Principal Financial Group Inc. NYSE:PFG Guidance/Update Call Thursday, December 03, 2015 3:00 PM GMT
CALL PARTICIPANTS
2
PRESENTATION
2
QUESTION AND ANSWER
5
.............................................................................................................................. ......................................................................................... WWW.SPCAPITALIQ.COM 1 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
Call Participants .....................................................................................................................................................................................................................
EXECUTIVES Daniel J. Houston Chief Executive Officer, President and Director James Patrick McCaughan Chief Executive Officer of Principal Global Investors, President of Principal Global Investors and President of Global Asset Management John Egan Nora Mary Everett Chief Executive Officer, President, Director and Member of Executive Committee Terrance J. Lillis Chief Financial Officer, Chief Accounting Officer and Executive Vice President ANALYSTS Eric N. Berg RBC Capital Markets, LLC, Research Division Jamminder S. Bhullar JP Morgan Chase & Co, Research Division Michael Kovac Goldman Sachs Group Inc., Research Division Sean Dargan Macquarie Research Suneet L. Kamath UBS Investment Bank, Research Division
................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 2 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
Presentation .....................................................................................................................................................................................................................
Operator Good morning, and welcome to The Principal Financial Group's 2016 Outlook Conference Call. [Operator Instructions] I would now like to turn the conference over to John Egan, Vice President of Investor Relations. John Egan Thank you and good morning. Welcome to The Principal Financial Group's 2016 Outlook Conference Call. Earlier today, we issued a press release and supporting slide presentation detailing our outlook for the key drivers for our businesses for 2016. The release and slides for this call are available on our website at principal.com/investor. Following a reading of the safe harbor provision, CEO Dan Houston and CFO Terry Lillis will deliver some short prepared remarks. Then we will open up the call for questions. Other members of senior management are also available for the Q&A. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise nor update them to reflect new information, subsequent events or changes in strategy. Risk and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q filed by the company with the Securities and Exchange Commission. Now I'd like to turn the call over to Dan. Daniel J. Houston Chief Executive Officer, President and Director Thanks, John, and thanks to everyone for joining us on the call today. Before Terry provides details on our outlook for 2016, I'll provide a few overall comments about how well our strategy positions us for continued long-term growth. We built leadership positions in high-growth, high-potential markets and a set of diversified businesses to provide the solutions our clients need to help protect their long-term savings. We continue to attract and retain clients by delivering strong investment performance, partnering with key distributors across our markets and of course, delivering outcomes-based solutions. On a trailing 12-month basis, as of third quarter 2015, we've delivered $1.3 billion in total company after-tax operating earnings and $25 billion of positive net cash flows. These strong results were in spite of continued macroeconomic headwinds, including strengthening U.S. dollar and market volatility. Assets under management were more than $500 billion at the end of the third quarter. We expect to double assets under management in the next 5 to 7 years as we continue to meet the needs of retail, retirement and institutional investors around the world. As I reiterated in our investor workshop in New York last month, our successful global strategy remains very much intact as I take over the CEO role from Larry Zimpleman. However, as many of you heard at the workshop, we have no intention of standing still, and we'll continue to evolve our strategy to achieve strong growth across our businesses. In the U.S., our protection business has continued to generate solid consistent growth. The small and medium-sized business market remains an excellent growth niche for us. The combination of improving job market and businesses adding benefits to attract and retain employees is driving growth in our existing block that we expect to continue in 2016 and beyond. In addition, the U.S. retirement market remains a growth opportunity. At $22 trillion, the U.S. market is larger than the ................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 3 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
