Thank you for standing by, and welcome to Invesco's Second Quarter Earnings Conference Call. [Operator Instructions] This call will last 1 hour to allow more participants to ask questions. As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Sir, you may begin.

All right. Thanks, Andrew, and to all of you joining us today. In addition to the press release, we have provided a presentation that covers the topics we plan to address on the call. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward- looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for the accuracy of our earnings teleconference transcripts provided by third parties, daily authorized webcast are located on our website. Andrew Schlossberg, President and CEO; and Allison Dukes, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions. I'll now turn the call over to Andrew. Thanks, Greg, and good morning to everybody. I'm pleased to be speaking with you today. I'll start as I have for the last several quarters on Slide 3, which covers our strategic initiatives and our performance drivers as it is an important framing for the second quarter and for highlighting significant recent accomplishments. We remain focused on generating positive client outcomes, executing against our strategic priorities and making meaningful progress in our efforts to improve operating leverage while strengthening our balance sheet. I'm appreciative of the hard work of my colleagues around the world as we continue to look across the organization to unlock value. Before we review the quarterly results, I'd like to take a moment to highlight to you significant examples of this progress over the past several months. First, I'd point to our partnership with MassMutual and Bearings. During the quarter, we completed the repurchase of $1…

Thank you, Andrew, and good morning, everyone. I'll start with the second quarter financial results on Slide 7. After a challenging start to the second quarter in April, we experienced strong growth in assets under management during the remainder of the quarter. We ended the second quarter at a record level for total AUM, slightly over $2 trillion. . This was $157 million or 8% higher than the end of the first quarter and $286 million or 17% higher than the end of the second quarter of 2024. Average long-term assets under management were $1.34 trillion, an increase of 1% over last quarter and 12% over the second quarter of last year. The increase of only 1% in average AUM was driven by market weakness early in the quarter with AUM growth rebounding in May and June. Growth in total assets under management during the quarter was mainly driven by market gains of $126 billion, of which $52 million was driven by the QQQ. ETF and index market gains were $41 billion and fundamental equity market gains were $26 billion. Net long-term inflows drove a $16 billion increase in AUM during the quarter, representing an annualized organic growth rate of nearly 5% for the quarter. As Andrew noted, net inflows in our ETF capability for $13 billion. China JV in India added $6 billion of net inflows and fundamental fixed income contributed $3 billion of debt in post. Net outflows of $4 billion in fundamental equities and $2 billion in private markets partially offset the net inflows. Net revenues, adjusted operating income and adjusted operating margin all improved from the second quarter of 2024 while operating expenses continued to be well controlled. Adjusted diluted earnings per share was $0.36 for the second quarter. We continue to strengthen the balance sheet…

[Operator Instructions] Our first question comes from Bill Katz with TD Cowen.

Maybe picking up on the QQQs. Just a couple of questions that were embedded in my first question. Maybe why now? Obviously, it's been around for quite a while. It looks like the marketing spend is going to be down versus the prior payout. So how do you think about flows on the other side? And then maybe the biggest part of the question for me is the 4 basis about what we figured out as well. How do we think about the incremental margin? In other words, would you look to let that all drop to the bottom line? Or would you look to spend some of that back for growth? And could you quantify what that might look like?

Let me start and Allison will pick up. Let me start with the line now question. Look, as I said in my -- was saying in my opening remarks, the management team, we're looking across the entire business, looking for ways to enhance outcomes for our clients and enhance outcomes for shareholders. And I think this is another area we looked. And we look at our fund lineup routinely, looking for ways to enhance the outcomes and remaining confident that the structure of the strategies we have are both efficient and being responsive to evolving client needs and evolving market conditions. As you know, the Q Unit Trust was launched in 1999. So a lot has changed since then. And we just felt like it was the right time to put forward this proposal to modernize the structure. And we'll -- let me let Allison pick up on the back-end parts of your questions. .

Bill, I think as it relates to marketing, again, and we're going to point you to the proxy probably over and over again. But as the proxy stage, we currently anticipate a marketing budget for the trust of $60 million to $100 million. And so right now, that would translate to 2 to 3 basis points of annual assets. That is at our discretion, as I noted. And it's really on the heels of really significant levels of marketing expenditure for the Q2 over the years that have created significant brand awareness for the trust. As it relates to the net approximately 4 basis points, I think what I would say there is, as I said in my comments, we would expect that to add 4 basis points to net revenue and to operating income. We don't expect any additional operating expenses associated with this conversion if the proposal is approved.

