Artisan Partners Asset Management : Reports 4Q22 Results 236.6 KB

Artisan Partners Asset Management Inc. Reports 4Q22 and Year Ended December 31, 2022 Results and Quarterly and Special Annual Dividend

Milwaukee, WI - January 31, 2023 - Artisan Partners Asset Management Inc. (NYSE: APAM) (the "Company" or "Artisan Partners") today reported its results for the quarter and year ended December 31, 2022, and declared a quarterly and special annual dividend.

CEO Eric Colson said: "Over the long term, Artisan Partners has built a trustworthy brand, proven investment record and a diverse business. Time is required to attract talent, raise assets and compound client wealth. We have done this across generations, asset classes and market cycles. Over shorter periods, our business is subject to market forces and demand dynamics. Our firm is built to weather and absorb these short-termperiods-and to create stability, value and predictability over the long term.

"From a short-term perspective, 2022 was a difficult year. Our AUM declined 27% from $175 billion to $128 billion, as a result of $9.8 billion in net outflows and $36.6 billion in investment declines. In the fourth quarter, though, the power of our equity engine resulted in investment returns outpacing net outflows. We have continued to benefit from the market rebound-particularly in non-U.S. markets, including China-in early 2023.

"While 94% of our AUM is in investment strategies that primarily invest in equity securities, we believe we are at an inflection point in the development of our fixed income businesses. Since 2013, when we made a strategic investment to expand and diversify into fixed income, we have never seen excitement around potential fixed income returns and allocations like we do today. Because of our long-term investments, we now offer six high value-added fixed income strategies spanning high-yield, leveraged loans, long-short credit, emerging markets debt and global macro. We are optimistic about the near, medium and long-term growth prospects of our two fixed income teams, the Artisan Credit team and the EMsights Capital Group.

"Since inception in 2014, the Credit team's High Income strategy has generated average annual returns of 5.1%, after fees, beating the benchmark index by 178 basis points per year annually. The Artisan High Income Fund is ranked number 5 of 338 funds in the Lipper High-Yield Category. We have raised cumulative net flows of $6.8 billion in the High Income strategy during a period of muted flows into the high-yield asset class. Our recent focus has been diversifying the High Income strategy across investment vehicle and client types, as well as developing the team's Credit Opportunities and Floating Rate strategies.

"The foundational growth achieved by the Credit team is similar to that experienced by many of our established equity teams. Historically, we have seen foundational growth translate into a subsequent phase of more pronounced compounding growth as teams compound capital and leverage their resources, returns and reputations to extend duration with existing clients, diversify books of business and launch additional strategies.

"Our demonstrated success with the Credit team was instrumental in our ability to recruit, on-board and launch the EMsights Capital Group. We are less than a year from having launched the team's first strategy. Our priority remains early franchise development, establishing the people, processes, resources, culture and returns necessary for long-term success. Early returns have been strong, with all three of the team's strategies outperforming benchmarks since inception. In the near-term, we expect to see early institutional adoption, and as the team experiences foundational growth, we believe there will be multiple vectors for long-term growth.

"Everyone has their list of 2022 geopolitical and market events. Thus far in 2023, we have seen a continuation of the fourth quarter, as decision-makers have learned to operate with greater uncertainty and have gathered more information and knowledge about the direction of inflation and China policies. We are energized by the excitement around potential fixed income allocations and returns. And we believe that valuations outside of the United States present attractive return and demand opportunities for non-U.S. and global equity strategies where we have long-term track records of generating meaningful alpha. We will remain patient and confident in the tremendous long-term potential as we bring together investment talent, large investment opportunity sets and long-term secular demand."

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

		For the Three Months Ended				For the Years Ended
	December 31,		September 30,		December 31,		December 31,		December 31,
		2022			2022			2021			2022			2021
		(unaudited, in millions except per share amounts or as otherwise noted)
Assets Under Management (amounts in billions)
Ending	$	127.9	$	120.6	$	174.8	$	127.9	$	174.8
Average		127.4			132.9			175.9			141.5			171.8
Consolidated Financial Results (GAAP)
Revenues	$	226.0	$	234.3	$	315.0	$	993.3	$	1,227.2
Operating income		70.0			78.7			137.8			344.1			540.5
Operating margin		31.0 %			33.6 %			43.7 %			34.6 %			44.0 %
Net income attributable to Artisan Partners Asset Management
Inc.	$	52.9	$	44.2	$	84.6	$	206.8	$	336.5
Basic earnings per share		0.76			0.65			1.25			2.94			5.10
Diluted earnings per share		0.76			0.65			1.25			2.94			5.09
Adjusted1 Financial Results
Adjusted operating income	$	70.6	$	77.1	$	137.8	$	340.3	$	540.8
Adjusted operating margin		31.2 %			32.9 %			43.8 %			34.3 %			44.1 %
Adjusted EBITDA2	$	73.3	$	79.5	$	140.6	$	349.2	$	548.9
Adjusted net income		52.0			56.4			102.4			249.6			399.9
Adjusted net income per adjusted share		0.65			0.70			1.29			3.11			5.03

