Q4 2019 Earnings Call
You will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to Matt Dennis. Please go ahead Sir.
Good morning, before I turn the call over to David Brown I'd like to note that today's discussion contains forward looking statements and they have such include certain risks and uncertainties. Please refer to our press release that are FCC filings for more information on specific risk factors that could cause actual results could differ materially from those projected in the forward looking for.
That's a recording of this call will be made available by us on our website any 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 worst circumstances that exist. After the date on which they were made in addition.
The U.S. GAAP reporting we also report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our business and our performance reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in the tables that can be found in our earnings.
Press release, and there's a slide presentation accompanying this call both of which can be accessed on the investor relations portion of our website and I are dot VCM Dot com no. It's my pleasure to turn the call over to David Brown, Chairman and CEO David.
Thanks, Matt.
Good morning, and welcome to victory Capital's fourth quarter 2019 earnings call.
I'm joined today by Michael Polycarbonate, President Chief financial and administrative officer, as well as Matt Dennis or Chief of staff and director of Investor Relations.
I'm going to spend a few minutes discussing our record fourth quarter results, which I believe demonstrate the earnings power integrated business model.
I'll also share an update on the integration of the U.S.A. investments acquisition.
Then I will turn it over to Mike, who will review our financial results for the quarter and full year in greater detail.
Following our prepared remarks, Mike, Matt and I will be available to take questions.
The business overview begins on slide five 2019 was a transformational year for victory capital on many levels.
We significantly increased or size scale asset class product and client diversification, while generating outstanding financial results for our shareholders and investing significantly for the future.
Total AUM grew to 151.8 billion at the end of 2019.
Are you I'm increased by 188% year over year, reflecting acquired assets and long term net inflows of 1.8 billion.
Positive flows during the full year period were driven by net inflows into our recently acquired U.S.A. investments franchise as well as our solutions platform.
Both benefited from industry trends favoring fixed income a competitively priced solutions products.
As a reminder, the margins we earn a most of our solution strategies are higher than our firm wide average despite typically lower than average fee rates.
This is due to the efficiencies gained by managing rules based quantitative strategies on are integrated platform.
After two straight quarters of positive net flows we did experience not long term outflows of 1.5 billion during the fourth quarter, reflecting a significant amount of client reallocations tied to strong investment performance by our franchises coupled with positive market momentum.
Well the impact of a reallocation is a net outflow, we often continue to have larger economic relationship with clients. Despite the rebalancing.
Additionally, client rebalancing activity is typically cyclical and reinforces the importance of diversification and taking a longer term view of our business, which is how we think about it.
Adjusted net income tax benefit increased to a record 99 cents per diluted share in the fourth quarter.
9% for the third quarter and up 161% from the fourth quarter 2018.
Adjusted EBITDA margin also set a record high of 46.8% during the quarter.
This is a 200 basis point improvement over the third quarter ended expansion of 890 basis points from the last year's same quarter.
These results can be attributed to our superior business model combined with superior execution.
We remain committed to our disciplined capital management strategy in 2019, we ended the year with 952 million of debt down significantly from 1.1 billion on July one when we close the U.S.A. asset management company acquisition.
Subsequent to yearend, we further reduced debt to 929 billion with additional principal payments.
We also declared a cash dividend a five cents per share payable on March 20 fit for shareholders of record on March 10th.
We continue to make exceptional progress in integrating the business, we acquired from USA and remain ahead of schedule on the achievement of our previously disclose cost synergies.
As we move through 2020, we look forward to shifting our focus from integrating the acquisition to realizing growth opportunities with our direct channel for USAA members and selling the acquired products through our traditional distribution channels.
Finally, we've completed the move into our new headquarters in San Antonio, which has now become our largest office and our new home.
Our investment franchises and solutions platform continued to deliver excellent investment results during the fourth quarter as illustrated on slide seven.
More than two thirds of value I'm in our mutual funds any Ts was ranked four or five stars overall by Morningstar as of the ended the year.
