up 5% compared to $705.4 million in the prior quarter reflecting:

• An increase in separate account and fund advisory fee revenues of $13.0 million, or 2%, reflecting higher average AUM and one additional day in the quarter.
• Performance fees increased by $28.0 million, of which $7.1 million were non-pass through.

Operating expenses of $618.3 million were down 1% from $621.4 million in the prior quarter, reflecting:

• Lower compensation of $2.1 million driven by a $14.3 million decrease in strategic restructuring costs, a smaller gain in the market value of deferred compensation and seed investments of $2.9 million, with an offset in non-operating income, as compared to a gain of $7.0 million in the prior quarter as well as $5.0 million in lower seasonal compensation. These decreases more than offset increased compensation and benefits related to a $21.0 million increase in pass through performance fees, as well as higher advisory fees and non-pass through performance fees.
• A decrease in other expenses of $3.2 million largely due to lower conference and travel and entertainment expenses, which more than offset a $1.0 million increase in restructuring costs.
• The $19.7 million of restructuring costs consisted of $15.9 million of strategic restructuring costs related to the implementation of our cost savings initiative and $3.8 million of professional fees for other corporate matters.

Non-operating expense was $19.7 million, as compared to $4.3 million in the prior quarter reflecting:  

• Losses on corporate investments, not offset in compensation, were $2.9 million compared with gains of $3.1 million in the prior quarter.
• Gains on funded deferred compensation and seed investments, as described above.
• A $5.0 million gain associated with the consolidation of sponsored investment vehicles compared to a $10.1 million gain 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 16.8% compared to 11.9% in the prior quarter.  Adjusted operating margin¹, was 25.0%, as compared to 21.6% in the prior quarter. 

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $8.7 million compared to $9.7 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 Second Quarter of Fiscal Year 2019

Adjusted net income was $85.6 million, or $0.95 per diluted share, compared to adjusted net income of $78.0 million, or $0.88 per diluted share, in the prior year quarter.   The increase was driven by a decrease in operating expenses as a result of the impact of savings from the strategic restructuring as well as an increase in non-pass through performance fees.   These more than offset a decline in investment advisory and distribution and service fees reflecting lower operating revenue yields, despite higher average long-term assets under management.   

Net income was $67.1 million, or $0.74 per diluted share, compared to net income of $72.8 million, or $0.82 per diluted share, in the second quarter of fiscal year 2019.  In addition to the items noted above, the changes were driven by $19.7 million of restructuring costs in the current quarter as well as a discrete tax benefit of $2.8 million related to the completion of a prior year audit in fiscal 2019 partially offset by $5.6 million in corporate restructuring charges in the second quarter of fiscal year 2019.

Operating revenues of $743.3 million were down 2% compared with $758.4 million in the prior year quarter reflecting:

• A decrease in distribution and service fees of $12.0 million reflecting a shift to lower fee earning mutual fund share classes and lower average fund AUM earning distribution fee revenue as well as a decrease in advisory fee revenues of $5.3 million, primarily due to asset mix, the shift from funds to lower fee vehicles and specific fee reductions.
• These decreases were partially offset by an increase in non-pass through performance fees of $5.1 million.

Operating expenses of $618.3 million were down 1% compared with $622.7 million in the prior year quarter reflecting:

• Distribution and servicing expenses decreased by $9.4 million reflecting the shift of assets under management as described above.
• Compensation and benefits increased by 4%, primarily due to $14.4 million in strategic restructuring costs. Excluding the strategic restructuring costs, compensation and benefits were $1.6 million lower primarily due to strategic restructuring savings, which more than offset higher affiliate compensation as well as higher corporate compensation including increased sales commissions.
• Communications and technology expenses decreased by $3.5 million primarily due to strategic restructuring savings.
• Other expenses decreased by $2.9 million despite $4.8 million in restructuring costs. The lower other expenses were due in part to strategic restructuring savings of $5.3 million and lower professional fees.
• A $2.9 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 $4.0 million in the prior year quarter.

Non-operating expense was $19.7 million, compared to $24.8 million in the prior year quarter reflecting:

• Losses on corporate investments, not offset in compensation, were $2.9 million compared with gains of $2.9 million in the prior year quarter.
• Gains on funded deferred compensation and seed investments as described above.
• A $5.0 million gain associated with the consolidation of sponsored investment vehicles, as compared to a $4.3 million loss 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 16.8%, as compared to 17.9% in the prior year quarter.  Adjusted operating margin was 25.0%, as compared to 24.5% in the prior year quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $8.7 million, compared to $11.3 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 30, 2019 Stephen C. Hooley, a financial services, technology and operational efficiency executive, was elected to Legg Mason's Board of Directors.
• On September 3, 2019 Legg Mason and Cathay Financial Holdings, the largest financial holding company in Taiwan, announced that Legg Mason Investments (Taiwan) Limited and Cathay United Bank entered into a partnership to introduce theme based, customized investment portfolios to Taiwanese investors.
• On October 15, 2019 Legg Mason announced the launch of the Clarion Partners Real Estate Income Fund Inc. (CPREIF), its first commercial real estate-focused fund designed for individual investors.

Balance Sheet

At September 30, 2019, Legg Mason's cash position was $580.9 million.  Total debt was $2.0 billion, and stockholders' equity was $3.7 billion.  The ratio of total debt to total capital was 35%, compared to 38% in the prior quarter.  Seed investments totaled $211.2 million.

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. ET today. The call will be open to the general public.  Interested participants should access the call by dialing 1-800-891-8256 (or for international calls 1-212-271-4651), confirmation number 21932009 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 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, www.leggmason.com, in the Investor Relations section, or by dialing 1-800-633-8284 (or for international calls 1-402-977-9140) enter pass code 21932009 when prompted.  Please note that the replay will be available beginning at 8:00 p.m. ET on Wednesday, October 30, 2019, and ending at 11:59 p.m. ET on Wednesday, November 13, 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 $781.8 billion as of September 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 87% of total AUM is included in strategy AUM as of September 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.