Q3 2020 Victory Capital Holdings Inc Earnings Call
Okay.
[music].
Gentlemen, thank you for standing by and.
Welcome to the victory capital management in the quarter 2020 results conference call at.
At this time, all participants are in listen only mode.
After the speaker presentations, there will be a question and answer session.
You ask a question during the session you need to press star one on your telephone.
You require any further assistance please press star zero.
I would now like to hand, the conference over to your speaker today that being.
Thank you Sir you may begin.
Good morning, before I turn the call over to David Brown I would like to note that today's discussion contains forward looking statements and as such include certain risks and uncertainties. Please refer to our press release Center FCC filings for more information on specific risk factors that could cause actual results to differ materially from those projected in the forward.
Looking statements while a recording of this call will be made available by us on our web site 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 exist. 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 cable that can be found.
In our earnings press release and in the slide presentation accompanying this call both of which can be accessed on the investor relations portions of our website at IR Dot VCM dotcom.
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 third quarter 2020 earnings call.
I'm joined today by Michael Pellet car from our President Chief financial and administrative officer, as well as Matt Dennis our chief of staff and director of Investor Relations.
Today, we announced plans to acquire Ghb asset management, which we're very excited about.
Ill start off by providing the business overview for the quarter and then an overview of the transaction and turn it over to Mike who will review our financial results in greater detail.
Following our prepared remarks, Mike.
I will be available to take questions.
The business overview begins on slide five.
Victory capital generated record financial results for the quarter and nine month periods.
Adjusted net income tax benefit was a record one dollar per diluted share.
That's up 12% from the second quarter of 2020 and up 10% from the third quarter of last year.
Adjusted EBITDA margin improved to a record high of 51% for the quarter.
Our ability to achieve industry, leading operating margins, while continuing to invest in our business shows the strength and efficiency of our business model.
Total AUM grew to $132.7 billion for the quarter.
It's up 3% from 129.1 billion at June Thirtyth and up 7% from the end of the first quarter.
We had long term gross sales of 5.1 billion during the quarter and long term net outflows of 2.9 billion.
We continue to see some disruption or net flows as a result of the sale of USA brokerage business as we've seen throughout the year.
However, the level of disruption slowed as the third quarter progressed and this trend of slowing is continuing into the fourth quarter.
We are encouraged by the sales activity on the intermediary and institutional side for business as well, where we have a strong won but not yet funded book and a very healthy sales pipeline.
We're also winning platform placements and specifically for USA funds exam.
Examples of recent intermediary platform placements include. The addition of 15 USA mutual funds and three EPS onto the northwestern mutual platform.
Principles now offering all the USA funds on defined contribution recordkeeping platform. Additionally.
Additionally, empower retirement recently added all USA funds would be our six share class as well as institutional share classes for the USA intermediate term bond USA income.
Say international.
And USA sustainable world funds with record keeping platform.
Key to our distribution center success going forward, we'll be continuing to execute within and to build out our retail and institutional channels content.
Continuing to evolve the direct channels also important which I will discuss in more detail on the next slide.
Lastly, we have started to see or won but not yet funded book begin to fund this month and anticipate a good portion of it to continue to fund through the end of the year and the first quarter of next year.
We don't report intra quarter flows, but I thought it was important to make this note.
From a capital management perspective, we repaid an additional $44 million in debt during the quarter lowering our leverage ratio to two times at quarter end subs.
Subsequent to quarter end, we reduced debt by an additional $20 million to $817 million.
Additionally, we announced a 17% increase in our regular quarterly cash dividend as well as a new $15 million share repurchase program.
We remain committed to our strategy of creating flexibility through reduction of debt. So we can pursue inorganic opportunities. While also returning capital to shareholders through dividends and share buybacks or.
Our acquisition pipeline remains exceptionally strong and we continue to look for larger scale transactions that enhance our business I want to be clear that the acquisition of Ghb and the investment at all or would do not impede our ability to execute on the larger acquisition, either constrains, our capital or limits, our ability from an operational perspective to exit.
[music].
Turning to slide six I'd like to provide a brief update on our direct channel and external distribution opportunities for the USA mutual funds DTF and 529 College savings plan.
We continue to invest in direct channel to enhance the user experience and expand our reach among the broader USA membership and the military community.