We had multiple franchises with mutual funds ranked in the top quintile by Morningstar for the trailing one year period, including Sycamore Rs investments in core Bonder and tried to Alan.
USA investments had mutual fund Andone TF ranked in the top quintile.
Over the trailing three year period, 79% of you ended legacy victory capital strategies, and 85% of anyone in our USA fixed income strategies outperformed its respective benchmarks. Additionally, 11 of the 12 U.S.A. fixed income mutual funds rated four or five stars overall.
As far as of the end of 2019.
Across our total platform, 64% of value and outperform respective benchmarks for the trailing three year period.
Slide eight illustrates the percentage of strategies that have outperformed their benchmarks over the trailing 135 and 10 year periods.
These results highlight that we're producing for our current clients and our platform is attractive new clients seeking the types of investment products and solutions that we provide.
Turning to slide 10, I would like to provide an update on our acquisition of U.S.A. asset management company.
As I said earlier or integration efforts are progressing well and we remain ahead of schedule on or previously disclose cost synergies I.
I would like to spend a few minutes drilling down on a few areas and providing some additional transparency into our growth efforts.
First the referral agreement we have in place with U.S.A. ensures that all members interested in investing directly in the USA Mutual fund for the 529 College savings plan are probably directed to victory.
This interest maybe expressed when a member visit U.S.A. website calls USA directly or response to an email from USA promoting our investment products.
In each case, the prospect is guided by U.S.A. to victory.
This is an important component of establishing new interaction with members who do not currently own one of our products.
Having this long term referral agreement in place strengthens the foundation for future success in this channel.
Second we are actively marketing the USA mutual funds Ats and 529 College savings plan to members.
Peter email or phone or other means we are in the beginning phases and plan to accelerate these efforts as the year progresses.
For example, we distributed tens of thousands of emails designed to increase the number of occurring automatic investment plans with existing customers. We received the great response and realized 153% increase in new automatic investment plan Activations in the second half of the year.
From July one when we closed the acquisition through the end of 2019 49000 members activated new automatic investment plans, which was up from 19000 during the same period in 2018.
Another example is in the fourth quarter. We also executed the 529 email campaign encouraging members to consider 529 contributions as a gift idea.
In December alone, we realized a 44% increase in 529 contributions compared with the same month the prior year.
This resulted in a few thousand new 529 accounts opened in December alone with 89% of those coming through the web site.
While still early these tangible results are really encouraging and reinforce our pieces that we can increase wallet share among existing accounts and attract new USAA members to victory.
These test cases provide a sampling of the types of programs. We have started executing and we have a number of similar campaign staged are underway.
In addition, we're developing new products this channel and we'll be launching a new technology and digital platform in the second quarter to enhance these marketing efforts.
Our goal is to strike the proper balance of continue to provide exceptional client service at the level USA members have come to expect while accelerating the growth opportunities in front of us.
We continue to effectively engage with Inserv members to our dedicated member contact Center, our contact center staff, primarily with long tenured employees, who joined victory capital from USA. So they are familiar with and understand how to serve members' needs. We've taken approximately 300000 sales and service call since we closed the.
Transaction on July Onest.
Each one of these causes an opportunity converse with the members about their financial objectives and provide solutions.
License professionals conducting personalized portfolio reviews, providing college financial planning assistance and delivering general investment guidance at no cost to the member.
We are often these services to members because we believe they provide significant value and members are validating the importance of these customized services in our conversations with them.
Additionally, we are expanding communication options and recently added live chat functionality, which is preferred by some members. The goal is to enable members to engage with us through the platform of their choice.
We're very happy with how our contact center operation has evolved and is working in the way we envisioned.
Another substantial growth driver is the commercial distribution of USA investment products to our existing retail intermediary and institutional channels.
We are steadily gaining traction on this front, which typically has a longer sales cycle. For example last month, we learned that the USA tax exempt intermediate term fun will be added to the Morgan Stanley wealth management Global investment manager Analyst approved list as a recommended fun.
