Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the victory capital third quarter 2019 earnings Conference call.
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I would now like to hand, the conference over to your speaker today, Mr. about Dennis Chief of staff and director of Investor Relations. Please go ahead Sir.
Thank you Liz good morning, before I turn the call over to David Brown I would like to note that today's discussion contains forward looking statements and as such include certain risks and uncertainties. Please refer to our press release Center FCC filings for more information on specific risk factors that could cause actual results to differ materially from those projected in the full.
Looking statements.
The recording of this call will be made available bias on our website and he is a forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these forward looking statements to reflect new information or future events that occur or circumstances that exist. After the date, which they were made.
In addition to U.S. GAAP reporting we also report certain financial measures that you're not conform to generally accepted accounting principles. We believe these non-GAAP measures in the hands the understanding of our business and our performance reconciliations between these non-GAAP measures and the most comparable related GAAP measures are included in tables that can be found in our earning.
The press release and in the slide presentation accompanying this call both can be accessed on the Investor relations portion of our web site at I R. <unk> D. C. M. Dot com now I will turn the call over to David Brown, Chairman and CEO .
Thanks, Matt.
Good morning, and welcome to victory Capitals third quarter 2019 earnings call.
I'm joined today by Michael Paul Carbone, or President Chief financial and administrative officer, as well as Matt Dennis Chief of staff and director of Investor Relations.
I'm going to spend a few minutes discussing our business in investment results.
Also share an update on integration of U.S.A. asset management company.
And I will turn it over to Mike who will review our financial results for the quarter.
Following our prepared remarks, Mike, Matt and I will be available to take questions.
The business overview begins on slide five the financial and operating results reported last night represent the culmination of the crisp execution or long term strategy profitably grow the business.
We more than doubled adjusted earnings in expanded margins reinforcing the power of are unique business model.
Total AIU and grew from 64.1 billion as of June 32019, 245.8 billion as of the ended the quarter.
Long term net inflows were positive for the second consecutive quarter at 726 million and EUR 3.3 billion year to date.
Revenue and adjusted net income more than doubled sequentially and adjusted EBITDA margin expanded by 480 basis points to a record high a 44.8% as of the ended the quarter.
This marks our third consecutive quarter of meaningful margin expansion.
Turning to the de leveraging front, we paid down 63 million of debt during the quarter the end of quarter with a debt balance of 1.37 billion.
Subsequent to quarter, and we paid down an additional 40 million, bringing or debt balance to 997 million.
That's down from 1.1 billion on July one 2019.
Our run rate net debt leverage ratio is now 2.4 times. Additionally, we declared a second consecutive quarterly cash dividend of five cents per share.
As previously announced we closed on the acquisition of U.S.A. asset management company on July 1st.
Our integration efforts following the close of the acquisition continued to progress well and I'm pleased to announce do we expect to achieve our estimated cost synergies of 120 million faster than our previous guidance.
The direct channel for U.S.A. members was reopened on July one 2019, and our call center, which is staffed largely by former U.S.A. employees is actively serving members investment needs.
As of the ended the third quarter. The metrics, we used to evaluate service were in line with those achieved by U.S.A. prior to the acquisition.
We believe our ability to drive these results was particularly notable given you actually age well established reputation for providing exceptional service to its members.
We also view this as a foundation for future future success in this channel.
Our investment franchisees and solutions platform continue deliver excellent investment results during the third quarter as illustrated on slide seven.
68% of the U.M. in our mutual funds any T.S. was ranked four or five stars overall by Morningstar as of September 32019.
Over the trailing three year period ended September Thirtyth, 83% of where you ended legacy victory capital strategies outperformed its respective benchmarks.
I'd also like to point out that we had multiple franchises with mutual funds ranked as the top quintile by Morningstar for the trailing one year period, including Sycamore capital Rs investments in core wander capital management and U.S.A. investments.
Looking at our you I'm in the U.S.A. fixed income strategies that we acquired 88% outperformed benchmarks over the trailing three year period.
