Yahoo Finance T. Rowe Price Group, Inc. (NASDAQ:TROW) Q1 2024 Earnings Call Transcript
T. Rowe Price Group, Inc. (NASDAQ:TROW) Q1 2024 Earnings Call Transcript April 26, 2024
T. Rowe Price Group, Inc. beats earnings expectations. Reported EPS is $2.38, expectations were $2.01. T. Rowe Price Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Norma, and I will be your conference facilitator today. Welcome to T. Rowe Price's First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode until question-and-answer period. I’ll give you instructions on how to ask questions at that time. As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website shortly after the call concludes. I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations. Please go ahead.
Linsley Carruth: Hello, and thank you for joining us today for our first quarter earnings call. The press release and the supplemental materials document can be found on our IR website at investors.troweprice.com. Today's call will last approximately 45 minutes. Our CEO and President, Rob Sharps; CFO, Jen Dardis, and Head of Global Distribution, Dee Sawyer, will discuss the company's results for about 20 minutes. Then, we'll open it up to your questions, at which time we'll be joined by Head of Global Investments, Eric Veiel. We ask that you limit it to one question per participant. I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures.
Please refer to the forward-looking statement language and the reconciliations to GAAP in the supplemental material, as well as in our press release and 10-Q. All investment performance references to peer groups on today's call are using Morningstar peer groups. Now I'll turn it over to Rob.
Robert Sharps: Linsley, thank you. And thank you all for joining us this morning for our first quarter update. Before I get started, I'm pleased to say that Dee Sawyer, our Head of Global Distribution and a member of our firm's Management Committee will be joining us today. Dee will provide an overview of our Retirement business, which is critical to our clients and integral to our firm's long-term success. We'll hear from Dee after Jen's update on our financial results. With that, I'll turn to first quarter performance. Tailwinds from stronger than anticipated markets drove assets under management up in the first quarter, bringing our total assets under management to $1.54 trillion as of March 31, a 15% increase over the first quarter of 2023.
Our first quarter net outflows of $8 billion were about half the level we had in the first quarter of last year. This improvement came from increased client demand driving higher sales and stronger investment performance reducing redemptions, particularly in U.S. equity. As I said on last quarter's call, we expect to see net outflows in 2024, but anticipate substantial improvement compared to last year. However, this improvement will not be linear. It's important to understand that monthly flows can be heavily impacted by client activity, including rebalancing, new mandates and terminations. So far in the second quarter, net flows are shaping up to be weaker in April, in part due to rebalancing in a handful of large clients. However, at this point, our pipeline suggests the balance of the quarter will be stronger.
Investment performance was solid in the first quarter, with 65% of our funds beating their peer group one-year medians. I'd like to mention a few other performance highlights. Our capital appreciation, U.S. equity research, mid-cap value, and financial services funds all had top quartile performance versus peers for the one, three, and five year time periods. Our integrated U.S. Small Cap Core and integrated global equity funds, which combine our fundamental and systematic processes, we're also top quartile performers for these time periods. And in our multi-asset range, our nearer dated retirement funds, the 2005 to 2035 vintages as well as our managed payout fund, retirement income 2020 are all top quartile performers for the one, three and five year periods.
All vintages of our more recently launched retirement blend funds are top quartile performers for the one year period. Over 50% of our fixed income funds beat their peer group medians for the one, three and five year time periods, and several of our fixed income Muni Funds as well as our global multi-sector bond, credit opportunities and U.S. dollar hedged international bond funds are in the top third of their peer groups for these same periods. Investment performance across the alternatives platform in the first quarter was generally strong. Private credit, Structured products and liquid portfolios generated attractive returns driven by strong credit selection and favorable market dynamics. Before I turn it over to Jen, I want to acknowledge our associates.
We reached important milestones in the first quarter, thanks to their hard work and commitment to our clients, including our capital appreciation equity ETF surpassed $1 billion in assets under management, less than a year after its launch last June. Across a number of channels, we are seeing sales momentum with significant year-over-year gross sales improvement with our wealth and individual investor clients. Earlier this month, OCREDIT launched on its first major wire house, demonstrating the close partnership of T. Rowe Price and OHA in successfully launching our first BDC with a key strategic partner in the wealth management channel. We retained our number one position among the over 330 asset managers nominated in Institutional Investors 2024 ranking of America's top asset management firms.