This expands that funds availability within an important distribution channel for victory and we expect to continue see similar successes as the year unfolds.
Turning to slide 11, we're confident we have all the tools in place to further enhance shareholder value as we execute on our growth strategy.
Our ability to rapidly de lever provides us the flexibility, we need with our balance sheet to execute future shareholder friendly deals.
Beyond simply increasing scale, which is critical in today's market environment, all of our acquisitions, including strategic element that improves our company.
But that I mean, we see deals that make our platform and our company better. So we can enhance how we serve current and future clients.
We're continuing to evaluate potential acquisitions are quite encouraged by the opportunity set that we see.
We believe our management teams experience in sourcing integrating and operating acquired businesses is best in class, we have truly become the acquirer of choice for many in our industry.
With that mine do not foresee any changes in the cadence of completing transactions as we look forward.
Before I turn the call over to Mike I would like to spend a minute discussing the benefits of our business model.
We are a growth company to industry, where most companies are struggling to maintain the status quo.
Our business model is generally unique and what specifically designed to address the types of challenges currently facing our industry.
The efficiency of are fully integrated operating platform combined with the advantages of our multi boutique structure sets us apart.
Our unique model voids disadvantages facing most multi boutiques such as lack of control from partial ownership complexity operating redundancies or lack of real scale, we share none of these challenges victory capital the single registered investment advisor and our investment franchise and solutions platform or not separately.
Cities, but part of our company and our platform.
This provides effective controls will also allow each franchise to remain completely autonomous and their investment process.
Additionally, our revenue sharing model with our franchises mitigates complexity, we have no significant operating redundancies and our product offerings are at sufficient scale.
We have started to referring to the combination of these favorable attributes around our operating model and infrastructure as our victory edge.
Looking ahead, the current headwinds in the asset management industry are likely to persist we see the challenges, but we also see great opportunity. We believe we're very well positioned with the right business model, the right team and the necessary resources to create substantial value for our shareholders in this rapidly changing environment.
Now I'll turn it over to Mike for his financial review.
Thanks, Dave and good morning.
Financial results review begins on slide 13.
For the quarter was 219 million up 128% from the fourth quarter of 2018.
Our average fee rate remained steady quarter over quarter at 58.7 basis points.
Adjusted net income tax benefit increased to 99 cents per diluted share.
9% relative to the prior quarter and 161% relative to the prior year.
Adjusted EBITDA margins grew to 46.8%, that's an increase of 200 basis points relative to the prior quarter and 890 basis points relative to the prior year.
We're pleased with our ability to quickly achieved most of the acquisition related cost synergies and earned record high margins in the fourth quarter.
We will continue to make investments in the business for the future. So we're maintaining our forward guidance on our adjusted EBITDA margin of approximately 46%.
This number will fluctuate slightly up or down as the timing of these investments will not be steady.
But we're confident in our overall guidance moving forward.
The ability to maintain these margin levels and make the necessary investments in the business further illustrate the advantages of our model and our superior execution.
Moreover, our model gives us the flexibility to scale up significantly and quickly through acquisitions at the same time, we've been able to deliver record financial results, while driving measurable operating efficiencies.
We were able to take advantage of our strong financial performance to reprice, our term loan b and reduced interest expense by 75 basis points, which will increase free cash flow used for de leveraging and future strategic initiatives.
We also returned $9.6 million to shareholders during the fourth quarter through share repurchases and dividends.
Bringing total capital return to shareholders during 2000 $19 million to $23 million.
Slide 14 provides a snapshot of our growth through year end.
Our AUM increased to $151.8 billion as of December 31 up 188% from prior year.
Our asset class mix as of December 30, Onest was 38% us equities, 8% global non us equities, 21% solutions and 33% fixed income and money markets.
We also have a well diversified mix of product vehicles, including institutional separate accounts mutual funds with multiple share classes EPS collective trust funds SDMA and USA models.