Additionally, all 12 U.S.A. fixed income mutual funds were rated four or five stars overall by Morningstar as of the ended the third quarter.
Our victory shares GTF platform also continued to deliver strong investment results during the quarter.
As of September 32019, Threed victory shares each yes were ranked in the top decile and six each yes were ranked top quintile by Morningstar for the trailing one year period.
Across the total platform, which includes the legacy victory funds and the acquired USA funds, 64% of the UN outperformed benchmarks for the trailing three year period ended September 32019.
Slide eight illustrates the percentage of strategies that have outperformed their benchmarks over the 135 and 10 year trailing period ended Septemberthirty 2019.
We believe these results demonstrate that we are producing for current clients and their platforms attractive to new clients seeking the types of investment solutions that we provide.
Turning to slide 10, I'd like to provide an update on our acquisition of U.S.A. asset management company and our integration efforts.
As I said earlier, our dedicated call center for the direct member channels open and we are interacting live with members six days a week.
Remember service Representatives have taken more than 150000 call since July 1st and we are operating at member satisfaction levels that are in line with those achieved by U.S.A. prior to the acquisition.
Yes, its reputation for services World class. So what is a high bar we're meeting.
We're very pleased with our ability to operate at those service levels. It is our intent to work to improve even further upon U.S. age historically high member satisfaction levels for the direct channel overtime.
The call Center staff, primarily with long tenured employees, who came over to victory capital. We're operating partner from U.S.A., So they're familiar with and understand how to serve members' needs.
Our call Center staff includes license professionals, who are available to conduct a personalized portfolio reviews provide college financial planning assisting and all for general investment guidance at no cost to the member.
We also the services because we believe they provide significant value to the members and members are validating the importance of these customized services in our conversations with them.
We're very happy with how our call center operation is evolving and he is working the way we envisioned.
Business that we purchased from USA is unique in many respects and we've only just begun to tap into the tremendous opportunity a direct member channel represents.
Never has invested in the mutual funds in the 529 College savings plan are extremely loyal with high historical retention rates.
Many members invested through direct channel also have automatic investment plans.
This is particularly true among investors and the 529 College savings plan.
Additionally, most are registered users on U.S.A. dotcom.
Today through our strong partnership with the let's say, we continued to provide a seamless digital and mobile experience on USA Dotcom. We're also evolving to victory capital digital and mobile platforms to upgrade the experience for members when they fully transitioned to our servicing platform bid next year.
Now.
I haven't provides a snapshot of the USA mutual funds home page on USA dotcom as well as an example of a recent email campaign designed due to increased share of wallet. Among members currently invested in USA 529 College savings plan.
There are two important points that I would like to cover on this page.
First our branded products are well represented throughout USA is wide range of digital assets, which is where most member transactions take place.
We also have a process in place to ensure that members calling are interacting digitally with USA who'd like to invest directly with us or transferred to victory capital member Service Representatives were are directed to our pages on U.S.A. dotcom.
We expect this process to remain consistent answer Schwabs acquisition of the USA brokerage business is complete.
Members, who want to invest directly in U.S.A. mutual funds or the U.S.A. 529 College savings plan and received advice from our member service Representatives will continue to be able to do so in a seamless manner.
We believe this illustrates the strength of our partnership with USA as well as USA his desire to ensure that their members investment needs continue to be served.
Second we are actively doing outreach either through email revised outbound calls to members. We're currently invested with us to expand those relationships.
Moreover, we're starting to marketing capabilities to the broader USA member base.
We expect these efforts to continue to ramp up in the coming month and quarters and we'll plan to share some details as we cycle through some of the programs we have planned.
Turning to slide 12 victory capital direct member channel represents just a portion of the overall distribution opportunity for this acquisition.
We are leveraging are well established distribution team to bring the U.S.A. strategies to our intermediary our eye and retirement partners as well as to institutional consultants and clients.
While there is a longer sales cycle in this part of our business. We expect to begin to see more impactful results through the ended this year.
