Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the victory capital Management first quarter Twentytwenty results Conference call.
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Please be advised <unk> today's conference is being recorded.
I would now like to Hana conference over to your Speaker today Mackie Dennis Chief.
Staffing director of Investor Relations. 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 as such includes certain risks and uncertainties. Please refer to our press release and our 60 filings for more information on specific risk factors that could cause actual results to differ materially from those projected in the forward looking.
These statements while recording of this call will be made available bias 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 or circumstances that exists. After the date on which they were made.
In addition to 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 tables that can be found in our earth.
Earnings press release and in the slide presentation accompanying this call both of which can be accessed on the investor relations portion of our website at <unk> IR Dot B C. M. Dot com. It's now my pleasure to turn the call over to David Brown, Chairman and CEO.
Thanks, Matt Good morning, and welcome to victory Capital's first quarter 2020 earnings call.
I'm joined today by Michael Paul Carbone, or President Chief financial and administrative office or as walls Madness, our chief of staff and director of Investor Relations.
I'm going to start with an overview of the quarter animal briefly touch on financial performance, which I believe further validates the resiliency of our business model, particularly how it instantaneously flexes with market conditions.
Then I will turn over to Mike, who will review our financial results for the quarter in greater detail.
Following our prepared remarks, Mike, Matt and I will be available and take questions.
The business overview begins on slide five before we get into the numbers I want to take a moment to acknowledge our talented employees for their truly inspirational work during the past few months.
From technology and operations to our contract service Representatives to our investment professionals to distribution and marketing all of our teams have performed superbly despite dealing with substantial disruption in the personal lives.
I would also like to thank all the frontline workers and other central service providers, who put himself into harm's way to care for those whose health has been impacted by cobot 19.
We were fortunate to have a previous investments in technology and dinner business continuity planning a testing long before the need or rose to implement these systems.
Because of this comprehensive preparation regular training and maintenance our client servicing operations did not miss a beat during the quarter.
Same time, we continue to make investments in the business to support future growth.
The speed in precision of a response to the market societal disruption has energized and strengthen us as a firm.
I could not be prouder of the way, we've collectively answer the challenges featuring each of us during this pandemic.
The safety and health of our employees and serving our clients remains Paramount we immediately baby appropriate accommodations to ensure both.
Most of our employees have been working from home and in cases, where employees are still coming into our offices. We've added safety measures to ensure the safest possible working environment.
This includes reconfiguring workers to ensure adequate social distancing as well as providing personal protective gear hygiene supplies and specialized cleaning services.
I believe we've enhanced our employee engagement and corporate culture as a firm because we're getting through this together.
Unprecedented events in challenges combined people together increased trust income Rhodri and we've witnessed this year it victory first fan.
We have more frequent touch points or did you recessions I'd been hosting frequent companywide town halls.
I take questions and address any concerns that arise.
Employee teams are also meeting socially on video trots outside of business hours, which is an unexpected but very positive outcome.
We've also pivoted to construct a virtual interactions with clients and prospects. During this time, our distribution teams have been hosting investment strategy sessions with financial advisors, providing them with actionable idea to satisfy the needs of their clients.
On the institutional side of the business, we've held virtual client meetings as well as consult reviews and introductions, we do not participate in virtual finals presentations with investment franchises participating by video.
Additionally, we are holding virtual idea gathering sessions with our sales professionals, which are proving very productive.
Direct channel contact centers remain fully staffed with some representatives working from home, we're receiving praise from our USA member clients far level service during this time.
These and other creative sales initiatives resulted in a 30% increase and long term grow sales during the quarter compared with the fourth quarter.
Our world is now a different place.
People organizations that are agile and forward thinking well Johnston pride moving forward.
We do believe everything will return to the way it was well be left behind.
We're well positioned to continue to adapt and succeed in this new environment I look forward to the evolution of our industry.
Turning to slide six not only was our corporate culture tested, but so as our business model.
Again here, we demonstrated tremendous resiliency and durability, but our cost structure spontaneously flexing as planned and the diversification of a products that providing a level mitigation against the market volatility.
Hello, everyone declined 18% in the first quarter, primarily from more than 25 billion of negative market action.
The 2.9 billion of total net outflows, we experienced in the period represented less than 2% of the U.M. at the beginning of the year.
Moreover, inclusive of this quarter over the last 12 months, we've had flat organic growth despite going through the biggest market dislocation we have seen in over a decade.
We believe this is another proof points supporting our resilient business model as I've said, many times predicting quarterly flows with accuracy is quite difficult and sometimes random but looking at flow performance over several quarters in years provides a more accurate picture.
[noise] Fourever investment franchises achieved positive organic growth in the quarter and flows in our fixed income products held up much better than most of the industry.
At quarter end anyone was still up more than twice the level at the end of the first quarter 2019 and by the end of April or you have rebounded to 131.8 billion.
Our outlook inflows for the next few quarters is somewhat cautious given the market environment.
We are well positioned with our diverse product set competitive investment performance and our penetration in our existing distribution channels, along with the U.S.A. direct channel opportunity emerging as the year progresses.
It is hard to predict in next few quarters will be the market direction and the corresponding investor behavior.