The next question comes from Glenn Shorr with Evercore.

Maybe I'll just pick up on where we left off there. So you've been improving margins in the balance sheet and delevering. And I heard a lot of comments throughout the call on potential more delevering. So I just want to push buttons a little bit and ask how much can this incremental revenue go towards growth? Because I see great diversification across product and geography, but I think there's a lot more to do in private markets. You have amazing distribution. So how do you balance the whole delevering combo that clearly shareholders keep asking you for with driving growth, which I want to keep asking you for.

Completely fair question, good question and exactly what we challenge ourselves with all the time. We want both. We want growth and we want to delever. We don't think it's a binary choice. And so much of our focus is improving our operating cash flow so that we provide that optionality for ourselves. I think we've made significant parts just in the announcement last quarter around the repurchase of $1 billion of preferred, changing that structure. As we said last quarter, the nature of that transaction does provide a pathway for conversations to do more in the future. But we are not exclusively focused on delevering at the expense of growth. We continue to be extremely focused on growing broad set of capabilities, namely private market capabilities through both workshops. And through acquisitions, we continue to remain very open to that. We think we've got good organic growth capabilities. We have been investing heavily in ourselves over the last few years and launching a lot of new products, a number of which we highlighted today. And you can see the success of that in our organic growth rate. I mean, our organic growth, I dare say, is among the very best of our peer group. We've really demonstrated broad growth potential, and we think we've got more to come. That said, we're exclusively focused on organic growth. We continue to remain open to inorganic opportunities as well.

Yes. And Glenn, I'd add, in addition to private markets, and we were mentioned it before, investing behind the ETF business and in particular, the active ETFs, the growth of SMAs and models that we're seeing, we want to accelerate that pace. And also looking at creative solutions, not just here in the U.S., but continue to take advantage of our competitive edge in Europe and also very much in Asia Pacific.

Now next question comes from Alex Blostein with Goldman Sachs.

Another one around the Qs, and I appreciate you guys might be limited relative to what's in a proxy but curious how you're thinking about the licensing fee of 8 basis points relative to other rates that are out there in the market, how durable do you think that's going to be? And ultimately, do you see room for that to be negotiated lower at some point of time in the future? .

Yes. I mean, look, we're really limited to what's in the proxy. But I'll say our principal partners on the fund are 2 outstanding partners. And as was outlined, things remain the way that proposed is the way that it was -- it currently is set up. So we don't really have much more to add there other than they're 2 great partners.

The next question comes from Patrick Davitt with Autonomous Research.

One more I'll try on the Qs. There's been some reporting that the, I guess, roadblock to doing this in the past was a view that it was too tough to round up a quorum for the vote. So do you now think it would be easier to get that quorum for some reason. I'll leave it there and then ask my follow-up now.

I don't know that we can speculate on that one way or the other. I'm not sure there's much we can say there. I'm not sure that's exactly why maybe it hasn't been done in the past, but I don't think we can speculate on the degree of difficulty. And I'll point you back to the proxy and a lot of, I think, strong detail and statements around the path forward there.

Yes. Okay. And then as a follow-up, will you now be able to also generate sec lending revenue on top of that net 4 bps.

As it states the practice, there is that opportunity. I will tell you the magnitude of that, I think, is going to be relatively small. That was not the primary sort of motivation behind this at all. It's really to modernize the structure. I think it's going to be relatively immaterial for us. And so I wouldn't -- as you think about the opportunity that's associated with this, I wouldn't put too much there. I think it's really coming back to what that net revenue improvement consistent with the approximately 4 basis points that we noted, recognizing there are some of those net expenses that are discretionary, and it is at our discretion.

Our next question comes from Benjamin Budish with Barclays Capital.

Maybe following up on some of your earlier comments on M&A. Just curious how you think about the missing pieces in the private market suite and how you think about your capacity? I mean, I think there's a view that to sort of achieve scale quickly, it requires maybe a bigger check. So how are you thinking about what may be missing? And how quickly could you scale up some of those capabilities in sort of the near term?