And get into full swing next year, given the strength of our distribution efforts and our history of successfully integrating products from acquisitions onto our platform.
Importantly, there've been no disruptions for the investment professionals, who came over from the USA, where imagined client assets. Additionally, we've been able to enhance a number of the investment tools and technology that they are using to manage their portfolios through our stated BR operating capabilities.
On slide 13, I'd like to spend a few minutes discussing our solutions platform.
The platform is comprised primarily of rules and factor based solutions available through a number of different vehicles, such as institutional separate accounts.
Yes, and mutual funds.
This includes multi asset target date target risk active fixed income bts and completion portfolio capabilities. Some of her added through the U.S.A. asset management company acquisition.
Total AUM for the solutions platform increased to 49.1 billion as of September Thirtyth.
Growth in the AUM is tied primarily to the funding of significant mandates year to date in our multi asset global dividend and customize thematic strategies.
These findings or come through a number of different channels, including institutional sub advisor and traditional retail intermediary.
The retail intermediary wins have been through both platforms and financial advisors.
The solutions platform as a high margin competitive fee business for us the strategies on the platform yield competitive fee rates that are lower than the average fee rates for our business as a whole.
However, we are achieving higher than overall average firm wide margins on these products due to a number of factors, including the lower cost of managing new strategies.
This is an important concept, which is exemplified by our ability to grow margins quarter over quarter, while average fee rate slightly declined as I've said in the past our integrated multi boutique model designed for success and evolving industry environment, and the changing dynamics around fees costs and flows.
Before I turn it over to Mike to review, our financial results for the quarter I'd like to provide a brief update on our acquisition sourcing activity.
We are actively engage in a good number of discussions and I would characterize the acquisition environment for us is very active.
Due to believe that our platform is unique and value added to many sellers, particularly given our proven track record of successfully integrating investment franchises without disrupting your ability to manage assets and service clients well ultimately grown your client breeze through our distribution capabilities.
Additionally, they're able to retain their unique brands in individual investment purchase.
As a result, we're seeing more inbound increase than we ever had in the history of the from.
Im confident in our ability to execute as we have in the past transactions that enhance our existing business and produce real value for our clients and our shareholders.
We have the capital flexibility bandwidth experienced envisioned to be active participant in the consolidation. We believe it's only going to accelerate as the industry continues to evolve and mature now I'll turn it over to Mike.
Thanks, Dave and good morning.
The financial results review begins on slide 15.
Total AUM increased to 145.8 billion as of September 32019.
Long term net flows were positive for the quarter at 726 million.
This is our second consecutive quarter of positive net flows.
And we are long term net flow positive year to date as at September 30 at 3.3 billion.
Revenue for the quarter was 215 million up 135% from 91.4 million in the second quarter revenue was positively impacted by higher average eight when following the USA asset management company acquisition and one extra day in the quarter.
Net income a tax benefit increased 139% to 91 cents per share relative to the prior quarter.
Adjusted EBITDA margin grew to 44.8% from 40% or 480 basis points from the prior quarter.
We believe this meaningful growth in AUM revenue and earnings along with the achievement of industry, leading margins demonstrates the power of our integrated multi boutique model.
Our model gives us the flexibility to scale up significantly through acquisitions, such as the one that we just completed at the same time, we've been able to deliver record financial results, while driving measurable operating efficiencies.
Note that we had been able to achieve these efficiencies while continuing to invest in areas to support our future growth.
On the capital management front, we ended the quarter with $1.037 billion of debt outstanding.
Subsequent to quarter end, we reduced our outstanding debt to 997 million, bringing our total debt pay down to 103 million since July onest.
We returned $9.1 million to shareholders during the third quarter through a combination of $4.0 million and dividends and 5.1 million of share repurchases.
Finally, we have declared a second quarterly cash dividend of five cents per share payable on December 26, 2019 to shareholders of record on December 10, 2019.
Slide 16 provides a snapshot of our growth year to date.