Entering 2020, we now have very balanced business that is well positioned for all market environments.
I would like to reiterate our expectations for our money market fund business.
Based on the information that is publicly available today, we do expect to see a material decline in the portion of the approximately $8 billion in money market fund assets, we manage that currently sit on the USA brokerage platform. Following the close of swaps planned acquisition of that business.
As we've mentioned before those money market assets are currently subject to an arm's length revenue share arrangement. So they are profit neutral to us.
Therefore, we do not anticipate any earnings impact when these assets leave.
It will simply lower our money market AUM levels, while modestly increasing our average fee rate margin.
On the other hand, the remaining $3.6 billion, a money market assets that fit on and are sourced through the direct member or 529 channels are not subject any revenue sharing arrangement and contribute to our profitability.
These direct money market assets are not at risk assets like the other money market assets that sit on the brokerage platform and we intend to grow these assets over time.
Turning to slide 15.
We achieved long term gross flows of 23.3 billion for the full year 2019 long term net flows were positive at 1.8 billion, reflecting a strong organic growth rate of 3.5% for 2019.
These flows were across all channels with for investment franchises and our solutions platform, having positive net flows for the year.
From an asset class perspective, we saw strong positive long term net flows in fixed income and solutions for the 12 month ended December 31 2019.
We experienced long term net outflows of 1.5 billion during the fourth quarter due impart to client reallocations, resulting from strong investment performance and positive market momentum.
Looking ahead, we remain confident that our diverse high performing product platform is appropriately weighted toward strategies that represent the growers of the future.
And following on Dave's comments around ongoing initiatives in our direct member channel.
And with commercially distributing USA investments products, we feel good about organic growth outlook.
Slide 16 provides a snapshot of quarterly revenues fourth quarter 2019 revenues increased to 218.6 million up 2% for the quarter and 128% compared with the fourth quarter of 2018.
Average AUM increased to 147.9 billion during the fourth quarter and our end of the year a win is up approximately 3% from that number.
Revenue realization remained steady at 58.7 basis points, we saw a slight positive impact from the achievement of certain performance fees on legacy victory products in Q4.
Please note. These are not related to the focus fees that we have wave as part of the USA acquisition.
The opportunity to earn those performance fees restarts July 1st of this year.
As I've said in the past our average fee rates will vary from time to time based on asset class mix client mix and product mix.
Turning to slide 17 expenses decreased by 6% to 170.1 million for the quarter compared with 180.9 million in the previous quarter.
Non operating expenses decreased by 27% during the quarter due to lower onetime debt financing costs related to the USA acquisition in Q3 and reduced interest expense due to debt reduction.
General and administrative expenses reduced by 17% as a result of the operating leverage from the successful integration of USA investments onto our platform.
Importantly, approximately two thirds of our expense base remains variable, which is a key element of our overall business model.
The one time acquisition related restructuring and integration expenses recorded in 2019 are consistent with our original estimates.
In the fourth quarter. These expenses included a onetime noncash expense of 19.9 million, reflecting a higher valuation estimate for the contingent payment.
This represents the mark to market of the potential $150 million total earn out to be paid to USAA and for annual installments of $37.5 million. Each as a reminder, the earn out is based on revenue retention associated with the acquired business.
As of December 31, 2019, we've achieved $117 million, an annual run rate synergies.
We expect to achieve the additional 3 million in annual synergies by Threeq 2020 for the total of $120 million.
These cost synergies are net of strategic investments in the business, which I will touch on momentarily.
Lastly, as at the end of quarter, we've spent $27 million of their projected 50 million of onetime costs.
And we do not anticipate exceeding the projected amount.
We expect to spend the remaining $23 million over the next nine months.
We continue to made great strides through strategic investments and enhancing our investments support technology marketing distribution client servicing and product capabilities to support future growth.
Some examples of specific areas in which we are currently investing our the buildout of our direct member channel.
The 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.
Our non-GAAP earnings EPS and margin metrics are shown on slide 18.