second through the 10th largest global retirement markets combined. We're a top 3 provider across the pillars of retirement as we continue to differentiate through industry-leading target-date investment options, total retirement suite and plan design options that prepare workers for retirement. Additionally, with the growth in retiree demand for income solutions, we're focused on meeting those needs through a comprehensive suite of outcome-oriented mutual funds and income annuities. As an example, we recently launched the guaranteed income option for defined contribution plan participants. Outside of the U.S., we firmly established ourselves in the right markets in Latin America and Asia, capitalizing on the fast-growing need for retirement and long-term savings. Despite the volatility inherent in emerging markets, Principal International has a track record of strong and consistent performance, with 28 consecutive quarters of positive net cash flows as of third quarter 2015. As we continue to strengthen our leadership positions, we in turn strengthen our longterm growth prospects. As a reminder, we're now the second-largest pension provider in Latin America based on assets. As we said in our earnings call, our acquisition of AXA's pension business in Hong Kong closed in September. We expect AXA to contribute $0.02 to $0.03 per share in 2016 as we transfer customers, asset management and service provider contracts in the first half of the year. As a reminder, the 15-year exclusive distribution agreement with AXA's 4,400 agents was a very important and strategic component of our acquisition. With the closing of this transaction, we have improved our competitive position not only in Hong Kong but in all of Asia. With the consolidation of Principal Funds and Principal Global Investors, we now have the right active strategies for retail, retirement and institutional investors all under one roof. We will continue to leverage efficiencies in areas of global distribution, research, product development and technology. Globally, asset management industry AUM is projected to surpass $100 trillion in 2020. We remain well positioned to compete, given our outcomes-based investment lineup, our ongoing efforts to expand and enhance that lineup and strong investment performance. As of the third quarter end, 91% of our funds were in the top 2 Morningstar quartiles for the 3- and 5-year performance and 78% of our rated funds had a 4- or 5-star rating. In closing, The Principal remains in a very strong competitive position. We continue to take actions to strengthen that position and continue to create value for our shareholders. Terry? Terrance J. Lillis Chief Financial Officer, Chief Accounting Officer and Executive Vice President Thanks, Dan. As John mentioned, this morning we issued a press release and posted slides to our website with details of our outlook for 2016. The release and slides include the assumptions supporting our 2016 outlook, the key earnings drivers for each of our businesses and our 2016 capital deployment strategy. Our list of assumptions is on Slide 4, and it includes an average S&P 500 Index in 2016 of 2,160, which assumes a 2% quarterly total return on levels as of the end of November 2015; an increase in the 10-year treasury yield to 2.75% to 3% at the year-end 2016; and future foreign exchange rates following external consensus as of the end of the third quarter 2015, which reflects a further strengthening of the U.S. dollar in 2016 relative to full year 2015. Slides 5 through 10 provide the expected revenue growth rates in 2016, plus our expected pretax margins for each of our business units. As we announced at our investor workshop last month, our 2016 outlook follows the recent realignment of our financial reporting structure. While I won't go through each business individually, I did want to touch on a few points regarding our outlook for 2016. Overall, our outlook reflects confidence that our businesses will continue to generate growth in 2016 despite the strengthening U.S. dollar and sustained low interest rates. 2016 outlook also reflects the market underperformance in 2015. Slide 5 shows key metrics for fee businesses for retirement and income solutions, which now combines Full Service Accumulation with variable annuities. We expect 2016 margins to be in the 28% to 32% range and to remain strong versus industry peers. ................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 4 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
On Slide 6, you'll note that pretax return on net revenue for the spread businesses for retirement and income solutions is projected to be in the 55% to 59% range. This reflects growth in both fixed income annuities, which is now part of the segment, and Full Service Payout. Moving to Slide 7. We expect 2016 margins for Principal Global Investors, which now includes Principal Funds, to be in the 33% to 36% range. This is a modest increase over 2015 as we continue to build scale and profitability in this business. Investment management is at the core of what we do at The Principal. Continuing to build our global footprint and our expand our capabilities are critical in our efforts to help our clients achieve financial success. Moving now to Principal International on Slide 8. We expect the strengthening U.S. dollar to be a strong headwind again in 2016, roughly a 10% negative impact to earnings using external currency exchange consensus. However, on a local currency basis, we expect growth rates to remain at the mid-teens level. Slide 11 outlines projected capital deployment of $800 million to $1 billion in 2016. As a reminder, we announced that our board authorized a $150 million share repurchase program in October, which was an acceleration of our 2016 deployment. We began executing on this authorization in the fourth quarter. Our approach to capital deployment remains balanced to optimize long-term value for shareholders. Common stock dividends, strategic acquisitions, share repurchases and managing the leverage ratio all remain part of our strategy. In conclusion, our outlook for 2016 represents continued momentum across our diversified business, despite ongoing macroeconomic volatility. We remain optimistic about our long-term growth opportunities. This concludes our prepared remarks. Operator, please open the call for questions.