I'm increased 145.8 billion as of September Thirtyth up 128% from 64.1 billion at the end of the second quarter.
This increase the AUM was driven by acquired assets from the USA asset management company transaction and positive net flows.
The acquisition of USA asset management company has enabled us to achieve significant growth in size and scale up further diversifying our business. Both in terms of channel an asset class mix.
As of the ended the quarter, 49% of our assets were invested through the direct member channel, 26% for the institutional channel and 25% through the retail channel.
Our asset class mix as of September Thirtyth was 38% U.S. equities, 8% global non U.S. equities, 20% solutions, and 34% fixed income and money markets.
I would like to drill down on the money market business to provide some additional context.
On the information that is publicly available today, we do expect to see a decline in the portion of the money market Fund assets. We managed to currently sit on the U.S.A. brokerage platform. Following the close of swaps planned acquisition of that business.
However, because those money market assets are currently subject to an arm's length revenue share arrangement their profit neutral to us.
Therefore, we did not anticipate any negative impact to profitability should these assets leaf.
That said, we believe it's important for members who invest for the USA brokerage platform to continue to have a higher yielding investment option for the cash portion of their accounts. As a result, we will continue to manage money markets on that platform for the benefit of members who choose to investor cash with us.
On the other Han and quite different the money market assets that sit on and are sourced through the direct member channel are not subject to the revenue sharing arrangement and our profitable to us.
We intend to continue to work to grow those assets over time.
Turning to slide 17.
Long term net flows were positive for the second consecutive quarter at 726 million.
Year to date long term net flows were also positive at 3.3 billion.
Gross long term flows were consistent quarter over quarter at 7.5 billion.
During the quarter, we saw the funding of several sizable mandates and our institutional business from an asset class perspective, we saw strong positive net flows in fixed income during the quarter.
Fixed franchises plus our solutions platform, our net flow positive year to date as of September 30.
Sales pipeline is solid and we remain confident that our diverse high performing product platform is appropriately weighted toward strategies that represent growth of the future.
Slide 18 provides a snapshot of quarterly revenues.
Third quarter 2019 revenues increased 135% to 215 million relative to the second quarter.
Average AUM increased 85.8 billion to 145.9 billion quarter over quarter. Following the close of the acquisition of USA asset management company.
Revenue realization declined to 58.5 basis points in the third quarter compared to 61 basis points in the second quarter of 2019.
To drill down on this our average fee rates have been slightly impacted by the funding of a number of sizable wins and lower fee strategies and our institutional business year to date.
Additionally, we are seeing a shift away from Twelveb, one fees in our retail intermediary business.
Which have almost the full offset an expense in our distribution and other asset based expense line item.
Also many of the USA funds have historically been subject to fulcrum fees, which we agreed to waive through July 1st 2020.
This has a direct impact on the fee rates, we expect to reinstate those fees in the third quarter. If next year after our fee waiver agreement expires.
As I've said in the past our average fee rates will vary based upon asset class mix client mix and product mix, but fees on all of our strategies meet our margin thresholds.
The significant increase in margins that we achieved from 40% to 44.8% in a quarter, where our average fee rate decreased slightly evidence of the strength and efficiency of our integrated multi boutique model.
Turning to slide 19 expenses were 180.9 million for the quarter compared with 72.5 million in the second quarter 2019.
The increase in expenses was in line with projected costs related USA asset management company acquisition.
This includes the hiring of more than 110, new employees and increases in distribution and asset based expenses such as platform distribution sub administration sub advisory and Middle office expenses as well as certain general administrative expenses.
Non operating expenses also increased due to higher interest costs and loss on debt extinguishment related the refinancing and subsequent pre payments made in the third quarter on the new term loan B facility.
Importantly, note that approximately two thirds of our expenses are variable.
Additionally, the acquisition related restructuring and integration expenses that we experienced during the quarter a onetime and are in line with previous estimates.
We were able to achieve a substantial amount of the projected synergies in the first quarter of ownership.
We achieved 105 million annual run rate synergies in the third quarter.