Adjusted net income tax benefit increased to 99 cents per diluted share in the fourth quarter of 2019.
Up from 91 cents per share in the third quarter and 38 cents per share from Q4 2018.
This is an increase of 9% quarter over quarter and 161% year over year.
And I with tax benefit for the quarter increased to $72.8 million, an increase of 9% for the quarter and 180% over the same quarter last year.
Adjusted EBITDA was $102.3 million up from 96.3 million in Q3, and 36.4 million in Q4 2018.
Finally, turning to slide 19, we continued to deliver against our balanced and strategically aligned capital management plan in 2019, we repurchased 293000 shares in Q4.
Our share buyback program demonstrates our thoughtful and proactive approach to capital management and reflects our confidence and our long term business strategy.
We have reduced our net debt to run rate EBITDA ratio at the end of it quarter to 2.3 times.
We anticipate continuing to lower that ratio as we look forward and execute on our deleveraging strategy.
In January of this year, we announced the repricing of our existing term loan.
Repricing lowered the interest rate spread by 75 basis points from 3.25% over LIBOR to 2.5% over LIBOR.
While maintaining the current maturity and structure of the term loan.
Our strong financial performance allowed us to execute repricing, which will result in annualized interest savings of approximately $7 million.
But there are strengthening balance sheet, we're enhancing capital flexibility to support future inorganic growth initiatives.
This concludes our prepared remarks, I'll now turn it back over to the operator for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question and press the pound or hash key.
Our first question will come from the line of Randy manner with B. Riley.
Hi.
Yes.
Well ask the process.
Our integrating acquisitions I think.
People I've talked to you.
No the kind of rapid integration of units.
The pay down and that has people thinking going ahead.
When there might be another acquisition. So can you can you remind us what that the cadence timing us.
Hi, Randy.
The cadence I was referring to is really our historical pace of acquisitions.
Which over the last six years, we've averaged probably one or so.
Every year or two.
We can't predict when we're going to do the next acquisition, but based on what we're seeing in the market. We're really excited we think there's great opportunities.
My prepared remarks, I mentioned that I thought we were becoming an acquirer of choice for many in the industry. We're seeing that so my reference to vacate into is really about what we've done historically and really the opportunity reset seeing going forward.
The strengthening of our balance sheet I think allows us to to really be flexible on what we can do and as you know our desire is to de lever quickly of course to de risk, but also to set us up for the next transaction given what's happening in the industry.
All right Yep.
The.
My follow up would be.
The that the USA deal is quite a bit larger than the historical deals so is it.
You know as your then improves in machine running smoothly enough that even though it's larger the processes could could move along fast enough.
You might be ready like this year, because if you look at that either on other metrics. It. It seems like you would be back to kind of a pre USAID balance sheet situation by the end of this year.
Yes.
Alright, thanks for the comments.
Your next question will come from the line of Alex Blostein with Goldman Sachs.
Hi, guys good morning.
A question. So first I was hoping you could frame the distribution opportunity verse with USAA. So maybe how big the addressable market is there for victories products sort of what percentage or the customer wallet.
You guys have today, where they could go.
And also what type of products on the victory side, you think are most.
Most likely to gain share of assets on that platform.
Hi, Alex it's Dave.
First on the addressable size of the USA market I believe there is about 13 13 to half million members.
We have close to a million members as clients today. So I think the remaining members who don't have products with us today could be potential clients.
The when I think about the opportunity and some of the.
Information, we shared today in my prepared remarks around some of the progress we're making we feel really good.
Those are really small, but tangible results and also feel that they are really good test cases, so we're starting to accelerate that as we think about this year and the years to come as far as products.
I will say that one product that we feel is very.
Clickable to that group is our USA 529 plan.
Product, where we're conversing with members around college savings around savings.
For their children's education, and we have seen good results with that so that's one example, we think that Theres, obviously other products, but thats a really good example, something that we feel we can make really good progress with.