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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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December 2022 Quarter Compared to September 2022 Quarter

AUM increased to $127.9 billion at December 31, 2022, an increase of 6%, compared to $120.6 billion at September 30, 2022, primarily due to investment returns of $12.8 billion, partially offset by net client cash outflows of $5.2 billion and $0.3 billion of Artisan Funds' distributions not reinvested. For the quarter, average AUM decreased 4% to $127.4 billion from $132.9 billion in the September 2022 quarter.

Revenues of $226.0 million in the December 2022 quarter decreased $8.3 million, or 4%, from $234.3 million in the September 2022 quarter, primarily due to lower average AUM.

Operating expenses of $156.0 million in the December 2022 quarter increased $0.4 million, or less than 1%, from $155.6 million in the September 2022 quarter, due to an increase in long-term incentive compensation costs resulting from the market valuation impact on compensation plans and higher occupancy expense due to the abandonment of an office lease, partially offset by a decline in incentive compensation expense as a result of lower revenues.

GAAP operating margin was 31.0% in the December 2022 quarter compared to 33.6% in the September 2022 quarter. Adjusted operating margin was 31.2% in the December 2022 quarter compared to 32.9% in the September 2022 quarter.

Within non-operating income (expense), investment gains (losses) are 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 $14.9 million in the December 2022 quarter, compared to losses of $9.4 million in the September 2022 quarter. Artisan Partners' portion of investment gains was $13.1 million in the December 2022 quarter, compared to losses of $7.1 million in the September 2022 quarter.

GAAP net income was $52.9 million, or $0.76 per basic and diluted share, in the December 2022 quarter, compared to GAAP net income of $44.2 million, or $0.65 per basic and diluted share, in the September 2022 quarter. Adjusted net income was $52.0 million, or $0.65 per adjusted share, in the December 2022 quarter, compared to adjusted net income of $56.4 million, or $0.70 per adjusted share, in the September 2022 quarter.

December 2022 Quarter Compared to December 2021 Quarter

AUM at December 31, 2022 was $127.9 billion, down 27% from $174.8 billion at December 31, 2021. The change in AUM over the one- year period was primarily due to global market declines, $9.8 billion of net client cash outflows and $0.5 billion of Artisan Funds' distributions that were not reinvested. Average AUM for the December 2022 quarter was $127.4 billion, 28% lower than average AUM for the December 2021 quarter.

Revenues of $226.0 million in the December 2022 quarter decreased $89.0 million, or 28%, from $315.0 million in the December 2021 quarter, primarily due to lower average AUM.

Operating expenses of $156.0 million in the December 2022 quarter decreased $21.2 million, or 12%, from $177.2 million in the December 2021 quarter, due to a decline in incentive compensation expense as a result of lower revenues, partially offset by increased long-term incentive compensation expense resulting from the 2022 annual grant, increased travel and occupancy costs, and higher fixed compensation costs reflecting annual merit increases as well as an increase in the number of full time associates.

GAAP operating margin was 31.0% for the December 2022 quarter, compared to 43.7% for the December 2021 quarter. Adjusted operating margin was 31.2% in the December 2022 quarter, compared to 43.8% in the December 2021 quarter.

Total investment gains, which include gains attributable to third party shareholders of consolidated investment products, were $14.9 million in the December 2022 quarter, compared to gains of $1.5 million in the December 2021 quarter. Artisan Partners' portion of investment gains was $13.1 million in the December 2022 quarter, compared to gains of $0.4 million in the December 2021 quarter.

GAAP net income was $52.9 million, or $0.76 per basic and diluted share, in the December 2022 quarter, compared to GAAP net income of $84.6 million, or $1.25 per basic and diluted share, in the December 2021 quarter. Adjusted net income was $52.0 million, or $0.65 per adjusted share, in the December 2022 quarter, compared to adjusted net income of $102.4 million, or $1.29 per adjusted share, in the December 2021 quarter.

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Average AUM for the year ended December 31, 2022 was $141.5 billion, 18% lower than average AUM of $171.8 billion for the year ended December 31, 2021.

Revenues of $1.0 billion for the year ended December 31, 2022 decreased $233.9 million, or 19%, from $1.2 billion for the year ended December 31, 2021, primarily due to lower average AUM and a decrease in performance fee revenue.