Within weeks, we'll be rolling out a new state of the art digital experience. This is going to advance our direct channel marketing and sales opportunities, while delivering a richer digital experience for investors.
We will also provide us with the opportunity to more effectively promote the sale of our products to individual investors, who do not carry USAA members through this channel.
We continue to benefit from our referral agreement with USA and our ability to deliver diversified set of competitive products USA members. Since we launched the direct business in July 2019, we have approximately 100000 new account registrations. These.
These accounts region size and product. However, one common demographic is that half of them were opened by investors under 40 years old they.
They tend to be smaller accounts, however, their values enhance stores by being attached to an automatic investment plan.
Keep in mind the size of the account doesn't necessarily equate to the quality of the account of there as there is an opportunity to interact directly with the investors through this channel and expand that relationship through the direct interaction.
Moreover, the foundation of the channels to build long lasting relationships and provide guidance to investors financial journey.
In regard to the USA 529 College savings plan. He remains net flow positive since the acquisition and for the year to date period end AUM reached a record high in the third quarter.
In August we launched our first multi channel paid media campaign in a number of regions in the us each with a strong military presence. The campaign was designed to increase brand awareness and drive engagement among the USA membership and military community in general.
To date the campaign has already generated close to 6 million digital and social impressions, which is helping to increase our brand recognition within the military community we've.
We expect these types of efforts to grow in both frequency and scale overtime, which will support the growth of the direct channel.
In addition to our marketing and digital efforts were focused on continuing to expand the investment capabilities that we offer direct to members as well as through financial advisors recently, we added new share classes to several USA mutual funds to provide additional choice for financial advisors and their end clients.
During the quarter, we began offering taxable and tax exempt fixed income separately managed accounts SMS based direct to members.
These custom solutions, which leveraged the expertise of the USA investment fixed income franchise are particularly appealing to high net worth investors, who are seeking a more institutional and personalized approach for management of their assets.
We expect to extend this capability to our intermediary platform partners in early 2021.
In keeping with our initiative to integrate material SG considerations alongside longstanding disciplined investment processes. We recently revised the strategy for the USA World growth fund to focus on sustainable and responsible investing and DSG considerations in conjunction with this change the funds name has been changed.
To the USA, a sustainable World Fund.
Looking ahead, we will soon be introducing two new thematic EPS designed specifically to appeal to the military community. We will also be adding a new no load member share class specifically designed for the direct channel for 11 of our existing victory funds in conjunction with the launch of our new digital experience.
This means that members will be able to invest directly in funds and in demand asset classes not previously available through the USA mutual funds platform.
The combination of excellent service from our contact Center Representatives and new modern digital experience supported by innovative and focused marketing campaigns and specialized products is the formula for success and growth in this channel.
On slide eight I will review our investment results for the quarter.
As of September Thirtyth more than two thirds of companywide AUM and mutual funds and EPS was ranked four or five stars overall by Morningstar.
15 funds are ranked in the top quartile by Morningstar for the trailing one year period, including 11 funds in the top quintile.
Performance of the fixed income funds managed by our USA investments franchise continued to improve.
The percentage of a lemon those products outperforming its respective benchmarks over the trailing three year period was 89% as of September Thirtyth.
10 out of 14 of those funds are ranked four or five stars overall by Morningstar as of September Thirtyth.
This excellent investment performance will help us in our placement and distribution efforts as we continue to make progress to set the foundation for distribution success with this franchise.
Looking at the investment performance of our victory shares EPS five were ranked in the top quartile by Morningstar, including two ranked in the top decile for the trailing one year period, we are particularly excited about our two active fixed income EPS, you like GB and us TD, which you treat their three year track record.
In October and a month, then ranked in the 19th and 10th percentile, respectively by Morningstar.
Finally, we launched our first thematic DTF triple Q and in September and are seeing significant interest from financial advisors and investors as of November one we've attracted approximately $80 million in lending to the strategy with strong investment performance results as well.
Triple Q and offers exposure to the 50 stocks that are next in line for the inclusion in the NASDAQ 100 index and seek to provide investment results to track the performance of the NASDAQ Q 50 index, which has a 10 year track record.