Great. Thanks for that and second question just around the profitability. So.
EBITDA margins, obviously quite strong.
Over 46% in the quarter.
I'm curious why 46% EBITDA margin is still the right target over over the near term.
On the fact that obviously markets have been supportive assets are up.
Understanding you guys are doing incremental investments so maybe help us frame how much incremental costs you expect to run through the model as you make these enhancements and what are the kind of probabilities and the what's kind of though the movie needle on potentially getting to about 46% EBITDA margins here.
Thanks, It's Mike Good morning, I think we have stated the guidance of 46% we had a very strong quarter in Q4, as you mentioned with with respect to the markets.
Well, we also mentioned that we're making investments in the business and some of those investments will be.
Overtime as we think about it we talked about the areas of the direct channel standing up the direct platform as well as thinking about continuing to invest in the investment support for our franchises.
Client service distribution and technology.
But I would say as we think about going forward, the 46% it'll be tied to that range inclusive of those investments longer term.
Absent and the ability to see expanded margins will really.
Depend on our next phase from.
Acquisition perspective in inorganic growth, what we can accomplish but we're confident in the 46% and there'll be a tight range around that.
Understood Thanks very much.
Your next question comes from the line of Ken Worthington with JP Morgan.
Hi, good morning.
Maybe first on solutions can you talk about the pipeline there you've had a couple of quarters now of.
Tiny outflows.
How does the pipeline look for solutions over say the next couple of quarters.
Hi, Ken it's Dave we're very happy with our solutions business.
Has grown.
From where we really started it back in April 2015.
We think it's going to be a bigger part of our business going forward.
We have a lot of clients that have that we're working with.
Around outcomes and we think that.
Hi pipeline is strong sometimes the sales cycle depends on the client and depends on the work that we're doing so sometimes it's a quarter could be multiple quarters, but we feel really good about the pipeline. We feel really good about that part of our business and that is definitely a portion of where the industry is going and we think.
We are pretty well position there with the team that we have in the products that we have.
Great. Thank you.
You mentioned the referral agreement I was hoping you could give us a little more information in terms of how the direct account business is growing.
If there's any information you can share either growth rates or number of accounts and I know this is starting from a standstill, but again any sense would be great and then what does the sales cycle look like in the direct account business. So once you get a referral.
How long it taking to turn referral into account opening I assume it's fairly short, but maybe that's Roe.
So the referral agreement as well as we referenced in our prepared remarks is in place it's working.
There are some incentivization for USA to pass us referrals through the earn out.
They've been great partners, and it's really working the way we envision we shared some statistics again those are.
Just pieces of what we're doing we're not in a position today or would not like today to share some of the more detailed numbers, but what I can share with you is that it's working the way we envisioned I can also share that with you that we think we're really just beginning and starting to scrap.
Such the surface on those opportunities we have started off really focusing on service service to the members in a way that USAA members would expect we've been able to reproduce that service if not expand that service and do a better job and now we're pivoting towards working with the.
The members and thinking about how we can.
Grow wallet share, how we'd be a better partner for them.
We have taken 300000 calls as I said in my prepared remarks since July one.
That is 300000 calls that we've been able to interact converse.
Guide members with and it's a touch point.
So we think theres a lot of opportunity in this channel and we think our product set will work for for a large group of these members that we get to interact with them we get the touch.
Okay, great. Thank you very much.
Your next question comes from the line, if Mike carrier with Bank of America.
Good morning, Thanks for taking the questions.
First just on flows.
Positive for the year and then some outflows in the fourth quarter, Dave I think you mentioned.
Some cyclical client rebalancing.
Maybe just some color based on.
Historical perspective.
Knowing in like the clients in the affiliate just how long is that tend to last and then given some of the strategic focus you have with U.S.A. solutions do you think theres enough maybe momentum you in those other areas to offset some of that that cyclical rebalancing.
Sure we have seen we saw in the fourth quarter heightened level of client Reallocations as I said in my prepared remarks, sometimes those reallocations.