This is faster than the guidance, we provided last quarter.
Expect to achieve an additional 15 million in annual synergies by Threeq Q2 thousand 20 for a total of 120 million.
These cost synergies are net of investments in the business, which I'll touch on momentarily.
Lastly, as at the end of the quarter. We've spent 18 million of the projected 50 million of onetime costs and we do not anticipate exceeding that projected amount.
We expect to spend the remaining $32 million over the next 12 months.
We continue to manage controllable expenses.
So effectively drive strong industry, leading margins.
It's important to note that this prudent expense management has not impaired our ability to invest in the platform.
We continue to make great strides through investment in enhancing our investments support technology marketing and distribution capabilities to support future growth.
A few examples of specific areas in which we are currently investing our the buildout of our direct member channel.
Evolution of our web and mobile platform to support all of our business channels.
And the enhancement of our digital efforts around advanced analytics and technologies.
We believe the ability to effectively manage expenses, while still investing in our platform is a distinct advantage of our integrated operating model.
Our non-GAAP earnings EPS and margin metrics are shown on slide 20.
Adjusted net income with tax benefit increased to 91 cents per diluted share in the third quarter of 2019 up from 38 cents per share in the second quarter, an increase of 139%.
And I with tax benefit for the quarter increased 143% to 67.3 million compared with 27.79 in the second quarter.
Adjusted EBITDA was 96.3 million up from 36.6 million in Q2, 29 team an increase of 59.7 million or 163%.
Adjusted EBITDA margin expanded 480 basis points from Q2, and 640 basis points from Q1.
To 44.8%.
But the incremental size and scale associated with the closing of the USA asset management company transaction and its integration onto our business operating platform, we expect to realize modest incremental margin expansion in line with target levels of approximately 46% as we recognize the remaining cost synergies and continue.
To make investments in the business.
Turning to slide 21, the continued to deliver against our balance and strategically aligned capital management plan third quarter.
We increased our cash balance the 79 million at September Thirtyth 2019 up from 51.5 million at December 30, Onest 2018.
We believe this demonstrates our ability to consistently deliver strong cash generation as evidenced by Q3, GAAP operating cash flows of $118.4 million.
We ended the quarter with 1.37 billion in debt outstanding after paying down $63 million during the quarter.
Subsequent to quarter end, we've paid down an additional $40 million than debt and our outstanding debt now stands at 997 million.
Our net debt to pro forma EBITDA ratio at the end of a quarter was 2.4 times.
This is down from 2.7 times on July Onest 2019 at the close of the USA asset management company transaction.
In August we announced a new common stock repurchase program authorizing the buyback of up to $15 million of class a shares through December 30, Onest 2020, as our prior $15 million repurchase program was completed.
We repurchased 300000 shares in Q3.
We believe the share buyback program demonstrates our thoughtful and proactive approach to capital management and reflects the confidence in our long term business strategy.
Turning to slide 22.
We believe we have all the tools at our disposal to drive shareholder value as we execute on our business strategy to our integrated multi boutique business model, our balance sheet flexibility allows us to execute accretive transactions build the necessary scale in today's market environment and capitalize on the industry trends of consolidation that asset management.
Our integrated business model provides distinct advantages that enable us to attract investment professionals and execute on our organic and inorganic growth strategy, which in turn allows us to reward our shareholders.
Finally, turning to slide 23, I would like to reaffirm our guidance on the USA asset management company transaction.
Our integration efforts are on track and remain on target to achieve total annual cost synergy estimates of 120 million net of investments in the business ahead of our previously communicated timeline.
So on target not to exceed the $50 million and onetime cost associated with the aforementioned synergies.
Acquisition is expected to result in significant accretion to earnings per share, we expect EPS accretion of one of them, 100% in 2020, our first full year of ownership.
The impact on EPS accretion is expected to be great in the 40% in 2019, which represents a partial year based on the July 1st 2019 transaction close.