Adjusted net income tax benefit of 92 cents per diluted share and adjusted EBITDA of 91.5 million. Both exceeded estimates. We also generated an adjusted EBITDA margin of 44.8% in the quarter, which further demonstrates the power of our business model.
Mike will cover the variable nature of our cost structure in more detail in his remarks.
We continued our disciplined capital allocation strategy and deploy most of our free cash flow to further reduce debt since July one we've reduced debt by 217 million and lowered the current outstanding balance to 883 million.
Our debt continues to be free of covenants with our eight for mentioned prepayments. We have made all of the required principal payments to the maturity of alone in 2026.
The same time, we've returned a portion of our excess capital to shareholders through steady share repurchases and our cash dividend.
The integration of our USA acquisition is nearly complete last month, we launched our new phone system technology, which is a key element to enhancing efficiency and effectiveness of the contact center.
We're now able to better Ralph calls and collect more data, which will enhance our ability to serve USAA members and engage with new ones.
We've experienced much faster account authentication reduced latency I Miss direct calls and service handle times have been improved by 20%.
Mark in each of the direct channel is beginning to ramp up we're now able to use unique telephone numbers for various campaigns, which will have greatly with the measurement and likelihood of success.
On that note and turning to page seven I want to step back for a moment discuss the substantial progress ends and made since we closed the acquisition of U.S.A. asset management business.
As a refresher on day, one we reopened a direct channel so USA members could once again invest directly.
Members are no longer required to open a separate brokerage account divine mutual funds or invest in USA 529 College savings plan.
Members have also been taking advantage of or no cost portfolio review sessions, an expert investment guidance from licensed representatives in our contact center.
We knew that Paramount to our success in the direct channel was replicating the same high level service that USA members are accustomed to receiving.
As quickly as during our first quarter of ownership service scores were above our goal based on member service completed and remain at that level. Today. This was and is quite an achievement and will provide the foundation for success in this channel.
As I touched on we just launched their new Genesis call system technology, which is another significant milestone for US. In addition to the improved panel times and better efficiency. The new system is fully integrated with our CRM technology, providing better coordination with our marketing objectives.
This summer, we'll be rolling out a new state of the art digital platform. This is going to further advance our direct channel marketing initiatives, while delivering a richer digital experience for members prefer to transact will be supported online.
We believe the combination of excellent service from a contact center Representatives armed with state of the our technology at a new modern digital platform supported by innovative and focus marketing campaigns is the formula for success and growth in this channel.
We will also benefit from our ability to leverage the USA brand to deliver strong and diversified set of products to members. We're progressing through the steps nicely and are on track with the goals we set out.
Lastly, our established distribution teams have been introducing USA branded mutual funds and gaining traction with product placements on approved and recommended list at several intermediary platforms.
This work is expected to further increase prominent shelf space for the these products and better position us for growth as you move through the current year.
Turning to slide nine with the integration essentially complete beginning this year, we're presenting only consolidated investment performance data.
As of March 31, more than 60% of companywide you added mutual fund GTS was ranked four or five stars overall by Morningstar.
More than half of our active us equity mutual fund assets ranked in the top cortile in the first quarter.
And more than three quarters rank in the top half of their peer group.
Mixed asset class funds also performed remarkably well with more than 90% of value and our USA a target date funds outperforming benchmarks during the quarter.
And three of for each yes, now rank in the fourth percentto or higher for the one year period through the end of March across the total platform, 69% of 81 outperform respective benchmarks for the critical five year trailing period.
The credit intensive nature of our USA fixed income strategies, which we believe delivers the best long term risk adjusted performance weighed on short term fixed income performance in the first quarter.
In April these products rebounded sharply.
Nine of the 12 USA fixed income funds are four or five star rated by Morningstar, which translates to 84% or they are you, adding these mutual funds at the end of April.
Our USA taxable bond funds performed particularly well in the market recovery, averaging top quintile returns during April as well.
The chart on the right illustrates the percentage of strategies outperformed their benchmarks over the trailing 135 and 10 year period through quarter end here again, the short term periods are skewed by the large number of fixed income strategies impacted by the rapid widening of credit spreads that was reversed in April.
In contrast equity strategies performed exceptionally well with 80% of our active us and international Smallcap strategies outperformed benchmarks during the first quarter two.
Two of those Sycamore small cap and try Bill International Smallcap are now ranked in the first percentile for the 10 year period.
And are using that to reduce debt at a rapid pace.
By stressing our balance sheet, we were enhancing our flexibility pursue strategic acquisitions.
Yeah. My opinion, there is no doubt the market disruption will have an impact on the I mean a landscape.
I believe it will accelerate consolidation in the industry.
The salvation will happen one through some stability.
At this point is impossible to know exactly when that will take place, but once it does the acceleration woke her at a rapid pace and there'll be many quality firms looking for partners.
Given our unique business model acquisition experience operation distribution capabilities I believe we've you know choir of choice for many we're coughing, new emoney landscape will present, more and even better opportunities as long as the appropriate level diligence impatiens or exercise.
Without mine, we are still currently evaluating and where appropriate moving those types of strategic opportunities Ford or activity in this area has not stopped.