They occur as a net outflow, but we actually have a larger economic relationship with the client. Those if there are good outflows that is a good outflow that is a client that's rebalancing to there.
Definitely guidelines are in their investment policy, so where we are perfectly fine with those those are cyclical in nature, but there's definitely been a heightened.
Level of those and I would attribute that to where we are in the market cycle.
As far as do we have enough to offset that I would absolutely say, yes, we have a diversified product set we've really good investment performance and with some of the products. We have they're just getting pushed into our our traditional channels. The fixed income USA fixed income.
The solutions product and then the opportunity set in the direct side, we're encouraged by our opportunity to be.
In that out in net inflows.
In 2020 and Ford.
Okay, and then just a follow up so given the USA deal and then some of the strategic focus on some of the organic growth opportunities.
I guess, maybe from like a time standpoint like how.
Are you guys looking for new affiliates, any particular areas in and maybe a little bit like who's responsible.
For driving USA forward versus.
Looking for some of the new potential out there.
So.
Let me start to say that doing acquisitions is really part of our culture. It's part of our key our management team. So I would say that our management team is responsible for pushing the opportunity in USA forward and being successful there as well as finding new opportunities.
From an inorganic growth perspective.
As we said before we start off looking at Intergraded inorganic growth opportunities to say does this opportunity make our company better.
It is in just about financial engineering, it isn't about size and scale. It starts off does this make our company better. We also look at the product set what I've always said and what we've always kind of communicated is that we're looking for products that work for clients in their portfolios where would they are willing to pay.
Fair fee for and where we think we can win where there is less opportunity be disintermediated by a passive product.
And we and we use those principles to look for opportunities.
We are active as I've said searching for those opportunities. It is an interesting time in the industry.
We have as I said earlier that we have become I believe for many and acquire of choice.
We're mindful of of what we wanted to do.
We also our creative and we're very well experience so.
So I think the ability to make us a successful as well as the ability to pursue integrate inorganic growth opportunities.
We're perfectly capable of doing both and I think we're actually pursuing those in a really good way at this point.
Hi, Thanks, a lot.
Your next question comes from the line of Kenneth Lee with RBC capital markets.
Hi, Thanks for taking my question.
Just one on the net flows were there any kind of.
Key.
Dempster within the fixed income or any other key net flows that you'd like to highlight in the quarter and then looking forward.
Could you comment on your expectations for four net flows within fixed income and whether the product offerings. There are well positioned to lead to take advantage of client demand that's being seen across industry. Thanks.
Sure Ken Good morning, It's Mike and no significant flows to highlight in Q4 for fixed income or any of the product offerings. I think we saw activity and flows across all channels and products and franchises, but nothing significant Dave highlighted some reallocations with respect to deposit.
And in the equity markets, but nothing to point out as far as going forward I think we've talked a lot about now having.
Third of our assets in high performing fixed income products with the USA acquisition plus or in core franchise.
We feel like we're very well positioned in the fixed income across all.
Strategies.
To continue to look at capitalizing on both the distribution within the direct channel as well as our institutional and retail and retirement distribution.
Fixed income offers us a great.
Opportunity, especially as we think about where markets are today.
It just offers us another bucket to continue to capture organic growth.
Great and just one one follow up if I may.
In terms of the investments youre going to make and that includes the digital platform. The marketing direct member channeling a couple other.
Effort that you mentioned it feels as if most of the investments are going to be within this year just wanted to check on terms of timeframes, whether it's maybe just this year or could it potentially spillover into next year. Thanks.
Hi, it's Dave it's definitely in this year, but these are investments due to stay competitive that will continually make as we think about moving forward the investment in technology the investment in data.
We estimate in the ability to service clients better faster.
And with better transparency those are going to be things that we're going to need to continue to do.
But that being said our model and our ability to make those investments and ability to make those investments wants across our entire platform and not have redundancies is really an advantage.