Operating expenses of $649.2 million for the year ended December 31, 2022 decreased $37.5 million, or 5%, from $686.7 million for the year ended December 31, 2021, due to a decline in incentive compensation and third-party distribution expense as a result of lower revenues, partially offset by increased travel, occupancy and technology costs and higher fixed compensation costs reflecting annual merit increases as well as an increase in the number of full time associates, including our newest investment team.

GAAP operating margin was 34.6% for the year ended December 31, 2022, compared to 44.0% for the year ended December 31, 2021. Adjusted operating margin was 34.3% for the year ended December 31, 2022, compared to 44.1% for the year ended December 31, 2021.

Total investment losses, which included losses attributable to third party shareholders of consolidated investment products, were $23.4 million for the year ended December 31, 2022, compared to gains of $21.5 million for the year ended December 31, 2021. Artisan Partners' portion of investment losses was $16.9 million for the year ended December 31, 2022, compared to gains of $9.3 million for the year ended December 31, 2021.

GAAP net income was $206.8 million, or $2.94 per basic and diluted share, for the year ended December 31, 2022, compared to GAAP net income of $336.5 million, or $5.10 per basic and $5.09 per diluted share, for the year ended December 31, 2021. Adjusted net income was $249.6 million, or $3.11 per adjusted share for the year ended December 31, 2022, compared to adjusted net income of $399.9 million, or $5.03 per adjusted share, for the year ended December 31, 2021.

Capital Management & Balance Sheet

Cash and cash equivalents were $114.8 million at December 31, 2022, compared to $189.2 million at December 31, 2021. The Company paid a variable quarterly dividend of $0.56 per share of Class A common stock during the December 2022 quarter. The Company had total borrowings of $200.0 million at December 31, 2022, and December 31, 2021.

During the December 2022 quarter, limited partners of Artisan Partners Holdings exchanged 76,474 common units for 76,474 Class A common shares. The exchanges increased the Company's public float of Class A common stock by 76,474 shares, or 0.1%.

Total stockholders' equity was $279.4 million at December 31, 2022, compared to $296.0 million at December 31, 2021. The Company had 68.0 million Class A common shares outstanding at December 31, 2022. The Company's debt leverage ratio, calculated in accordance with its loan agreements, was 0.5X at December 31, 2022.

Long-Term Incentive Awards

On January 25, 2023, the Company's board of directors approved a grant of long-term incentive awards with a grant date fair value of approximately $57.1 million, consisting of $18.1 million of restricted share-based awards and $39.0 million of long-term cash awards, which we refer to as franchise capital awards. The grant will be effective March 1, 2023.

Dividend

The Company's board of directors declared a variable quarterly dividend of $0.55 per share of Class A common stock with respect to the December 2022 quarter and a special dividend of $0.35 per share. The variable quarterly dividend represents approximately 80% of the cash generated in the December 2022 quarter. The combined amount, $0.90 per share of Class A common stock, will be paid on February 28, 2023 to shareholders of record as of the close of business on February 14, 2023. Based on our projections and subject to change, we expect some portion of 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 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 February 1, 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 10173831. A replay of the call will be available until February 8, 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 3521270. 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, poor performance of our investment strategies, change in the legislative and regulatory environment in which we operate, operational or technical errors or other damage to our reputation, the long-term impact of the COVID-19 pandemic, 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, 2021, filed with the SEC on February 22, 2022, 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 to 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's definition of AUM is not based on any definition of Assets Under Management contained in the ADV or in any of Artisan's 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 Artisan 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 strategy's average annual return and the return of its respective benchmark. We may also present Excess Returns (alpha), which are an estimate of the amount in dollars by which Artisan's investment strategies have outperformed or underperformed their respective benchmark. Excess Returns are calculated by

1. 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 Company's management to evaluate the performance of the strategy.

Composites / Indexes used for the comparison calculations described are: Non-U.S. Growth Strategy / International Value Strategy-MSCI EAFE Index; Global Discovery / Global Equity Strategy / Global Opportunities Strategy / Global Value Strategy-MSCI ACWI Index; Non-U.S.Small-Mid Growth Strategy-MSCI ACWI ex-USA Small Mid Index; U.S. Mid-Cap Growth Strategy-Russell Midcap Growth® Index; U.S. Mid-Cap Value Strategy-Russell Midcap Value® Index; U.S. Small-Cap Growth Strategy-Russell 2000 Growth® Index; Value Equity Strategy-Russell 1000 Value® Index; Developing World Strategy / Sustainable Emerging Markets Strategy-MSCI Emerging Markets Index; High Income Strategy-

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