Turning to slide 10, I will read the planned acquisition of Th B asset management, which will become our 10th investment franchise.
He is a great fit for us on many levels and highlights our ability to strike financially attractive creative deal structures with talented investment organizations.
The framework of the transaction is no different than many of the transactions we've executed in the past and which we buy 100% of the existing company and bring the investment team onto our platform, where they benefit from our operational marketing and distribution capabilities.
CHP is a 38 year history with an impressive investment performance track record currently manages approximately $435 million in the micro cap small cap and mid cap asset classes, including us global and international strategies. These.
These are capacity constrained asset classes that we like and know well.
These are also asset classes in which active management is important part of a well diversified portfolio from a business perspective, CHP as significant room for growth across its product set which we think we can significantly accelerate with our distribution capabilities.
All phds strategies have ESG considerations fully integrated into their investment processes. In fact, THQ as an early adopter and has been managing socially responsible investment portfolios for decades.
In addition to serving clients in the us th via the footprint in Australia, and Europe and provides us with expanded distribution opportunities in regions in which we have limited presence today.
This will benefit all our franchises as we look to leverage th fees distribution footprint to sell more of our investment strategies outside the U.S.
The transaction is expected to close in early 2021 and be immediately accretive to earnings nominal considerations, we pay for the assets, we will not need to use any of our capital consistent with our business model CHP divestment team will become employees and shareholders that victory capital and already are significant investors in their own products.
Additionally, the new traded franchise will be subject to our standard compensation agreement based on revenue sharing and as I mentioned before we'll leverage our operational marketing and distribution platforms.
Th fees entrepreneurial Klein first culture aligns well with ours and we are very pleased to welcome them to our team.
On slide 11 highlights CHP stellar investment performance track record as you can see all four of the Phds primary strategies have outperformed their respective benchmark for nearly every time period shown and since inception.
Keep in mind. This data is net of fees. Additionally, phds strategies rank among the top tier of their strategy peer groups. According to investment.
As of September Thirtyth, the micro cap small cap and mid cap and international opportunities strategies, while ranked in the top quartile for the one year period. According to investment and two of the four strategy ranked in top decile.
Three of the four strategies were also ranked in the top quartile over the three year period and three of the four were top quintile performance for the five year period.
This is a testament to the strength and consistency of their processes and long tenure managing strategies in these specialized asset classes.
Turning to slide 12, I'd like to touch briefly on our strategic investment in all the wood partners in September we announced that we had acquired a 15% interest in alderwoods.
Although it is a London based investment advisory firm focused on taking stakes in specialist boutique asset management businesses.
It was founded earlier this year by Jonathan Little through previous firms has an established history of success acquiring stakes in specialist asset managers around the world.
Although it is planning to raise a single private equity style funded deployed strategy I.
I will be a member of the board at the general partner level and we intend to also participate as an investor in the fund.
In addition to providing attractive return opportunity this investment in a proven M&A capability provides us with a number of compelling strategic opportunities. It broadens our international scope for future growth via acquisitions, particularly in UK and on the European continent. Additionally, it expands opportunities for complimentary distribution.
Licenses, including selling victory managed product into new regions and distributing products manage offshore in the U.S. VR established distribution networks. Finally, it provides us with access to strategic partnerships, leveraging organizational and regulatory platforms and non us jurisdictions.
Now I'll turn it over Mike to review, our financial results for the quarter.
Thanks, Dave and good morning, everyone. The financial results review begins on slide 14.
We produced record results for the third quarter and nine month period, thanks to focused execution and our integrated operating platform our ability to consistently generate strong financial performance throughout this year's market swings is a testament to the efficiency and flexibility of our differentiated business model.
Revenue for the third quarter increased 4% from the June quarter, reaching $188.7 million.
For the nine months revenue for $575 million up 46% from the $394 million reported for the same period in 2019.
GAAP operating margin expanded to 43% in the third quarter, which was substantially wider than the second quarter of this year and the same quarter last year.
This resulted in adjusted EBITDA margin widening to a record high 51%.
Adjusted net income tax benefit grew $8.4 million or 13% from the second quarter to $73.4 million.
This was $6.1 million or 9% higher than in the last year's third quarter, despite 9% lower year over year average AUM.
GAAP earnings per.