................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 5 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
Question and Answer .....................................................................................................................................................................................................................
Operator [Operator Instructions] The first question comes from Sean Dargan with Macquarie. Sean Dargan Macquarie Research I have a question about the RIS fee margins. They seem to be a bit -- the outlook seems to be a bit lower than what I would have thought the normalized margins would have been over the period that you presented to us in the new format. Can you just maybe comment on what's causing compression, if anything? Daniel J. Houston Chief Executive Officer, President and Director Yes, Sean. This is Dan. Appreciate you being on the call. I'll have Nora make some additional comments, but maybe at the macro level when I think about where we're at through this part of this year through 11 months, the S&P 500's up 1.1%. So we're, frankly, starting off at the lower account value than we would have had otherwise as you think about starting off 2016. We've got some nice tailwinds when you think about both the revenues and margins for the business. And when I think about that, it's strong employment market here in the U.S. We still have a generation of workers kind of marching towards retirement, and there still continues to be strong recurring deposits. Just a couple of the headwinds that we're thinking about that tamped down some of these issues is the pressure we're going to have on 401(k) competition. I'm sure Nora would want to comment on that. We got a little bit of overhang on DOL relative to contingency plans, putting those in place to make sure we're able to absorb any sort of regulatory change in '16 and '17. And then lastly, we're going to continue to make pretty significant investments in this business. The digital environment is certainly one area where we'll have to make those investments and making sure we've got a great customer experience. But maybe with that sort of backdrop, I'll turn it over to Nora to have her make some additional comments. Nora Mary Everett Chief Executive Officer, President, Director and Member of Executive Committee Sure. Remember now, this segment is now heavily, heavily primarily FSA. And we've actually communicated over the last year or so that we actually expected these longer-term FSA margins to be within this range, 28% to 32%. So that's been over the last 12 to 18 months. We've talked about this range of 28% to 32% longer term. Now with that said, for 2016, we're certainly striving to hit the high end of this range, but this isn't a new range or a new communication now that we're looking primarily at FSA with regard to being part -- a significant part of this RIS fee segment. It -- to Dan's point, it certainly reflects the competitiveness of the U.S. market. We continue, however, to have leading margins relative to our competitors, even within this 28% to 32% range. We think it's the right balance between growth and profitability. And to Dan's point, we're going to continue to make investments back in this business for long-term earnings growth. Daniel J. Houston Chief Executive Officer, President and Director Sean, does that help? Sean Dargan Macquarie Research It does. And if I can just have one follow-up. You mentioned contingency plans. Can you maybe give more color on what those might be? ................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 6 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
Daniel J. Houston Chief Executive Officer, President and Director Yes. So the way I think about our contingency plans are there's a whole range of potential ways in which you'd have to work with customers at those inflection points we've talked about in the past. What are the 2 inflection points? It's in the very beginning when we're sitting down, talking to a plan sponsor along with an adviser and identify what those investment options are. So we'll have to be thinking about those disclosure items. And again, it had more to do with process than anything else. And then of course, the other one is a benefit event when there's a job changer or retiree, what will the fund counselors need to do in order to take steps to provide the necessary notification to a plan participant on what their options are. We do all of those things today. The question becomes what's the process? What's the programming? What are we going to have to do for training in order to successfully work our way through that? So again, it isn't insurmountable. We dealt with a lot of these sorts of complexities in the past, but we wouldn't be doing our job for our investors if we didn't think through what those permutations are and how we'll have to work with our plan participants and plan sponsors. Operator Our next question comes from Eric Berg with RBC Capital Markets. Eric N. Berg RBC Capital Markets, LLC, Research Division My question, too, has to do with the RIS fee business. I would have thought that the net revenue growth would be higher than what you are anticipating. And the reason I say this is largely because you have the stock market going higher next year, leading to an average level of the stock market that I think will be higher than this year's average or at least