Artisan Partners Asset Management : Reports 1Q23 Results 251 KB

The table below presents AUM and a comparison of certain GAAP and non-GAAP ("adjusted") financial measures.

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• Adjusted measures are non-GAAP measures and are explained and reconciled to the comparable GAAP measures in Exhibit 2.

• Adjusted EBITDA represents adjusted net income before interest expense, income taxes, depreciation and amortization expense.

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March 2023 Quarter Compared to December 2022 Quarter

AUM increased to $138.5 billion at March 31, 2023, an increase of $10.6 billion, or 8%, compared to $127.9 billion at December 31, 2022, primarily due to investment returns of $11.9 billion, partially offset by $1.3 billion of net client cash outflows. For the quarter, average AUM increased 6% to $135.4 billion from $127.4 billion in the December 2022 quarter.

Revenues of $234.5 million in the March 2023 quarter increased $8.5 million, or 4%, from $226.0 million in the December 2022 quarter, primarily due to higher average AUM, partially offset by two fewer calendar days in the March 2023 quarter.

Operating expenses of $166.2 million in the March 2023 quarter increased $10.2 million, or 7%, from $156.0 million in the December 2022 quarter, primarily due to higher seasonal expenses which include employer funded retirement and health care contributions, payroll taxes, and non-employee director compensation. Incentive compensation expense also increased as a result of higher revenues.

GAAP operating margin was 29.1% in the March 2023 quarter, compared to 31.0% in the December 2022 quarter. Adjusted operating margin was 29.9% in the March 2023 quarter, compared to 31.2% in the December 2022 quarter. The seasonal expenses referenced above are generally highest in the March quarter every year and impacted operating margin by 2.9% and earnings per share by $0.06 in the March 2023 quarter compared to the December 2022 quarter.

Within non-operating income (expense), investment gains (losses) are primarily comprised of net investment gains (losses) of consolidated sponsored investment products, nonconsolidated sponsored investment products, and investments held to economically hedge compensation plans. Total investment gains, which include gains attributable to third party shareholders of consolidated investment products, were $24.2 million in the March 2023 quarter, compared to gains of $14.9 million in the December 2022 quarter. Artisan Partners' portion of investment gains was $14.3 million in the March 2023 quarter, compared to gains of $13.1 million in the December 2022 quarter.

GAAP net income was $50.8 million, or $0.72 per basic and diluted share, in the March 2023 quarter, compared to GAAP net income of $52.9 million, or $0.76 per basic and diluted share, in the December 2022 quarter. Adjusted net income was $51.8 million, or $0.64 per adjusted share, in the March 2023 quarter, compared to adjusted net income of $52.0 million, or $0.65 per adjusted share, in the December 2022 quarter.

March 2023 Quarter Compared to March 2022 Quarter

AUM at March 31, 2023 was $138.5 billion, down 13% from $159.6 billion at March 31, 2022. The change in AUM over the one-year period was primarily due to a decrease of $8.9 billion in investment returns as a result of global market declines and $11.7 billion of net client cash outflows. Average AUM for the March 2023 quarter was $135.4 billion, 17% lower than average AUM for the March 2022 quarter.

Revenues of $234.5 million in the March 2023 quarter decreased $47.1 million, or 17%, from $281.6 million in the March 2022 quarter, primarily due to lower average AUM.

Operating expenses of $166.2 million in the March 2023 quarter decreased $8.4 million, or 5%, from $174.6 million in the March 2022 quarter, due to a decline in incentive compensation and third-party distribution expense as a result of lower revenues, partially offset by an increase in long-term incentive compensation expense and higher fixed compensation costs reflecting annual merit increases and a 6% increase in the number of full time associates.

GAAP operating margin was 29.1% in the March 2023 quarter, compared to 38.0% in the March 2022 quarter. Adjusted operating margin was 29.9% in the March 2023 quarter, compared to 37.7% in the March 2022 quarter.

Total investment gains, which include gains attributable to third party shareholders of consolidated investment products, were $24.2 million in the March 2023 quarter, compared to losses of $3.6 million in the March 2022 quarter. Artisan Partners' portion of investment gains was $14.3 million in the March 2023 quarter, compared to losses of $5.1 million in the March 2022 quarter.

GAAP net income was $50.8 million, or $0.72 per basic and diluted share, in the March 2023 quarter, compared to GAAP net income of $65.4 million, or $0.90 per basic and diluted share, in the March 2022 quarter. Adjusted net income was $51.8 million, or $0.64 per adjusted share, in the March 2023 quarter, compared to adjusted net income of $78.0 million, or $0.98 per adjusted share, in the March 2022 quarter.

Capital Management & Balance Sheet

Cash and cash equivalents were $150.6 million at March 31, 2023, compared to $114.8 million at December 31, 2022. The Company paid a variable quarterly dividend of $0.55 per share of Class A common stock and a special dividend of $0.35 per share of Class A common stock during the March 2023 quarter. The Company had total borrowings of $200.0 million at March 31, 2023 and December 31, 2022.

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During the March 2023 quarter, the Company invested $39.0 million of cash to economically hedge the franchise capital long-term incentive awards that were approved in January 2023.

During the March 2023 quarter, limited partners of Artisan Partners Holdings exchanged 107,737 common units for 107,737 Class A common shares. The exchange increased the Company's public float of Class A common stock by 107,737 shares or 0.2%.