Before I turn the call over them like I Wanna State to victory capital as not taken any governmental assistance, because frankly, we do not needed.
We continue to generate strong positive cash flow reduce debt.
Vest and are looking ahead to the future accompany roots can be traced back to the late 18 hundreds when we were known as Cleveland Trust and we have serve their customers through many serious events and market environments.
<unk> 19, while unprecedented is a challenge that we are well positioned to cope with.
Forward thinking business, we're adjusting accordingly, and we will emerge from this as an even stronger organization now with that I will turn it over to my first financial review.
<unk> in the morning, everyone. The financial results review begins on slide 12.
Revenue for the quarter was $204.4 million, which is down 6% from $218.6 million and the fourth quarter.
The decline is primarily attributable to the lower average anyway I'm in the first quarter and a slightly lower the rate realization.
There was also one let's say in the quarter and a little over $1 million, an annual performance fees that were realized in the fourth quarter.
Finally, we also experienced some asset mix shift, particularly in the second half of the quarter.
The rapid decline in equity markets costs are equity a U.M. to far more relative to certain other asset classes and products that have lower average p. rates.
The year over year revenue growth of 134% reflects the increase in a whim from the U.S.A.A. acquisition.
Cap earnings increased to $57.2 million or 77 cents per diluted share more than 50% from the fourth quarter due to a 26% decline and gap operating expenses.
Much of the decrease reflects acquisition related adjustments on the balance sheet.
Tick early their fair value of our future contingency payments for the USA acquisition, which was marked higher in the fourth quarter and lower in the first quarter, which netted out to a 25.4 million dollar quarter over quarter expense decline.
That was compounded by lower distribution personnel and operating expenses, which all flex slower when the market's decline.
There's more than offset typical first quarter increases in personnel taxes and benefit related expenses as limits reset.
Net income was negatively impacted by a 5.8 million dollar decline in other income.
Related to negative market action and our deferred compensation plan.
That was offset by lower interest expense and other financing costs, which declined by 23% during the quarter and we also received a state tax refund.
Adjusting that income tax benefit per diluted shared declined 7% from 99 cents and the fourth quarter to 90 two's tense and the first quarter.
And I would tax benefit was 35 cents per diluted share in the first quarter of 2019 and rose 163% year over year.
Adjusted EBITDA margin was 44.8% in the first quarter.
While this is down slightly from the fourth quarter. We're pleased to report the second highest level of adjusted even a margin in our history, which came during a challenging period.
We were very active on the capital management front during the quarter.
Continued to rapidly pay down that while managing other levers within our control.
Early in the quarter, we took advantage of our strong financial performance and healthy credit markets three priced r. term loan.
Reduce the spread over library by 75 basis points and had 100% participation from our original group of blenders.
Later in the quarter as the market's became dislocated we entered into an interest rate swap transaction before the end of March to effectively lock in a rate of 3.465% on $450 million of the outstanding debt.
A line of credit remains on drawn and our leverage ratio was at 2.4 times at the end of the quarter based on analyzing the first quarters adjusted D., but.
We also returned $8 million of capital to shareholders to share repurchases and the dividend during the quarter and have no current plans to change our capital allocation strategy, Dave just cover.
Turning to slide 13, you can see the 18% decline in H.U.N. from your end in tandem with the market deterioration.
Discharge also shows are diversification on a channel basis.
Refer to hear as retail represent assets on retail and retirement intermediary platforms.
Direct represents assets held primarily by USAA members or other direct individual investors.
Well both channels represent assets held by individuals we believe they exhibit different behaviors. So we break them out separately.
Confide 14, we cover longterm asset flows.
Gross sales improved 38% from the fourth quarter, which was not enough to keep pace with the long term redemptions during the market turbulence.
And the first quarter, we saw the highest level of long term outflows firm fixed income products, which parallels industry trends during the quarter.
Fixed income outflows for just under a billion dollars.
On a percentage basis, we perform much better than the industry average.
We view this as a testament to the sticky notes of the assets held in our direct USA member channel, which currently represents the majority of are fixed income assets.
During the quarter Sycamore try valid sofas and Incor all achieve positive long term that flows.
Before we move on I want to remind everyone that we still expect to see a reduction in our money market assets. After schwab closes its acquisition of the USAA brokerage business.
Misrepresents, approximately $8.4 billion of money market assets spread across three money market funds.
Swap has publicly stated its intention to sweep these assets onto its balance sheet upon closing.
It is important to know that these assets are essentially profit neutral to us we earn relatively lower average fees on these products and those fees are offset by the revenue sharing arrangement. We currently have in place.
The remaining $3.7 billion of money market assets, which are source through the direct member channel do not have any associated revenue sharing arrangement hands are profitable.
The exact timing is uncertain, but we believe this will occur late in the second quarter early in the third quarter.
This will result in a short term outflow and negatively impact revenue.
However, all other things being equal it will increase our average p. rate realization and profit margins.
We are continuing to work closely with <unk>.
Our teams meet regularly to coordinate activities and we look forward to expanding are already strong relationship with schwab as we mutually enhanced the customer experience for U.S.A. members.
Mm.
Revenues are covered on slide 15.