in line with. Could you offer some additional observations on the outlook that you are forecasting for net revenue growth in your fee business? Daniel J. Houston Chief Executive Officer, President and Director Yes, Eric, thanks for the question this morning. So it really starts back where I began, which was we would have anticipated starting 2016 with a larger average account balance, as much as 10% higher. The makeup of that would have been 8% from market performance, the other 2% from net cash flow. Nora and her team have done a good job on net cash flow, making sure we fell within that 1% to 3%. But here we sit 11 months into it, and if we went back and looked at the calculation, the S&P has only contributed 1.1% to the increasing of those account balances. So you're right, Eric. If we use our model and we add 8% in 2016, we're still starting from a lower base than we would have otherwise anticipated by the magnitude of roughly 7% or 8%. So that's probably the biggest contributor. And like you, we hope that we can outperform the 2% to 4%, but we fully anticipate this will be again a very difficult and challenging year as we think about the competitive environment. With that, maybe I'll ask Nora to make any additional comments. Nora Mary Everett Chief Executive Officer, President, Director and Member of Executive Committee Yes, I think Dan's covered it. I mean, it reflects a couple of things. It reflects the competitive nature of the U.S. retirement business. I mean, that's just our reality. But to Dan's point, it also reflects our equity market assumptions going forward. And if you look year-over-year, that full year S&P daily average based on our assumptions is up only 5% based on our assumptions. So we need to right size that S&P based on our assumptions, regardless of where the market's going to go. If you look at the last couple of years, go back to 2012, look at 2012 through 2014, extremely favorable equity market growth, up 19%, up 18%. And in addition to that, we saw a very high variable investment income. So I use that as a comparable just to right size expectations here with regard to what has happened historically with those equity markets to us. And that variable investment income that we communicated is probably not repeatable. We don't -- we're not -- we don't expect to see that level of variable investment income. So it's also just rightsizing relative to some of the growth we've seen in the equity markets over the last couple of years based on our current assumptions. ................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 7 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
Daniel J. Houston Chief Executive Officer, President and Director Eric, did that help? Eric N. Berg RBC Capital Markets, LLC, Research Division It does. I'm all set. Daniel J. Houston Chief Executive Officer, President and Director Did you have a follow-up, Eric? Eric N. Berg RBC Capital Markets, LLC, Research Division Actually, I did have one follow-up. I'd like to address it to you or to Jim, if he's there, but if not, to you, Dan. In Principal Global Investors, again, you are looking for a, let's call it, normal increase in the equity markets this year, revenue growth in line with that equity market growth. I realize that you have fixed income assets whose value could get -- would get depressed, given your forecast for rising interest rates. My question, what is baked into the 8% to 10% revenue growth forecast in terms of organic growth, meaning net flows, meaning nonmarket-related additions to your revenue? Daniel J. Houston Chief Executive Officer, President and Director Yes, very good, Eric. Jim is here this morning. I'll have him go ahead and respond to your question. James Patrick McCaughan Chief Executive Officer of Principal Global Investors, President of Principal Global Investors and President of Global Asset Management Eric, thank you for the question. And basically, what we've seen in 2015 is flows, net positive flows that are in the 3%, 3.5% range of beginning-of-year assets under management. And what we can see in the industry, we're unique in having such strong positive flows. The industry is seeing a lot of headwinds. It's not just FX. It's the move to passive. It's the associated fee pressures with a move to passive by many clients. It's the industry is seeing outflows from both retail and from the sovereign clients, particularly in the Middle East and Asia. So if you look at the industry, all our real marquee competitors pretty well have moved into outflows during 2015. We see our pipeline both for funds and for institutional being broadly maintained. So baked into this is something in the range of 3%, 3.5% positive net cash flows. And 8% to 10% to me is not the revenue growth I aspire to long term. I want the revenue growth to be back into double digits, but to get that would need an abatement of the headwinds that we're seeing. Terrance J. Lillis Chief Financial Officer, Chief Accounting Officer and Executive Vice President Yes. Eric, this is Terry. Can I add just a couple of comments on it? In the new financial supplement that we provided, we provided management fee revenue, which is in line with the growth of the AUM, as Jim talked about. But we also provided additional detail into other types of revenue, such as transaction fees that we get, and that's relatively flat at our estimation at this point in time. But to your point, the portion that is tied to assets under management is growing in line with the market performance as well as the net cash flows that Jim talked about. Daniel J. Houston ................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 8 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