This distinction reflects the value of our corporate access model and the importance of our differentiated research capabilities. And for the 14th consecutive year, the firm was named one of Fortune Magazine's World's Most Admired Companies. I'm proud of these accomplishments, and I'm grateful to our associates around the globe, who continue to put our clients first in everything they do. With that, Jen will now provide an overview of our first quarter results.
Jen Dardis: Thank you, Rob, and hello, everyone. I'll review our first quarter results before turning to Dee for a look at our Retirement business. Our adjusted earnings per share of $2.38 for Q1 2024 was up 40% from Q1 2023, driven by higher average AUM and investment advisory revenue and offset marginally by higher expenses. As Rob mentioned, we had $8 billion in net outflows for the quarter. Across asset classes, outflows were concentrated in U.S. equity, particularly large and mid-cap growth strategies. However, it's important to note that this quarter's U.S. equity outflows were less than half the level in the first quarter of last year, a meaningful improvement driven by higher sales and lower redemption rates, and consistent with improved investment performance.
There were a few notable areas of strength within the equity franchise, including U.S. structured research and U.S. smaller companies, both of which had strong flows to the CCAP product from EMEA-based clients. In fixed income, strong investment grade flows in the institutional channel were offset by continued outflows from stable value in the DC channel. Our target date franchise was positive for the quarter, with inflows of $6.8 billion, offset in part by outflows from other multi-asset products. And finally, we had just under $1 billion of outflows in alternatives from manager driven distribution. However, we are encouraged by recent trends in fundraising and expect capital raising to increase through the year. Turning to our income statement.
Q1 adjusted net revenues were $1.8 billion, a nearly 14% increase from Q1 of last year, driven by higher average AUM. Our investment advisory revenue of $1.6 billion included $17.6 million in performance based fees, predominantly from two of our U.S. equity strategies. These performance based fees had a 0.5 basis point impact on our effective fee rate of 42.1 basis points. Our Q1 adjusted operating expenses were $1.1 billion, which is up almost 5% over last year from market driven expenses, including the interim bonus accrual and distribution and servicing costs. Expense growth was tempered by the cost savings efforts we announced last summer. Our adjusted operating expenses were down nearly 7% from Q4 2023, due to the Q4 seasonality in stock-based compensation, professional fees and advertising and promotion expenses.
Adjusted operating income increased 31% from Q1 2023 to $692 million. This brings our rolling 12 month adjusted operating margin to 36%, up from 35% a year ago. Given the rise in equity markets over the last few months and related impact on our market driven expenses, which as a reminder, is about one-third of our expense base. We now expect 2024 adjusted operating expenses, excluding carried interest expense to be up 5% to 7% over 2023's $4.19 billion. Maintaining a strong cash position and distributing capital back to our stockholders remains a priority. We bought back $80 million worth of shares during the first quarter, reducing the shares outstanding to $223.5 million as of March 31, and have continued to buy back in April. Combined with our quarterly dividend of $1.24 per share, we returned $365 million in the first quarter.
With $2.9 billion of cash and discretionary investments on our balance sheet, we have ample liquidity to support the recurring dividend, continue opportunistic buybacks and if they were to arise to pursue select M&A opportunities to add capabilities to our business. We continue to manage the business with a long-term lens, balancing the investment in our strategic initiatives to drive growth over time with the need for ongoing expense discipline. From this position, we can continue delivering exceptional value for our clients by decking resources against new opportunities and added capabilities, while also identifying process improvements and driving efficiency. And now, I'll turn it over to Dee.
Dee Sawyer: Thank you, Jen. I am pleased to join today's call to talk about our Retirement business. As Rob noted, our clients have entrusted us with $1.54 trillion in assets. Of that, over $1 trillion, more than two-thirds are identifiable as retirement assets, demonstrating that retirement is a critical component of our business. Slides 15 and 16 in the supplemental deck provide a detailed view of our retirement assets. I want to take a moment to share a few highlights. First, the majority of our retirement assets, $676 billion or 65% are in U.S. defined contribution plans, with the balance in defined benefit and individual IRA accounts. Taking a closer look at our U.S. defined contribution assets, 395 billion or almost 60% are in our Target Date franchise.