We see with our model as we move forward and as there is a requirement for reinvestment in evolution in changing the industry. We just think we're very well positioned to continue to make these investments at a very efficient way.
Very helpful. Thank you very much.
Hi, Ken for any questions. Please press star followed by the number one on your telephone keypad. Your next question will come from the line of Alex Blostein with Goldman Sachs.
Hey, guys. Thanks for the follow up just wanted to get your thoughts on the mix of capital priorities as you progress as you progress through 2020 so.
Obviously nice you the loan re Fi you lowered the caused by significant 75 basis points.
Does that decelerate at all the need to Delever and maybe you some of the excess cash towards the buyback given the fact that the stock is still trading at quite of a low multiple both on earnings and EBITDA. So just some thoughts around the pace of de leveraging off from here and the buyback. Thanks.
Hi, Alex its Dave I start off saying I agree with you on your analysis of the stock.
But that being said our goal is to create.
The balance sheet, where we have the most flexibility to execute our strategic growth plan and today that is around de levering, we have a small as you know buyback program and.
A small dividend program.
I don't see those programs changing in the near future.
We think the best use of our capital is to de lever to create a balance sheet that gives us the most flexibility to go out and do.
Future acquisitions.
Yes makes sense. Thanks.
Your next question will come from the line of Michael Cyprys with Morgan Stanley.
Hey, good morning, Thanks for taking the question just on the.
I think about your operating platform today, largely outsourced model just thinking around capacity to do a deal from an operating platform perspective, So I guess with the more outsourced model that you have I guess, how much more in assets could you bolt on St. Similar asset classes to what you have today without meaningfully changing the expense.
And margin profile of the company.
Mike It's Mike, Yes, I think we've talked a lot about the model that we have and the integrated operating platform that does allow us with with the outsourced model that we have to scale up pretty quickly.
So with that said there really isn't an asset level that we say we cannot handle we talk a lot about the types of assets that we doing the complexity of the business.
As you said, if we are looking at asset classes that we already trade settle have compliance programs around those are very easy for us to kind of execute upon and to integrate.
Where we start to see the complexity as if theres different asset classes.
And or different geographies and those are things that we would take slowly to walk through but have the platform and the experience to be able to leverage.
So I think the the answer really comes down to we can continue based on the business model. We have we're making the investments one and it's a singular platform to continue to scale.
So should I take away from that if the acquisition is similar asset classes and we should expect a similar EBITDA, 46% sort of margin assuming it's similar to what you have today in terms of asset classes.
It's Dave I think each acquisition is different.
It depends on a lot of different variables I think what you should take away is that we have been able to grow our business pretty significantly over the last few years.
Through acquisitions and really execute the same business model as we look forward I don't see that opportunity set changing I think our platform is built to grow.
Also the outsourcing relationships, we have we have great partners. We also had built a really strong internal platform as well to to manage the business. So going forward be it in the same asset classes be in new asset classes or new geographies.
We feel that we're well positioned to grow through acquisition and we don't really see any limits today within the universe that we're looking at.
Okay, Great and then just a follow up question, maybe just on sales side of things pace of gross sales of like it was down a little bit in the quarter. Just curious any color you could share around the decline there and as you look forward from here I guess, where from a sales perspective do you think you're most underpenetrated from say a channel or asset class perspective.
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I wouldn't take anything from the quarter on gross sales quarter over quarter on the reduction either it was cyclical or.
I don't think Theres anything to take from there I think we're pretty well penetrated in the markets that we want to be in around our institutional retail and retirement side. We're working on the direct channel, obviously, but I don't think there's a market that I'd point out to say that.
But we're really focusing on ticket more penetration.
Okay. Thank you.
And we have no further questions at this time I'll turn the conference back over to management for any closing remarks.
Thank you for participating in today's call. We look forward to providing you with ongoing updates as we continue to execute on our strategy and I hope all of you have a wonderful day. Thank you.
Ladies and gentlemen, this concludes today's call. Thank you all for joining and you may now disconnect.
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