Chief Executive Officer, President and Director Eric, thanks for your question. Operator And our next question comes from Michael Kovac with Goldman Sachs. Michael Kovac Goldman Sachs Group Inc., Research Division I'm wondering on the RIS spread business, you mentioned some of the places you're expecting to grow. What sort of gives you comfort to grow in these today? And what are sort of your longer-term expectations there? Daniel J. Houston Chief Executive Officer, President and Director Yes. When I think about that spread business and one of the reasons we combined it with our fee business is they really very much belong together. As we see this generation of workers starting to retire, they're going to be looking for income-based solutions. And Nora, in this revision of her organizational structure, as we think about the supplement, spread becomes part of that and so there's some new elements of the spread components, and I'll have Nora kind of outline those for you. Nora Mary Everett Chief Executive Officer, President, Director and Member of Executive Committee Yes. So in this segment, you're looking at Full Service Payout, you're looking at investment only, and you're now looking at income annuities as well. And when you look at -- and I know there's quite a delta between the trailing 12 months, which was in a negative net revenue growth rate and we're now projecting 8% to 10%, so there's quite a delta there. And it's really caused by if you look back over the trailing 12 months, '14 to '15, that sharp decline was due to a very significant decrease in variable investment income and flat mean account value. We actually expect in 2016 to see that mean account value going up pretty materially. And in addition to that, well, in large part because we saw these strong 2015 sales in this income suite, both with regard to our Full Service Payout and our income annuity suite, and that's going to now contribute to that full year revenue growth in 2016. So we're seeing very strong sales. We continue to see a very healthy pipeline, and we're going to see the benefit of that in 2016. Daniel J. Houston Chief Executive Officer, President and Director Michael, is that helpful? Michael Kovac Goldman Sachs Group Inc., Research Division Yes, yes. And if you look out a couple of years on that, sort of following up, do you expect 8% to 10% as sort of a rebound from what you were seeing in '15? Or longer term, do you think that you can be growing in those upper singledigit levels? Nora Mary Everett Chief Executive Officer, President, Director and Member of Executive Committee Well certainly longer term, we would expect to be growing on the positive side of that equation for sure. Daniel J. Houston ................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 9 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
Chief Executive Officer, President and Director Yes, I think it's pretty difficult to sit here today and provide this sort of long-term outlook. It's -- we do think there's this pent-up demand relative to Full Service Payout. We feel good about that business. We're getting good pricing around that business. But we can't really predict what interest rates are going to do. But again, if you're going to be in the accumulation business and you're going to be a serious player in retirement, you got to be a serious player in the out -in the income business. And so this is, to us, just an extension of that Full Service Accumulation platform that allows us not only to manage assets during accumulation but also in the payout phase. And so that -- hopefully, it helps. Operator Our next question comes from Jimmy Bhullar with JPMorgan. Jamminder S. Bhullar JP Morgan Chase & Co, Research Division I had a few questions. First, Dan, on the DOL, obviously, nothing has come out yet that's final. But what's your insight into what the rules are going to look like and how they might affect your 401(k) business? And then you mentioned competition a few times. Just wondering if there's been a change in the competitive dynamics recently? Or are you just seeing a continued elevated competition in the 401(k) market? And then finally on your guidance, on Corporate, it seems like your guidance for the losses is a lot higher than what you're running at this year. It seems like this year is going to be in the $185 million, $190 million range or so in terms of Corporate losses. You're guiding to $235 million to $265 million. So is there something specific that's causing that? Or is it more of an allocation of expenses from the businesses? What's really driving that? Daniel J. Houston Chief Executive Officer, President and Director Thanks, Jimmy, for your question. Let's me start with your last question first and have Terry Lillis speak to the issue around the Corporate segment. Terrance J. Lillis Chief Financial Officer, Chief Accounting Officer and Executive Vice President Yes. Jimmy, this is Terry. I think you're a little bit high in terms of your after-tax impact on that. I would say that if you used our 40% effective tax rate for the Corporate segment, which it's a very volatile tax rate