In fact, we are the top manager of active Target Date assets, a position we have held for seven years, and we have the third largest market share overall. But our DC business is more than Target Date. Plan sponsors select T. Rowe Price for equity and fixed income investment options as well, with U.S. large cap growth equity and stable value being the largest proportion of the balance of our DC business. We serve the DC channel in two ways. The majority of our DC assets are DC investment only or DCIO, where the consultant adviser or plan sponsor selects T. Rowe Price to provide one or more of the investment options in their plan that is a record kept on an external platform. We are the fifth largest DCIO provider in the U.S. About one quarter of our DC assets are in our full-service record-keeping business, which we refer to as retirement plan services or RPS.
Plan sponsors hire us to provide record-keeping services as well as key investment options for their plan lineup. As of the end of 2023, we provided these services for over 8,100 retirement plans. About 60% of all of our RPS assets under administration are invested in T. Rowe Price products, which has been consistent over the past several years and is a significantly higher portion of proprietary assets than the industry average of 27%. We provide solutions for a wide variety of clients, including our broad array of equity and fixed income strategies and our market leading Target Date franchise. These are offered through a range of funds, common trust and custom solutions. Within our Target Date franchise, we offer higher and lower equity glide path and approaches that include both active and passive building blocks.
And our solutions extend to not only investment products, but also to tools and services to help clients, plan sponsors and participants manage their retirement accounts, track progress along their retirement journey and help improve their overall financial wellness. Through our record-keeping business as well as our individual investors channel, we have direct retirement account relationships with over 3.2 million end investors. The insights we derive from these relationships, coupled with the emerging trends we identify from our work with plan sponsors and intermediaries, enhance our ability to design innovative solutions and research to pursue better retirement outcomes. As a generation of retirement savers have aged and shifted from the accumulation phase to the decumulation phase, developing solutions to help people convert their retirement assets into income has become increasingly important.
Our proprietary research suggests that participants will need a variety of retirement income products and services to meet their individual needs in the decumulation phase. So we take a broad approach to retirement income, that means stand-alone retirement income products such as our managed payout products, single strategy investment products such as fixed income funds, along with the various services we offer, including guidance, retirement thought leadership and calculators are all included within our definition of retirement income. Our broad distribution organization allows us to access all retirement client segments, whether direct to the consumer or through intermediaries, institutions, consultants or advisers. We also have been adapting the expertise we have honed in the U.S. retirement market to pursue opportunities in the large retirement savings market in other countries.
This access, along with directly managing end investor relationships, uniquely positions us to anticipate and deliver what our clients need. And as a result, we are continuously innovating and adding new capability. A few examples include our managed payout products, an all-in-one solution for retirees, which offers the familiarity of our Target Date product, with the benefit of providing stable monthly income throughout retirement. We added a 2025 version of these funds in January. The recently launched social security optimizer tool, which is designed to help individual investors and participants maximize social security benefits, which are a critical part of the retirement income equation for many favors. This is an early example of the impact of last year's Retiree Inc.
acquisition. And the retirement advisory service, which offers ongoing access to advisers and personalized financial planning. The financial plans include tax aware retirement income planning and actively managed portfolios led by the expertise of our multi-asset investment professionals. We are excited we will be launching our new personalized retirement manager in the third quarter. This is an evolution of our robust Target Date offerings, driven by a highly customized approach. We plan to deliver a dynamic personal glide path for each participant by using plan level data, additional factors provided by participants and analyzing their portfolio through a monthly multifactor assessment. And in the fourth quarter, we plan to launch a managed lifetime income solution that will allow participants to combine a managed payout strategy with a qualified longevity annuity contract or QLAC.
The product is designed to enable a consistent income stream in retirement, while guaranteeing a minimal level of income for life after a defined age. It is also important to mention that the breadth of our retirement platform enables us to develop industry leading thought leadership and research on key retirement topics. We leverage both to build client relationships, advance our position as a retirement leader and enable clients and participants to pursue better retirement outcomes. I will close by saying that the leadership team and our associates are deeply committed to helping our clients confidently prepare for, pay for and live in retirement. We are grateful for their trust in us, and we will continue to use our expertise to drive capabilities and solutions that meet their evolving needs.
With that, I'll ask the operator to open the line for questions.
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