Total stockholders' equity was $281.2 million at March 31, 2023, compared to $279.4 million at December 31, 2022. The Company had

68.5 million Class A common shares outstanding at March 31, 2023. The Company's debt leverage ratio, calculated in accordance with its loan agreements, was 0.6X at March 31, 2023.

Dividend

The Company's board of directors declared a variable quarterly dividend of $0.50 per share of Class A common stock with respect to the March 2023 quarter. The variable quarterly dividend represents approximately 80% of the cash generated in the March 2023 quarter and will be paid on May 31, 2023, to shareholders of record as of the close of business on May 17, 2023. Based on our projections and subject to change, we expect some portion of the 2023 dividend payments to constitute a return of capital for tax purposes.

Subject to board approval each quarter, we currently expect to pay a quarterly dividend of approximately 80% of the cash the Company generates each quarter. We expect cash generation will generally equal adjusted net income plus long-term incentive compensation expense, less cash reserved for future franchise capital awards (which we expect will generally approximate 4% of investment management revenues each quarter), with additional adjustments made for certain other sources and uses of cash, including capital expenditures. After the end of the year, our board will consider payment of a special dividend.

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Conference Call

The Company will host a conference call on May 3, 2023 at 1:00 p.m. (Eastern Time) to discuss these results. Hosting the call will be Eric Colson, Chief Executive Officer, and C.J. Daley, Chief Financial Officer. Supplemental materials that will be reviewed during the call are available on the Company's website at www.apam.com. The call will be webcast and can be accessed via the Company's website. Listeners may also access the call by dialing 877.328.5507 or 412.317.5423 for international callers; the conference ID is 10176082. A replay of the call will be available until May 10, 2023 at 9:00 a.m. (Eastern Time), by dialing 877.344.7529 or 412.317.0088 for international callers; the replay conference ID is 4256720. An audio recording will also be available on the Company's website.

Forward-Looking Statements and Other Disclosures

Certain statements in this release, and other written or oral statements made by or on behalf of the Company, are "forward-looking statements" within the meaning of the federal securities laws. Statements regarding future events and our future performance, as well as management's current expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. These forward-looking statements are only predictions based on current expectations and projections about future events. These forward-looking statements are subject to a number of risks and uncertainties, and there are important factors that could cause actual results, level of activity, performance, actions or achievements to differ materially from the results, level of activity, performance, actions or achievements expressed or implied by the forward-looking statements. These factors include: the loss of key investment professionals or senior management, adverse market or economic conditions for whatever reason, poor performance of our investment strategies, change in the legislative and regulatory environment in which we operate, operational or technical errors or other matters that cause damage to our reputation, and other factors disclosed in the Company's filings with the Securities and Exchange Commission, including those factors listed under the caption entitled "Risk Factors" in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 27, 2023, as such factors may be updated from time to time. Our periodic and current reports are accessible on the SEC's website at www.sec.gov. The Company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this release.

Assets Under Management (AUM) refers to the assets of pooled vehicles and accounts for which Artisan Partners provides investment services. Artisan Partners' AUM as reported here includes assets for which Artisan Partners does not have investment discretion, including certain assets for which we earn only investment-related service fees. Non-discretionary assets are reported on a one-month lag. Artisan Partners' definition of AUM is not based on any definition of Assets Under Management contained in the ADV or in any of Artisan Partners' fund management agreements.

Results for any investment strategy described herein, and for different investment products within a strategy, are affected by numerous factors, including different material market or economic conditions; different investment management fee rates, brokerage commissions and other expenses; and the reinvestment of dividends or other earnings. The returns for any strategy may be positive or negative, and past performance does not guarantee future results.

Unless otherwise noted, composite returns have been presented gross of investment advisory fees applied to client accounts, but include applicable trade commissions and transaction costs. Management fees, when reflected, would reduce the results presented for an investor in an account managed within a composite. Net-of-fees composite returns presented in these materials were calculated using the highest model investment advisory fees applicable to portfolios within the composite. Fees may be higher for certain pooled vehicles, and the composite may include accounts with performance-based fees. Index returns do not reflect the payment of fees and expenses. Certain composite returns may be represented by a single account.

In these materials, we present Value Added, which is the difference, in basis points, between an Artisan Partners' strategy's average annual return and the return of its respective benchmark. We may also present Excess Returns (alpha), which reflects an estimate of the amount in dollars by which our investment strategies have outperformed or underperformed their respective benchmark. Excess Returns are calculated by (i) multiplying a strategy's beginning-of-year AUM by the difference between the returns (in basis points) of the strategy (gross of fees) and the benchmark for the ensuing year and (ii) summing all strategies' Excess Returns for each year calculated. Market Returns include all changes in AUM not included in Excess Returns or client cash flows. The benchmark used for purposes of presenting a strategy's performance and calculating Value Added and Excess Returns is generally the market index most commonly used by our clients to compare the performance of the relevant strategy. Prior to the June 2021 quarter, the Credit Opportunities strategy, which is benchmark agnostic, used the ICE BofA U.S. High Yield Master II Total Return Index. Since that time, the Credit Opportunities strategy has used the ICE BofA US Dollar LIBOR 3-month Constant Maturity Index, which is the market index used by the Company's management to evaluate the performance of the strategy.

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