We're quite pleased with our Q3 results and the progress we have made following the close of the lets say asset management company transaction, we believe our larger scale and more diversified business supported by our unique integrated multi boutique business model strong investment performance and the breadth and depth of our product offerings positions us.
Well for continued strong business and financial results.
This concludes our prepared remarks, I'd like to turn the call back to the operator for the Q anyway.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key to allow as many questioners as possible. Please limit yourself to one question and one follow up question.
And our first question is from Chris shelter from William Blair. Your line is now open.
Hey, guys good morning.
Just talk about how much of the synergies actually hit the personnel in the in the third quarter. I think is between 75 and 105 it sounds like closer to 105, but if you could get a little more granular that'd be great.
Chris Good morning, it's Mike.
The way we've looked at it is substantially all of the 105 was out from the beginning of the quarter. So if you look at the margins of 44.8% for the quarter and thinking about the guidance, we gave a 46% kind of fully synergized.
You look at that is basically baked into the yes, the full amount for the third quarter.
Okay great.
And then I guess secondly on the solutions mandates and they've had a couple of quarters here.
Oh good flows.
And you can't give specific client names, but could you walk us through a couple of examples of how you're going to market with those strategies. You know why why people chose victory and how we should think about incremental margins.
Hi, Chris It's Dave Good morning.
First let me let me address.
Where we are winning those mandates as I said in my prepared remarks really in a number of different channels. It isn't concentrated in to one channel.
When you think about the margins on that business again, as we said in her prepared remarks, there typically going to be higher than our overall.
Margins for our business they're selecting.
Our team and our products really because of the performance because of our capabilities.
We enhance some of those capabilities with the USA acquisition by bringing on additional people some additional product set.
It has been an area of growth.
That being said.
We have six of our 10 franchises plus the solutions platform.
Is positive are positive year to date, so although we've highlighted it although we've seen some recent success, let's not forget about these other asset classes that we're in and some of these other franchises that have really strong investment performance.
And then are quite competitive as well.
Thanks, Tim.
Thank you. Our next question is from Ken Worthington from JP Morgan. Your line is now fan.
Great. Thank you.
I'll try this I was hoping to get some additional metrics on USAA.
If you're opening new accounts at what level are you are you opening them.
In our you generating net sales through the USA distribution channel I know, it's early and there's integration issues. So if not maybe.
How does this change as the integration continues.
And I guess, along these lines you talked about the 529 plans actually a number of times is that where you're seeing kind of the most success at least initially.
From the USA relationship.
Good morning, Ken It's Dave.
Let me start off with the number of accounts in net sales.
We have not reported our net new number of accounts, we've not reported actually net sales on.
The direct channel what I can tell you is we really look at this as a building block approach our first objectives.
What were to really locked down the service and what I mean by that is is really getting to the service levels that the members of the U.S.A. have.
Aspect.
In a couple of those metrics our average speed to answer.
There's a member satisfaction score that the that members.
That we score based on surveys.
Those are at the levels as I said in my prepared remarks, those are at the levels that they were prior to the acquisition. So we have reproduce what I would say is a world class.
Service Center call Center that was really important to us that's the foundation for the channel. We're now pivoting towards really gaining new accounts, gaining new net sales gaining new members.
And as we progress into this quarter into next year, we think we're going to see the benefits of that because of the foundation. We set I would also point out that the U.S.A. investments franchise first quarter.
Which is this quarter that we've owned that that franchise is netflow positive so thats been very.
Very positive in the sense that we've grown that franchise to start.
We have called out the 529 plan.
That is not the only area, we're seeing growth, there's a tremendous opportunity to really grow that channel.
As we said in the past Theres potentially 12 million members. They do not have an investment in our mutual funds are in our 529 plan, we're really just getting started to market to them.
And as we've mentioned their past it's important for the current members that actually are investing in our product to make sure that we sit down with them either live or through digital means to make sure that their portfolios are taking care of.
And there is a real opportunity there to grow the wallet share with those existing numbers.
So when you really solve it up we look at that channel.