Yes. So thanks for the question. Maybe let me go back to the platform we have today just for a moment. With $130 billion in assets under management in private markets and a fairly robust real estate franchise and alternative credit franchise, we have a lot to build from. We also have tremendous top-tier strength in places like U.S. Wealth Management, where a fair amount of private market growth, we think will come both in retail and also eventually in retirement. So for us, looking for things that we can do to be additive to that and to complement those capabilities is what's on our mind. And the partnership routes is a fantastic route for us. and something that you should look at the bearings and Mass Mutual announcement from last quarter that we followed through with and things we've done in the last few months as a really good illustration of where we think we can see growth in partnerships. We'll continue to keep our eyes and ears open to other M&A, but the bar to clear for doing acquisitions in that space will continue to be very high. And our focus on partnerships as a way to grow is going to start as priority #1. And those won't be just here in the U.S. but opportunities to do the same in other markets around the world to expand the capabilities that we can bring to clients. We've been investing over the last couple of years, not just in our own product capabilities, but also in our specialized distribution capabilities and some of our operational practices that will help us add more private markets to the firm and really scale it in a way that can be profitable to shareholders, too.

And our next question comes from Brian Bedell with Deutsche Bank.

Great. Maybe just one half keeping and then one longer-term question. The half keeping back to the Triple Qs. So the licensing expense to NASDAQ and the administrative to Bank of New York. Do those -- just to clarify, do those both go into the third-party distribution and servicing expense line? .

Correct. The basis points that we noted, which would be to both NASDAQ and then the custodian fees to Bank of New York plus the discretionary marketing expense, which totaled to approximately 14 basis point, that would all be in third-party distribution, service and advisory expense.

Okay. That does include the marketing as well. Okay. So the 14 basis points. So then your net revenue yield is a clean 4 bps, depending on where you choose to do in the marketing, I guess.

That's correct.

Okay. Got it. And then the longer-term question is just on the 401(k) market, private, the potential adoption for private markets products. Maybe if you can talk about how you view your position there? What is your strategy? And I guess, just thoughts on timing. There's a lot of, obviously, different viewpoints on to what extent other things have to happen to get plan sponsors to be more comfortable with these products? Maybe just your views on that. .

Yes. Maybe I'll start. With the caveat that there's a lot regulatorily and from a litigation relief standpoint that I think would need to have -- that would need to happen in order to accelerate the retirement market for private markets in the U.S. So with that, assuming that those things could move forward and we see some relief, we think there's good promise for private markets and to defined contribution plans. You know all the capabilities I mentioned them before and our ability to structure it. The other thing that we have is a trust company and collective trust being a really good wrapper, so to speak, to be able to bring private markets to plan sponsors and to clients. We've had several of those conversations. We look forward to hoping to move some of those opportunities forward. We also think that private market solutions in large target date, target risk or other multi-asset strategies, maybe employing public and private together also could be of great interest in the defined contribution space. We have all of those component parts. So our ability to meet that market demand and will happen as the market progresses. I think it takes some time. But over time, you certainly could see this be an important part of DC plans, just like it's an importer of defined benefit plans.

The next question comes from Michael Cyprys with Morgan Stanley.

So it's great to see the number of steps you guys have taken over the last couple of quarters to unlock meaningful value. Just curious as you look at the form today, what other stones might you be able to turn over curious where you might find incremental meaningful opportunity. I think there's anything left on the revenue side? Is it more on the expense side or capital allocation from here. So just curious how you're thinking about that and where -- and to what extent -- how meaningful might some additional opportunities might be over time?

Yes. I'll start on the revenue side, and we were talking about it before. We want to enhance revenue and grow revenue at a faster clip than we're doing it today. And part of that are in the places I mentioned before, where we see real growth opportunity ETFs and SMAs, private markets, all will be revenue and ultimately profit enhancing. But there's also our need to retain better in the fundamental equity space, and we're doing a lot around that. The retention of those assets and the growth where there is demand, will have a meaningful impact on our revenue picture, and it's a place where we're significantly focused as a company. Allison, why don't you pick up from...