As I explained earlier my remarks quarter over quarter revenues decrease due to lower A.U.M., an average fee rate realization one less stay in the period shifting product mix and no recorded performance fees, which had a small positive impact on the fourth quarter fee right.
Moving to slide 16, total expenses were down 23% from the fourth quarter.
Most of the decline resulted from the non cash balance sheet adjustments related to the fair market value of the acquisition contingency payments.
The carrying value that liability was marked out by $19.9 million in the fourth quarter, increasing the quarters gap operating expenses.
And the first quarter higher market volatility combined with the higher discount rate resulted in a 5.5 million dollar mark down of the recorded value.
Even after backing out this noncash $25.4 million positive <unk> over a quarter variance operating expenses in the first quarter for more than 11% lower versus the fourth quarter.
Personnel expenses declined 12%.
This more than offset normal first quarter increases and personnel expense due to the seasonal increased average payroll taxes and benefit expenses.
Distribution and Middle back office expenses, which are 80 U.N. base declined by 5%.
Opting in the slight increase in non operating expense.
Slide 17 highlights our non-GAAP metrics for the quarter.
Adjusted net income totaled $68.5 million, which was comprised of adjusted net income of $61.7 million in the cash tax benefit of $6.7 million.
I'd like to spend just a moment highlighting the benefit we receive for our cash tax payments.
When we make an acquisition and step up the cost basis of the acquired business finite lived intangible assets are amortized for GAAP purposes, while indefinite lived intangible assets and goodwill or not.
However, the amortization of in definite lived intangibles.
And goodwill is deductible over 15 years for corporate income tax purposes.
This provides a substantial lift to our cash flow.
In the first quarter, this was $6.7 million and amounts more than 10% of our adjusted net income in the quarter.
We anticipate our full year tax deduction will be approximately $108 million ended at 25% tax rate that translates into more than $27 million in cash tax savings.
These reliable deductions are scheduled to flow through our tax returns over the next 15 years and we'll have a substantial economic impact on our company.
Currently the present value of the increased cash flow works out to be more than $200 million using a conservative 10% discount rate or approximately $3 per share of future tax benefits.
That receives a lot of questions on this topic. So we thought it would be worthwhile to recap the mechanics behind the number.
The adjusted EBITDA margin in the quarter, 44.8% was the second highest margin level achieved for our company.
But the tangible benefits of our cash tax situation, we feel the advantages inherent in our highly variable cost structure is important to point out.
Particularly during bull markets the ratio between fixed and variable cost has not been an area of concern for most asset managers.
Now with the change in market sentiment, we believe the distinction between companies with flexible operating cost versus not is becoming more important.
Slide 18 is a snapshot of our capital management activity in the quarter I won't repeat what has already been covered but I would like to highlight that given the resilience of our business model, we're not making any adjustments to our capital allocation strategy.
Lastly, following on the margin topic highlighted on the previous slide is important to note that we are continuing to invest meaningfully in the business, we have not stopped or changed any planned investments for our business due to the market dislocation.
As Dave mentioned last month, we launched our new interactive voice response system for the direct channel and have several other initiatives going on to support our growth and future positioning in the industry.
This concludes our prepared remarks, I'll now turn it back over to the operator for questions.
At this time, ladies and gentlemen, if he would like to ask the question. Please go ahead. Please press Star then the number one on your telephone keypad.
If you would like to withdraw your question you May press the pound key.
Your first question today comes from the line of Alex Goldstein with Goldman Sachs. Please proceed with your question.
Greg Good morning, Thanks for asking for taking the question.
So first just curious to just maybe expand a little bit on your commentary around the M&A opportunities you see in the current market environment, obviously, given the dislocation feels like the bid ask spread between buyers and sellers is probably going to remain somewhat wide, but curious how your pipeline has evolved over the last couple of months.
And sort of any indication of how the multiples have evolved as well will be helpful. Thanks.
Hi, Alex its Dave.
Let me start off by saying that.
I believe when when we get some stability that the opportunity to do acquisitions is going to be enormous for for firms like ours.
With the idea of.
Some stability and buyers and sellers can come together on pricing, which today as you mentioned is not there I think the issues going into.
The pandemic are the same for the industry. They haven't been fixed and I think as we go through this and we get some stability I think that there will be a lot of opportunities.
Today, our pipeline is still really strong as I said in my my remarks, we're working on opportunities we're involved in processes.
And we are moving things through that activity has not stopped I think the exercise that we all need to think about his patients and diligence and I think.
What we're doing with our capital allocation strategy of paying down debt and really recoiling, our balance sheet to execute on the opportunities that come our way is going to is going to pay us back in a big way down the road.
I have no idea how long that's going to take.
Forward to stabilize I think we've seen a lot of stabilization.
The month of April and going into this month.
Im somewhat optimistic that though that this is the beginning of the stabilization, but I really don't know how long, but were patient and we're preparing ourselves and from my viewpoint I think we're gonna have some tremendous opportunities and given our experience.
And our platform and our capabilities.
I think we will be an acquirer of choice for money.
Great that makes sense.
And I guess just from the capacity perspective can you guys just remind us on what's sort of the adjusted debt to EBITDA numbers you guys are expected to work with on the current set of conditions.