because we have a lot of different things, and both federal, state impacted on it. But one of the things that we've done this year with the realignment, with the realignment of our businesses is we moved some services that have in the past been housed in the mutual fund business, which basically is Princor, which our broker-dealer operation, which services our Principal advisory network, and it is across multiple lines. So we think that it makes more sense to actually take that out of the mutual fund business, PGI now, and move it into Corporate. So that had some impact on it as well. We also are looking at other financing costs that we did, which would be a little bit more consistent with what others may have done in terms of the life financing for some of the capital captives, and some additional pension expenses and the volatility of that beyond the normal service costs associated with the pension plans. So net-net-net, that's going to probably add about $10 million to that $130 million to $150 million after-tax number that we had in the past. And so as you say though, we're... Jamminder S. Bhullar JP Morgan Chase & Co, Research Division No, what I'm discussing more, just on the new [ph] basis, I think so far this year, you've averaged a quarterly loss of around $45 million, $46 million or so, which is a lot smaller loss than what you're projecting for 2016. Terrance J. Lillis Chief Financial Officer, Chief Accounting Officer and Executive Vice President ................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 10 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
Well, the -- in 2015, we didn't have some of these costs associated in there, okay? And so now on a go-forward basis, now we are moving those in as we realign that business. So yes, so net-net, we're going to be up slightly in that $10 million-or-so range, but we do provide it on a pretax basis and the effective tax rate associated with it. Daniel J. Houston Chief Executive Officer, President and Director So just a couple of quick comments from Nora then on DOL and competition. The reality is there's not a lot out new on DOL. But Nora, why don't you go in and hit that one? Nora Mary Everett Chief Executive Officer, President, Director and Member of Executive Committee Yes. So Jimmy, on the DOL front, there's still, to Dan's point, there's still a significant amount of uncertainty around this draft regulation, as you probably know. It was good to hear though Sec. Perez acknowledge within the last month or 2 that the DOL still has a lot of work to do. And now they're in their quiet period, so it's probably not productive for us to speculate. But there will be changes to the reg and that's coming right from the Department of Labor. How significant those are, where they're going to be, it's not clear. Timing-wise, it also appears that they're -- I don't know if we'd call it slippage, but the DOL has referenced now the first half of 2016 for publishing this final reg. And as we all know, that's kind of the first launch. And then there are issues around the funding of that as well as litigation, et cetera. So it's still really early in the game, lots of ambiguity, and we're waiting for that final reg to come out. We'll certainly speak to it at that point. Daniel J. Houston Chief Executive Officer, President and Director Should there be a lot of discussion at the end of the first quarter on this one, Jimmy. So thanks for the question. Operator Our next question comes from Suneet Kamath with UBS. Suneet L. Kamath UBS Investment Bank, Research Division Just 2 quick ones. So first, on the capital deployment, I just want to make sure I understand this. So the $800 million to $1 billion, that includes the $150 million of buyback and presumably includes whatever you're going to pay in common stock dividend, which let's just say, it's around $500 million. So that would imply sort of incremental capital deployment of this $150 million to $300 million based on my math? Terrance J. Lillis Chief Financial Officer, Chief Accounting Officer and Executive Vice President Yes. Suneet, as we just pointed out here, $800 million to $1 billion is kind of our estimate at this point in time. That's consistent with what we did last year. Now the pieces that you comment on our common stock dividend, the acquisitions as well as buybacks, if you look out into the next year, out of in 2016, we will continue, hopefully, to have that dividend. We won't get out in front of the board right now, but we continue to see that dividend moving up into that 40% range. We're continuing to work our way towards that as a percent of net income. Acquisitions, as always, we've got a very active pipeline in order to continue to build scale as well as enhance our capabilities. Share repurchases, right now, we have taken $150 million of the what we would have had as a 2016 more or less an opportunistic and anti-dilutive strategy and accelerated that into 2015, which we are executing on that right now. So that's strengthened. So as you look out into 2016, share buybacks will be part of it. Acquisitions will be part of it. Dividends will be part of it. And I do think we also, as I mentioned in a comment, are managing the leverage ratio. I think we're going to actually looking at bringing our debt down as well. But part of it is maybe maintaining a little bit higher equity position because of the strong ................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 11 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