Yes. I mean I would say we think there's more opportunity on all of them, Mike, I mean, revenue expensive and capital allocation. We, by no means, feel like we've just kind of achieved. We're just really, I think, starting to hit our stride and we see opportunities. Obviously, that revenue opportunity that Andrew has already mentioned on the expense side, I think we've demonstrated really strong expense management and just a very well-controlled expense base for a number of years now even while we've been incurring pretty significant costs for the implementation of Alpha and now our hybrid approach with both alpha and Aladdin. As I noted, we do continue to see and expect pretty significant implementation costs for the back half of this year, but that's all within the context of a very well-managed expense base. I'm extremely optimistic that we will continue to see operating income improvement. We've really got positive operating leverage as we sit here today. we're focused very much so on organic fee rate growth, and that means we have to contend with some of these headwinds on the fundamental equity side and earn through that. And that's our focus day to day. In doing that, we create that positive operating leverage with a well-controlled expense base. As we noted, we think the implementation of the hybrid approach will be -- will conclude at the end of '26, feeling good about our ability to continue to make progress and moving waves of AUM onto the A&G platform. the higher implementation expense this quarter is associated with another wave of AUM that we anticipate moving towards the end of the quarter. And so I think as we're able to do all of this, we reallocate our expense base, and we continue to find opportunity to shrink the expense base and create scale. Our focus is scale. And I think with $2 trillion in AUM and a lot of the moves we've made, we're starting to really see the benefits of that scale and it drops to the bottom line. And then last on capital allocation, following up on kind of Glenn's question, we're not exclusively focused on debt repayment and delevering, but we do think it's an important part of the story over the next few years. and starting to unlock that ability was a step we made last quarter. We anticipate making continued progress. We've created a number of average for ourselves, especially with the upside of the revolver to $2.5 billion, it gives us the potential to use that in a way that we can delever in more of a flexible manner without kind of the fixed rate and rather fixed noncallable debt. And as we do that, if both in bottom line, it gives us additional operating cash flow that we can use to redeploy into areas of breadth. So it's the flywheel that we're focused on. and we see multiple opportunities ahead.

I mean the company is very much positioned to play fence. And I think on Allison's last point, we've created a lot more flexibility on the ability to deploy capital.

Our last question for today comes from Ken Worthington with JPMorgan.

So first, you're a big cash manager through money funds and stable value. There's been a lot of talk about digital dollars, including stable coins and digital money market funds. Do you think digital dollars changes cash management? And how might Invesco fit into cash management and increasingly a digital dollar world. .

Yes, thanks for the question. You're right. We're a big cash player, a big money market player, a big short-term fixed income and stable value measure. I think we've also proven to be a good innovator. And so we're looking at many of the things that you mentioned, getting to a place where there could be a tokenized money market fund, for example, or other kind of single assets around the payment stream and the cash management are very much on our operating agenda. But there's a lot that needs to happen for that to occur. But we're very focused on keeping pace in the digital asset space. .

Okay. Great. And then just a little one. It looks like compensation fell quite a bit in the China JV this quarter. What happened there? And is this the good run rate? Or was 2Q more of a one-off?

Yes. Thanks for the question. A couple of things I'd point to. You'll see relative to last year, revenue in the China JV was a little bit lower relative to the second quarter last year. That's largely driven by performance fees. So you'll note our overall performance fees were lower than last year. Historically, a significant level of performance fees have come from China. And given some regulatory changes there, our ability to earn performance fees is probably a little bit lower going forward than it has been in the past. You saw that come through in the quarter. as they have changed some of the regulation around what is required to earn a performance fee namely a client or an investor redemption or the closing of a fund. So as we see that activity a little bit lower, that has correlated impact to compensation of first. There were also some discrete items within that compensation line or just that overall expense line item that we saw this quarter. So margins are a little bit elevated and maybe a little bit elevated next quarter. But longer term, I do expect our China JV operating margins would continue to be in that -- in the future will be a bit demand overall.

And back to you, Mr. Schlossberg. .

Okay. Well, thank you very much. In closing, we are well positioned to help clients navigate the impact of evolving market dynamics and subsequent changes to their portfolios. When market tenement becomes uncertain, we stay even closer to our clients. Uncertainty may sometimes create challenges over the short term, but we absolutely believe that over the long term, client convictions will strengthen, which creates opportunities in the future for greater scale, performance and improved profitability for Invesco. Given all the work we have done to strengthen our ability to anticipate, understand and meet evolving client needs, I'm very excited for the future of Invesco. Thanks, everybody, for joining the call today. Please reach out to our Investor Relations team for any additional questions. And we certainly appreciate your interest in Invesco and look forward to speaking with you all again soon.

Thank you. That concludes today's conference. You may all disconnect at this time.