In terms of kind of thinking how might how sizable the deal you could do overtime.
Yes, Alex its Mike Good morning, So I think what we've said is we really not give hard.
Metrics with respect to leverage ratio I think what we've said is and it really remains unchanged. Our capital policy really is yet to to support the overall business and the strategy the business, which does include M&A.
So as we evaluate opportunities that come down the Pike will want to use all the tools that we have available.
To us to do M&A.
Which includes debt, which includes the opportunity for equity, which includes our announced in structuring that we've been able to drill use as we have in the past.
So it's hard to sit here and to connect you're saying here's the absolute highest level will go or any range that will go it really will depend on the opportunity set that we see.
And the environment that we're in.
We do generate a significant amount of free cash flow.
And that has been driven towards deleveraging today.
We pay down 217 million of the $1.1 billion of debt that we had back from July so in 10 months, we've we've really driven.
Primary focus of our cash flows to deleveraging.
Lastly, I guess I'd say is that we know as we think about a transaction that comes down the pipe, we have opportunity between announced and close usually six months or so so we'll be able to to guide into gauge with respect to cash flow paydowns during that period and provide some connectivity of as well and Alex I'll add one thing too.
That on your question around size.
We are interested in strategic opportunities, we're not interested in just financial transactions and those strategic opportunities could be smaller I think there hurdle to do a smaller transaction would be very high.
From a strategic perspective, if we're going to spend the time and spend the resources, it's got to be strategic but we would we would default to something larger.
More impactful to the overall organization just as we have in the past.
Great Thanks for that.
Your next question comes from the line of Randy Binner.
B. Riley FBR. Please.
Please proceed with your question.
Hey, good morning, I wanted to ask a question on kind of April activity and.
Thanks for the U.M. number you quoted I'm just kind of curious what the flows have looked like in April.
Asset class and Thats been better and fixed income solutions that sort of thing.
Hi, Randy it's Dave who as you know, we don't disclose intra quarter flow activity, but I can give you some guidance.
You know for April we've seen some normalization in most of the asset classes I think in the first quarter.
What we experienced was multifaceted.
First we saw in some of our strategies people use those to go to cash and get some liquidity, which hurt us.
We did see a lot of activity around the growth side. So you'll you'll you'll note that we had a large increase quarter over quarter on the gross flows and then we also saw some delayed fundings in our won but not yet funded and in our anticipated wins really get pushed into the out.
Launch in quarters, which we think we'll be able to benefit from as the year progresses.
As I said in my.
Prepared remarks, we're a little bit cautious because of the market and investor sentiment around the market. We're seeing some unusual activity to the good into the bad.
And that really is around the volatility.
But when you really look at it longer term as as we do.
We'd like to look at flows over quarters are over a year.
We're optimistic.
We have a number of our franchises that have excellent investment performance that of open capacity.
And we went through some of those numbers like a sycamore, a try vale and and so for us and in Rs, where they have great performance and there's overcapacity. We also like where we are in our distribution channels.
And how we're positioned specifically on the retirement side and the sub advisor side and then the evolving opportunity on the direct channel side, which we'll see as the year progresses and into 2021.
And then we think the Schwab closing of the USA brokerage business will be a net positive to us as well as Schwab can begins to mine new accounts, we think some of that will accrue to to our funds as well. So so we're optimistic.
But cautious given what's happening in the market.
That's great just the one quick follow up the funding issue you mentioned that's in the solutions business.
No no not specifically in solutions more in general we've seen some of our clients delay fundings are delayed decisions.
And we think when we win win the quarters.
Through the quarters for the rest of year, we'll we'll get some benefit from those so think of those is really delayed.
Okay, but broad based across the portfolio.
Yes.
Okay. Thank you.
Your next question comes from the line as Chris Shutler with William Blair. Please proceed with your question.
Everyone. Good morning.
USAA do do you think it still likely that U.S.A.
Flows will begin to improve over the course of the year just given that the dip in the fixed income.
Formats and.
Maybe more broadly just on the outreach into the direct channel can you maybe dive a little deeper on what outreach youve done to date and compare and contrast that with the volume and quality of outreach going forward.
Hi, Chris It's Dave.
On the USA investments on the fixed income side.
We have seen a a very nice come back on the investment performance in April.
We're hopeful as we progress through the year that the allocations will come back to fixed income, especially as the performance is dramatically improved in April and into May.
Again, I can't predict quarter to quarter, but I anticipate that getting better as the year progressing as the market calms down.
From a direct channel perspective, we are seeing success there today.
Our new account sign ups, we've seen success, there and are increasing our automatic investment plans, we've seen success there.
We have done very little from with digital marketing and from a campaign perspective.
Really that opportunity you know is very methodical, how we've approached a very methodically where brown building around service around building you know, making sure. We've had the right levels of interaction in the correct levels of interaction with members and we're now at the point, where we've upgraded our.
Our call Center technology in the summer will rollout of new digital platform.
That will all accelerate.
And I think we will see as we go through 20 into 21, even better results.
But in the numbers today, we are seeing very encouraging signs through new account sign ups automatic investment plan sign ups, increasing automatic investment plans and our service level scores remain excellent which is really as I said the foundation for success in that channel.