As a tremendous growth opportunity, it's going to take some time.
It is early as you pointed out, but theres a tremendous opportunity there to grow and we really are just starting to begin tapping into that.
Great. Thank you very much.
Thank you. Our next question comes from my carrier from Bank of America. Your line is now fan.
Hi, guys. This is actually Sean comment on for Mike.
On the performance numbers on slide seven it appears USAA non fixed income am is underperforming can you talk about some of the ways you're trying to improve this.
Good morning, Sean.
Yeah.
Correct in what you have pointed out I would say I wouldn't use the term underperforming there's really some room for opportunity there.
We have taken a look at those strategies and have actively made some changes to the self advisors.
We are more actively managing those portfolios.
We feel pretty confident over the long term that will approve upon those and as we moved from quarters in years I think you'll start to see some of.
The positive performance starting to hit.
Okay. Thanks, and then on the waving of the full companies do you guys have.
Revenue or fee rate impact do you could give us on that.
Sure, it's Mike yet the waiver the focus on fees is in place really for the first year post the transaction. So beginning in July of 2020. The focus is on certain USAID mutual funds will.
Begin to accrue.
We've estimated that speed between one and two basis points at the farm level.
Okay. Thanks, guys.
Thank you. Our next question is from Alex Blostein from Goldman Sachs. Your line is now fan.
Hey, good morning, guys.
Question around Troms acquisition of USA brokerage business I know you guys gave some overlaps on the money market funds, but I guess thinking to step back can you just kind of give us.
Bigger picture overlap between USA.
You've acquired.
Versus the brokerage business, the swaps acquired and kind of help us think about any other areas of risks.
From a you on retention as those houses migrate over.
Good morning, Alex its Dave.
Let me take a step back on the brokerage channel the USA broker channel first that has historically and today than an open architecture environment.
All of the investments we have on that channel.
I have been self directed into the funds. So members have actively directed into the mutual funds.
I think they placed some value on the brand.
And it's really important to note that today and when Schwab completes their acquisition of USA brokerage channel.
Our brokerage business that we're paying an arm's length revenue share. So we look at that channel really as not any more risk than any other assets we have.
For any client that we manage we compete every day and an open architecture environment.
We have great product, great investment performance, Great client service and I'd actually say the brand.
Really allows some of those assets potentially to be even stickier.
Some of those assets potentially of tax gains. So there's some inertia in in moving those out so we don't look at those as any more risk.
And really theres been a lot of discussion.
About this.
This acquisition so much more than the brokerage channel, it's a tremendous opportunity for our business is transformational.
Has opened up a great new channel for us.
And then I would say lastly, we think schwabs success on the brokerage side.
Some of that will actually accrue to us through some of the members investing in USA mutual funds or the 529 plan. We don't look at the Schwab acquisition of the brokers channel as a headwind we actually looked at as a tailwind.
Got it thanks for that and then the second question just around capital priorities. When you look at the share price today.
And you kind of look at the free cash flow yield conversion you guys highlighted one of the slides it looks like the stock is trading with over 20% for gasoline yield so maybe talk a little bit about the appetite for buybacks from here versus the piece where deleveraging.
And obviously you highlighted the M&A pipeline remains quite robust should maybe maybe a comment on what the probability of some of these deals coming through in the next going to call. It 12 months or so thanks.
So.
It's Dave.
We are looking at our capital management policy really to align with our overall strategy.
Want to create flexibility and right now our priorities are to de lever.
About 90% of our free cash flow has gone and probably will go towards Delevering. We do have a small buyback program. We do have a small dividend program. We view these ancillary parts to our strategy, we look at the buyback as a way to manage shares outstanding share.
There's.
So we're going to focus on de levering.
Gets to the second part of your your question around M&A as I said in my prepared remarks is extremely busy for us and constructive.
We are getting more inbound calls than we ever have.
And I think what is starting.
To to come.
To us is some of the opportunities where we're solving a number of issues for.
Smaller businesses are businesses of our size.