growth that Nora had mentioned earlier in our Full Service Payout business. It's very good business. We're getting some very good pricing power in there. So all those things are part of the capital deployment strategy. Hopefully, that helps. Suneet L. Kamath UBS Investment Bank, Research Division Yes, it's helpful. And then the second one is on the 10-year treasury assumption, I guess the 2.75% to 3% by the end of this year -- or next year, excuse me. How sensitive are some of the underlying guidance targets that you're giving us, particularly in RIS spread? To that, in other words, if we stayed at closer to 2%, would some of this guidance change dramatically? Terrance J. Lillis Chief Financial Officer, Chief Accounting Officer and Executive Vice President Suneet, this is Terry again. We talked about the impact of the interest rate environment on Principal, and we've always said that it's not as significant of an impact on us as it is on others because of the fee-based businesses because of the strong asset liability management in our products that we have. That being said, as I look out into the future, I wouldn't say that there would be a dramatic change in the guidance levels that we provided here based upon the interest rate environment staying closer to 2%, albeit longer term, we do think that there will be some upward movements in interest rates. But at the same time, it's not going to have a significant impact on a rapid increase nor a rapid decrease on our Principal. Operator We have reached the end of our Q&A. Mr. Houston, your closing comments, please. Daniel J. Houston Chief Executive Officer, President and Director Well, again, thank you for everyone for joining the call this morning. We certainly appreciate your interest in The Principal Financial Group. Please enjoy the balance of the year and enjoy the time with your family during the holidays. Thank you. OperatorThank you for participating in today's conference call. This call will be available for replay beginning at approximately 12:30 p.m. Eastern Time today until end of day, December 10, 2015. 76001179 is the access code for the replay. The number you should dial for the replay is (855) 859-2056 for U.S. and Canadian callers or (404) 537-3406 for international callers. Thank you. This does conclude today's conference.
................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 12 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
PRINCIPAL FINANCIAL GROUP INC. GUIDANCE/UPDATE CALL DEC 03, 2015
The information in the transcripts ("Content") are provided for internal business purposes and should not be used to assemble or create a database. The Content is based on collection and policies governing audio to text conversion for readable "Transcript" content and all accompanying derived products that is proprietary to Capital IQ and its Third Party Content Providers. The provision of the Content is without any obligation on the part of Capital IQ, Inc. or its third party content providers to review such or any liability or responsibility arising out of your use thereof. Capital IQ does not guarantee or make any representation or warranty, either express or implied, as to the accuracy, validity, timeliness, completeness or continued availability of any Content and shall not be liable for any errors, delays, or actions taken in reliance on information. The Content is not intended to provide tax, legal, insurance or investment advice, and nothing in the Content should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Capital IQ or any third party. In addition, the Content speaks only as of the date issued and is based on conference calls that may contain projections of other forward-looking statements. You should not rely on the Content as expressing Capital IQ’s opinion or as representing current information. Capital IQ has not undertaken, and do not undertake any duty to update the Content or otherwise advise you of changes in the Content. THE CONTENT IS PROVIDED "AS IS" AND "AS AVAILABLE" WITHOUT WARRANTY OF ANY KIND. USE OF THE CONTENT IS AT THE USERS OWN RISK. IN NO EVENT SHALL CAPITAL IQ BE LIABLE FOR ANY DECISION MADE OR ACTION OR INACTION TAKEN IN RELIANCE ON ANY CONTENT, INCLUDING THIRD-PARTY CONTENT. CAPITAL IQ FURTHER EXPLICITLY DISCLAIMS, ANY WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. CAPITAL IQ, SUPPLIERS OF THIRD-PARTY CONTENT AND ANY OTHER THIRD PARTY WORKING WITH CAPITAL IQ SHALL NOT BE RESPONSIBLE OR LIABLE, DIRECTLY OR INDIRECTLY, FOR ANY DAMAGES OR LOSS (INCLUDING DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL AND ANY AND ALL OTHER FORMS OF DAMAGES OR LOSSES REGARDLESS OF THE FORM OF THE ACTION OR THE BASIS OF THE CLAIM) CAUSED OR ALLEGED TO BE CAUSED IN CONNECTION WITH YOUR USE OF THE CONTENT WHETHER OR NOT FORESEEABLE, EVEN IF CAPITAL IQ OR ANY OF THE SUPPLIERS OF THIRD-PARTY CONTENT OR OTHER THIRD PARTIES WORKING WITH CAPITAL IQ IN CONNECTION WITH THE CONTENT HAS BEEN ADVISED OF THE POSSIBILITY OR LIKELIHOOD OF SUCH DAMAGES. © 2015 Capital IQ, Inc.
................................................................................................................................................................................................................. WWW.SPCAPITALIQ.COM 13 COPYRIGHT © 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