Okay. Thanks.
And one more on U.S. and just the fulcrum fees, which I think take effect.
Third quarter, just all else equal would you give us a status update on how you're expecting fee rates to to change as a result of what you're seeing today to performance. Thank you.
Sure. Thanks, Chris So I think.
Maybe two comments there I'd say with respect to the fee rates.
Yeah, we saw a decline in the fee rates from Q4 to Q1 really solely driven by asset mix, So where we saw a decline in our higher fee.
I am resulting from the market dislocation compared to lower fees that was really an asset mix shift.
As we look forward that should recover.
As you see the market appreciation come through which we did see starting to come through in our April numbers.
As far as the fulcrum fees as you pointed out and we've said this will come back online in the third quarter.
And the guidance that we've given in still around as its one to two basis points.
Positive or negative in somewhere in between with respect to the overall fee rates for the business.
And we'll judge that as it comes online really starting in the third quarter.
Okay. Thank you.
Sure.
Your next question comes from the line of kind of clean with RBC capital markets. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
I'm wondering if you could just give a little bit more color around the net flows you're seeing within the solutions business more specifically, which particular strategies.
You want to call out in terms of seeing some either inflows or outflows. Thanks.
Hi, Ken It's Dave I don't think we have a specific product or piece of the solutions business I would tell you that there was abnormal activity in the first quarter, especially in March and a number of our different franchises in asset classes.
We continue as part of our solutions businesses or ATM business, we continue to be very bullish about or ATM business. We have a number of high performing HTS.
That we're pretty excited about but I don't have a piece of the solutions business that I would call out I would you say that.
There was definitely abnormal activity in a sense that you had people thinking about liquidity and just wanting to liquidate good performing strategies or liquid strategies that have capital ready for other things.
Things in their business or their portfolios.
Great very helpful and just one follow up if I mean, I'm just a follow up on the prepared remarks regarding the flexible cost base.
Just wondering in the current environment what are your latest thoughts in terms of adjusted EBITDA margins I think in the past.
You talked about potentially achieving somewhere in the neighborhood, 46% or so thanks.
Yeah, Hey, Ken it's Mike. Thanks, Yeah, we have stated our guidance in a normalized market environment, that's 46% and that was kind of post the completion of the USA integration, which at this point is substantially complete.
Q1 came in at 44.8%.
And really that was driven by some of the market dislocation that we saw and some of the seasonal expenses that happened in Q1 around personnel.
Which brought it down to that 45% range.
Going forward, we've talked a lot about the variable cost model, we have greater than two thirds of our expenses are variable.
And we'll really instantaneously flex.
With the market decline and revenue decline that we've seen.
The one item we can't control is kind of the market conditions going forward in the prolong nature of that but I'd say, if if their market persist down or further decreases down we could see a slight downtick from that 46% margins.
We're not stopping the investments that we're making for the future. So all of those rates and margin levels that I've talked about really include continuing to make those investments in the business to support the digital platform the distribution the technology in the data.
So I would say, where we are today is where we're looking in the forward and we'll see what happens with the market you could say a slight downtick and we could recover backup that normalized level of 46% very quickly as we sit market conditions improve.
Great very helpful. Thank you very much.
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Your next question today comes from the line of Ken Worthington with JP Morgan. Please proceed with your question.
Hi, good morning from one Ken to the next and I guess I'll follow up on that question.
Can you give us.
Help on the outlook for compensation, maybe start with maybe a walk forward from the $48 million you guys generated and for Q2. The 41 that you reported for one Q.
And if you can't I know you've given comments on the overall margin, but can we get sort of how we should think about compensation for the next couple of quarters. There's you know some some market Mark said I think flow through with the compensation lines. The market is now up in QQ.
My guess is average assets may still be down for the quarter, meaning that maybe revenue is down so how do we kind of put all these factors together.
To get a better sense of how comp itself will look going forward.
Sure. Thanks, guys, Mike I I'd say this our compensation is variable. So we talk about the variable nature of the cost basis.
Personnel, and specifically incentive compensation team revenue sharing and commissions all fall within that and our variable with.
The business.
So I think as you see us move forward I would expect that those rates would stay really historically, where they've been just based on the fact that you know the compensation for the business does adjust.
As you mentioned there was some some noise with respect to kind of the mark to market on some deferred comp that will recover.
It wasn't significant but it was included in Q1.
The offset to that also was an increase in kind of the seasonal expenses that we see some personnel taxes and benefits the reset that probably worth one to one and a half million dollars an incremental expense in Q1.
So that will normalize as we move out over the next several quarters.
But overall the guidance I gave on the the margins really will well allow the compensation expense.
To calibrate as we see assets recover and I would agree with your statement that the average assets for Q2 would tend to be lower than the average assets for Q1, just based on where we began the quarter and we're starting to see some recovery.
Okay, Okay, Great and then to maybe go go back to you I see a you've had it under your belt for a couple of quarters Theres, a couple of ways to gauge or for us to gauge success.
One would be a your ability to generate more sales from the existing U.S.C. customers and maybe another way would be to look at your penetration of the USA network. So from those two vantage points are there any metrics you can give in terms of again penetrating the exist or existing customer base.