Where we're able to provide a world class operating platform allow.
The sellers to keep their brands to keep their investment philosophy developed their own portfolios and the plug into a really effective distribution network and I think because of that.
We are getting more opportunities and we think that we're going to.
We have the opportunity to continue do transformational.
Acquisitions as far as timing.
We really don't have any guidance on that.
If you go back and look historically.
Since our NVO weve, probably averaged about one transaction a year or so I.
I think thats good guidance as we've guided before but there's really no exact way to predict on on on when the next transaction would occur.
Thank you very much.
Thank you. Our next question is from Randy Binner from B. Riley. Your line is now fan.
Good morning, I bought a little bit of a higher level question. Then it goes back to slide 18, and just the pace of kind of the headline feed a decline.
Your understanding it was a solid quarter and there's a lot of scale and the business you know how how should we expect based on what you know now that you have better visibility on the USA.
That's being in house, and how solutions and fixed income.
Productions for progressing how should we think about that pace of sequential decline I mean, it is good for people to plan on a couple basis points a quarter just to kind of create a level set just be interested to think about that cadence.
Good morning, Randy.
It really as Mike said, it really depends on asset mix client mix.
In a number of other factors.
If we could predict where clients were going to allocate assets in the portfolio would be much easier.
I don't think fees are increasing in the industry as we all know.
But that being said the issue of some of our fees declining some of it has been around the waiver of a focus on fee. Some of it has been around the asset mix and the channel mix.
Depending on how those things play out you could see.
Some erosion down but that being said Theres also another scenario, which could even be just as likely that the fee stay flat.
So we really don't have any guidance on that going forward, but the fee erosion is not around discounting.
But what we're focused on as an organization is really around the margins.
You can see this quarter the expansion of the margins by 480 basis points in a quarter where.
We have some slight fee erosion really speaks to our model. What we are confident on is the guidance or the 46% margin.
Margin and I think when we look at new products. When we look at channels. When we look at clients. We're looking at the margin threshold and not necessarily on the fee rates.
All right that's helpful. Thank you.
Thank you as a reminder to ask a question you want me to press Star one on your telephone.
Next question from Kenneth Lee from RBC. Your line is now fan.
Thanks for taking my question in the past you've talked about having certain focused investment categories, where you could potentially see faster growth in terms of organic growth.
And obviously with the you asked a asset management acquisition, you've certainly added a number of interesting product target date target risk active fixed income.
Just.
At a high level, you know, which categories, which asks categories. Do you think would be the ones, where you can see potentially the highest growth opportunities looking forward across the across the portfolio right now.
Good morning.
As I said earlier, it's Dave as I said earlier, we do have six of our 10 franchises plus our solutions platform positive year to date. So it has been in a number of different asset classes.
I think what you're seeing today.
We've seen this quarter is some investors are looking at where the markets are at all time highs and they are allocating.
New assets into fixed income into solutions.
Some have pulled back on some of our focused asset classes, what we've historically classified as focused asset classes us smallcap mid cap.
International emerging markets. Some over the growth is really going to come from where clients feel they want to allocate.
What's important to US is that we have really competitive product in the asset classes, where we are less likely to be disintermediated by passive.
And that's what we think we have across our portfolio of franchises, where we have great use small cap managers us midcap managers international equity.
Emerging markets equity and then solutions in active fixed income.
Part of the USA transaction, one of the great benefits was the diversification of the lineup of products that we have we now have really competitive products and solutions in active fixed income so when clients decide to allocate their based on where we are in the market cycle will be.
There to gather assets and continued to be growing.
Very helpful. Thank you very much.
Thank you at this time I'm showing no further questions I would like to turn the call back over to David Brown for closing remarks.
Thank you.
For your time. This morning Tomorrow, we will be in New York attaining the Bank of America Merrill Lynch Conference and will you back in New York next month at the Goldman Sachs Financial Services Conference.
We look forward to seeing somebody with those events and as always if you have any additional questions. Please don't hesitate to contact Matt had a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.