Invesco Ltd. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• 2024 Overview: Strong long-term net inflows of $65 billion (5% organic growth rate), higher revenues, disciplined expenses led to operating income of $1.4 billion. Operating margin was 31% for the year and 34% in Q4. Gained market share in key strategic capabilities. Strengthened balance sheet, reduced debt, ended with net cash position of nearly $100 million, and returned 54% of earnings to shareholders.
• Fourth Quarter Highlights: ETF and Index platforms led growth with $30 billion net inflows. US market led by S&P 500 Equal Weight, Equity Momentum, and Innovation Suite. EMEA had $11 billion net inflows. Launched largest ETF on record. Fundamental Fixed Income had $1.5 billion flow growth excluding stable value. Private markets had net inflows. Asia-Pacific had net inflows. Multi-Asset had outflows. Fundamental Equity had outflows but revenue up. Investment performance: nearly half of funds in top quartile, two-thirds of AUM beating benchmarks.

Segment Performance

• ETFs and Index Platforms: Fourth quarter had near or historic organic long-term flows of $30 billion (25% annualized organic growth rate). Revenue growth was 7% quarter-over-quarter and 31% year-over-year. The ETF platform finished the quarter with record AUM and revenues. In the US, growth led by S&P 500 Equal Weight, Equity Momentum, and Innovation Suite. EMEA had nearly $11 billion of net inflows. Launched a new ETF customized for a Finnish pension insurer, the largest ETF launch on record.
• Fundamental Fixed Income: Modest net long-term outflows in Q4, primarily due to stable value, but excluding stable value, had solid flow growth of $1.5 billion. Revenue from Fundamental Fixed Income strategies grew 9% year-over-year.
• Private Markets: Aggregate net long-term inflows of nearly $1 billion. Private credit had $3.5 billion net inflows (31% annualized organic growth rate). INCREF real estate debt strategy doubled in size to $2.5 billion AUM.
• Asia-Pacific: Net long-term inflows of $3.5 billion, led by India and $2.5 billion of net inflows into the China JV. Client source basis net inflows $7.5 billion (13% annualized organic growth rate).
• Multi-Asset Related Capabilities: Net long-term outflows of $1.5 billion, driven by global asset allocation.
• Fundamental Equity: Net outflows in global, international, and emerging market segments, but revenue up 10% year-over-year.

Guidance

• Expenses: Expect total operating expenses to increase ~1% over 2024 assuming flat markets. Alpha implementation costs $10 million to $15 million per quarter in 2025, ~$20 million to $25 million higher than 2024.
• Payout Ratio: Intend total payout ratio (dividends + share buybacks) to move closer to 60% in 2025.
• Market Expectations: Hoping for better than flat assets, optimistic on margin expansion due to expense management and organic flow growth.

Risks

• Market Volatility: Volatile markets, mixed economic signals, geopolitical risks impact client demand and flows.
• Fee Rate Pressures: Mix shifts and competitive forces affecting fee rates, particularly in certain segments like ETFs.
• Stable Value Market: Outflows in stable value due to rate environment, which is cyclical but impacts performance.

Question and Answer

Q: Dan Fannon from Jefferies asked about 2025 expense outlook, specifically alpha implementation costs and sequential builds.

A: Allison Dukes responded that alpha was ~$50 million in 2024, expecting ~$20M-$25M higher in 2025. Full year expense guidance 1% increase assuming flat markets. Sequential quarter implementation costs $10M-$15M, with seasonal factors like payroll taxes.

Q: Alex Blostein from Goldman Sachs asked about China pipeline and flows.

A: Andrew Schlossberg said China had $2.5 billion flows, focusing on equity ETFs and fixed income plots, with modest confidence boost from stimulus but needing more to see sustained growth.

Q: Brennan Hawken from UBS asked about alpha implementation and operational effectiveness.

A: Andrew Schlossberg mentioned early positive experience with small assets moved, expecting operational efficiency gains from simplifying systems and decommissioning legacy systems.

Q: Bill Katz from TD Cowen asked about private markets strategy and payout rate.

A: Andrew Schlossberg talked about growing private markets in wealth management, leveraging INCREF and partnerships, with payout ratio focused on investing in capabilities and preserving cash for growth.

Q: Glenn Schorr from Evercore asked about margin outlook.

A: Allison Dukes said bullish on margin due to disciplined expense management and organic flow growth, focusing on narrowing fundamental equity outflows to expand revenue.

Q: Ben Budish from Barclays asked about fee rates and China ETF fee pressures.

A: Allison Dukes said fee rate changes due to mix shifts, with China ETFs not significantly impacted by regulatory cuts as within mandate.

Q: Patrick Davitt from Autonomous Research asked about EMEA ETF trends and fee impact.

A: Andrew Schlossberg said EMEA ETF growth is early stage, with positive impact on organic revenue growth despite lower fee rates in some areas being net positive.

Q: Ken Worthington from JPMorgan asked about institutional business pipeline and losses.

A: Allison Dukes mentioned fixed income and private markets as strong areas, with losses in balanced risk and stable value due to cyclical rate factors.

Q: Brian Bedell from Deutsche Bank asked about operating margin and market impact.

A: Allison Dukes said comps to revenue expectations are revenue-dependent, with historical range 38%-42%, and active ETFs considered with multiple distribution avenues.