Base or the gross or net new accounts that you're generating from the U.S.J. network.
Hi, Ken it's Dave.
As far as the U.S.A. customer base, you know as I said on the call.
To gather new customers to gather more wallet share it has to start with reproducing the service levels and we have done that that we have scored out our scores are actually as good if not better them when that portion of the business.
<unk> was owned by USA so.
We've done an excellent job there we are signing up new accounts I can not and we do not disclose their percentage of total, but we're signing up new accounts at a pretty healthy rate.
We are we're signing up new automatic investment plans at a pretty healthy rate. We've grown the USA 529 plan number of plans and also have had net positive flows into that plan since we bought the business.
And I would say that we're really just getting started as we went through in our slide deck. Its a building block approach. It's around service as the foundation, it's around getting the technology, right and getting that technology ready, which we've done the call center and we'll be rolling out a new.
Digital platform in the summer and then from there we will have all of the tools and really lean into the marketing we've done some email and some digital marketing, but very little and we've had very good results, but we've not done in a large scale and that's been purposeful.
We look at this as of a long term opportunity.
We are trying to put the members' needs first.
Around having a good experience and making sure that we're diligently going in and growing the business. So.
From our perspective, the opportunity from a growth perspective has gone even better than we anticipated we'll start to see some material result, as we go through the year and then I would also remind you that you know part of the growth opportunity is to bring the U.S.A. products outside of the USA.
Network, which we have done.
We gained some very valuable shelf space I'm on the fixed income side and some of the other products that we're selling to the third party, which takes a little bit of time.
So we're really bullish on this opportunity and think you know as time progresses as we continue to really integrate this into our distribution system.
We're going to see some great results. So we feel really good about it.
Hey, thanks very much.
Your next question comes not line of Robert Lee with KBW. Please proceed with your question.
Great. Thanks.
Morning, Herbert ones doing well and thanks for taking questions.
You, maybe going back, causing us to Ken's question on it so I'm trying to kind of getting my arms around kind of the it changes the mean.
You had some seasonal increase revenues that 7% understand that you do get reflects lower revenues, but if we're looking at it today mean Britain comped down 13% sequentially revenues down seven even with an increase in seasonality.
And a half so.
How.
Frankly, I'm not clear how could this from here going forward if the average AUM, maybe a sustained or lower Q2 revenues a lower you get rid of seasonality or we actually looking at lower comp expense in Q2 were or were there some discretionary bonus accruals that didn't say.
Please in the quarter really just trying to get some that's this is a good run rating levels before.
Yeah. Thanks, It's Mike Yeah, I think the deferred comp right down in the quarter is included in that so that that was several million dollars. So backing that out and the seasonality, which was a less than that number but it was more than offset so probably a little bit artificially low for the quarter.
However, as we move forward it will absolutely calibrate over the course of the year with revenues.
And there's obviously discretionary compensation included in that as well that again and we've we have the ability to flex down.
Further in the year as we see how the year progresses.
So I would say, it's probably a little bits.
Artificially low in the first quarter, despite all of that but going out there's still an element of of calibration that you'll see completely.
Okay. Thank you and then maybe and Dana I apologize if you may have talked about this little bit but.
You know you update us on some of the initiatives.
The getting.
USAA Sixteenqam products online outside platforms in the last quarter, you talked about having some success, but could you maybe update us on.
If you if you were able to sign up additional platforms and how we should think about as we move past knock on wood, a pretty challenging fixed income flow environment for the industry, you know you're starting to see.
Some incremental.
Sales come from some of these new platforms I had just any update there.
Yeah, I think it's building the foundation now Oh, we have had additional platforms. We have signed up in the first quarter and we are building really the foundation for distribution. We spent all our teams have spent a lot of time going to our existing relationships going to new relation.
In ships working through diligence on the product and gaining shelf space. So this is all about now the foundation building to get access for these products endure distribution system and when you see the market come back and when you see flows go back to fixed income we're definitely.
Good to be a beneficiary hard to see right now because of what's happening on the flow side and most as Mike said in his prepared remarks, most of our clients today in fixed income our soon to direct channel. So we're not losing at the same level, what the industry had but when you see new flows come in you're going to see.
I think our work to pay dividends on the fixed income side and I'd point out that.
A recovery in investment performance that we've seen really post March.
End of quarter with the fixed income franchise, where we've got nine of our 12 USA fixed income funds foreign five star Thats about 80, 485% of the are you on there. So you've got really good investment performance improving investment performance, if it's going to be an area that I think we're going to see some.
Some really good results.
Okay, Great and maybe if I said one last one on.
Additional business so.
Obviously lot of moving pieces is there any.
Any color you may have that some of the inflows, it's more and the others. So in the quarter was existing investors, who may be weren't in the pipeline, but for whatever reason you know what the kind of lean into.
No.
Well the opportunity into any color on and as you've seen RFP activity kinda.
Pick up or change and how we should think of that context versus maybe where it was.
Quarter, no or even a year ago.
So on the institutional side I think there was a number of things that occurred in the quarter and are occurring you have some investors that you. There managers there are certain strategies to gain liquidity and just did it randomly.
And so that was a negative.
Then you saw some of our investors who are existing clients use the market pullback, we allocate to asset classes are very opportunistically and we were the beneficiary if some of those.
And then we did see some new clients.
Come in and use this to maybe fast track to get to get a you know all of their documents and paperwork done to fund and them on the other hand, we did see some where we are either no we're going to win or it's a one but not yet funded or we anticipate winning and knows slow down.
Now on because business slowed down it at those organizations and we'll get the benefit of those as we move out through the rest of your will catch up so we really saw a lot of those different.
Things and they all have different impacts a unfortunately on some of 'em. We saw more liquidity request them. We saw inflows, which is which is partially or some of the challenges. We had this quarter with with our flow number.
Okay, great. Thank for taking my question.
Your next question comes from the line of my carrier with Bank of America. Please proceed with your question.
Hi, good morning, Thanks for taking the questions just two follow ups, Mike given the volatile market backdrop can you try to little bit of color on how you're thinking about expenses more on the non comp in the DNA side, it's not market sensitive.
And where you're seeing maybe further areas for flexibility or moderation versus some of the ongoing investments you.
Oh sure.
Sure Mike Good morning, Yeah, I think again, we look at it is and I don't want to over emphasize this but the business model that we have greater than two Thursday expenses are variable. So those will flex and that includes the compensation.
As well as distribution and a lot of our middle and back office. So so a lot of organizations that have more fixed cost on the operational infrastructure will not see the flex that we do.
And frankly some of the investments that are made on the back office are made by our strategic partners. So the area is really on the DNA that we've seen some flex everybody is is that working from home. So we've seen obviously traveling expense travel entertainment and some conference expense come down.
And we'll see that continue whether some flexibility to do that beyond that as Dave said, we're we're really continuing to invest in the business, we've not rolled out our complete marketing plan yet for the direct channel that will start to.
We evaluated as we move through the rest of the year.
And that's really the two areas I'd say that or have some flexsteel marketing and kind of a teeny areas.
From a business perspective.
Okay. Thanks, and then just on USA in terms of like integrating and I guess more shows like the growth initiatives.
Just given the work from home.
Yes.
All season, and then in place any challenges in any of the areas are things progressing you fairly smoothly I mean, just seem environment.
As far as the U.S.A. opportunity and the growth side. The work from home has not impacted us at all.
We have a really strong built a really strong infrastructure and.
The work from home hasn't slowed us down we are on target to rollout in the summer our new digital platform and really accelerate the growth initiatives as we as we move through this year and into next year.
As I said a couple times, we're we're really excited about that.
Okay. Thanks, a lot.
Your next question today comes from the line of Michael Cyprys.
Morgan Stanley.
He was your question.
Hey, good morning, Thanks for taking the question just wanted to dig in a little bit more on the digital platform that you mentioned, you're rolling out. This warm summer, hoping you can elaborate on this little bit more and maybe from a customer standpoint, what's gonna be different versus what they already have you can see today and just from your perspective, what would successful look like.
For you on the back of this sort of digital rollout on terms of new accounts, new customers new assets as you look out over the next 12 to 36 months.
So hi, Michael it's Dave.
Let me start off and say that you know who success for us on the digital platform is all going to be about member experience and about client experience.
What you will see with the new digital platform is you will see a much easier way to interact with our organization to service to to buy new products and we'll be expanding really that product set.
Through the digital platform offering not only USA products would eventually offering.
No more victory products as well you're going to see a lot more education.
Educational tools on the digital platform.
So a member can come in and and really go and work through.
Investing.
Issues.
Work through portfolio issues will have a lot of digital communication through this platform through chat and other means but for us. It's all about the experience of the member of the client we don't and we don't have specific.
Numbers, we can share with you on what successes over the next 12 to 36 months, we do know that we're going to be able to increase the number of members and we do know that we're probably going to do more work with the existing members are given this digital platform.
It's going to have a totally new look and feel and it's going to be a significant upgrade to what they have today and it's going to be you know I would say as good as you know as anything in the industry.
And we're excited to kind of show that often.
Summer.
Great and just as a quick follow up maybe on the T.F. side looking at the gross sales. So look similar to last quarter or any kind of year ago, but certainly redemptions applaud I guess, just hoping you can elaborate on some of the a initiatives that you have on the T.F. side and what your expectations are in terms of driving gross sales acceleration from the E. G suite.
You know that's really part of you know our sales solutions. So some of the the TS sales are really dependent on what's happening in the market. We have a number of really good performing ats and it's really how they fit in the portfolio. So we haven't changed anything on the T. assets.
We've been pretty consistent.
From a from a sales perspective, and anticipate that same consistency going forward.
Some of our products have gained you know there are three year track record and we've also seen some you know really excel from a performance perspective, I would anticipate those.
To grow faster and then you know depending on how the market.
Performs you know will be what investors look for and I think we have a pretty wide range of VTS.
But we have not changed any of our sales or marketing tactics on that.
Great. Thank you.
And at this time I will turn the call back to Mr., David Brown for any closing remarks.
Sure. Thank you everyone for participating in this morning's call and I hope, everyone, Stacy safe and healthy and we'll talk to you soon thanks.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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