Or 76 cents per diluted share in the quarter. This.
This was up 25% from the second quarter of this year and more than twice the GAAP EPS generated in last years third quarter.
Adjusted net income tax benefit reached a quarterly record of one dollar per diluted share.
Okay.
132, 7 billion of au and at the end of the quarter reflects positive market action that was partially offset by net outflows.
And is up 7% since the end of March.
Long term asset flows are covered on slide 16.
Gross flows were in line with the second quarter, and we experienced our second consecutive quarter of modestly improving redemptions.
While still a challenge flows are better in the third quarter compared with either the first or second quarter of the year.
That they mentioned earlier, we are beginning to see our one but not yet funded book begin to be realized which should have a positive impact on our flows for the quarter.
[noise] several investment franchises were net flow positive in the third quarter and year to date periods.
Encor Trivalent, then focus all generated positive net long term flows and the global strategy was also net flow positive for the three and nine month periods ending in September.
Turning to 517 quarter over quarter revenues increased by 4%.
Which is slightly ahead of the 3% increase in average AUM.
The average fee right in the quarter declined just slightly by three tenths of a basis point to $56 for from $56 seven basis points in the second quarter.
Gross management fees increased one one basis points as a result of the positive asset mix shift from the recovering equity markets.
We lost eight tenths of a basis point from the Boston fees, taking effect this quarter uncertain USAA mutual funds.
Looking forward, we are encouraged by the sharply improving investment performance and most of the USA eight funds with poor compete.
Particularly the larger USA fixed income products have seen strong investment performance against the respective benchmarks since the credit markets for dislocated in March of this year.
That short period disruption will have less of an impact on the phone could be realisation and future look back periods, which will grow until we reach a 36 months growing in trouble.
Moving to slide 18 continuous improvements can expense management remains a priority.
Total expenses once again decline in the quarter marketing, our fourth consecutive quarter of lower expenses.
He can see from the chart as we move further past the closing of the USA acquisition, we have less accounting noise at the volatility and our expenses have normalized.
Personnel expense declined 3% quarter over quarter. This was primarily driven by a reduction in non-cash deferred compensation expense related to asset value adjustments and are deferred compensation plan investments.
Cash compensation was flat in Q3 compared with Q too.
Other operating expenses declined by 5% or $2.8 million from the second quarter, reflecting lower distribution an asset based expenses.
This was driven by lower platform expenses, which declined $3.8 million and was partially offset by higher southern ministration sub advisory and Middle office expenses.
Not operating expenses levels reflected significantly lower interest expense related to our deleveraging and lower cost of that.
The increase in Q3 relates to lower unrealized gains recognized on deferred compensation plan investments.
Acquisition related expenses with three $5 million lowered and the quarter.
The decrease was primarily attributable to the adjustment of the contingent acquisition liability that we run through our P&L each quarter.
Quarter over quarter, this would lower in the third quarter at $2 million compared with five $3 million from the second quarter.
That liability on our balance sheet was adjusted from $119 million at the end of June to $121 million at the end of September.
Our first annual cash payment will be paid this quarter, reducing that liability.
As previously disclosed we anticipate making the maximum annual payment of $37.5 million, which is based on a revenue retention calculation from the acquisition.
By 19 highlights are non-GAAP metrics for the quarter.
Just the net income tax benefit reached the record higher one dollar per diluted share for the third quarter. This was up 12% from 89 in the second quarter and up 10% from 91 per diluted chair and last year same quarter.
The operating market expansion. We've generated this year is a testament to our focused execution.
A sizeable portion of the margin improvement we have seen is expected to be sustained in the future and it's not attributable to a one time covid related reduction of expenses.
That being said not all of the margin improvement will stay as it will be impacted by the timing and amounts of non capitalized investments that we're making in technology data and distribution to better our platform.
<unk> net income tax benefit totaled $73 $4 million from the third quarter, which was comprised of adjusted net income of $66 $7 million and Ah scheduled cash tax benefit of six $7 million.
This was up 13% to $65 $1 million in the second quarter and 9% ahead of the third quarter of last year.
Adjusted EBITDA was up 11% or more than $9 million, reaching 95 $6 million compared with 86 $3 million and the prior quarter.
This resulted in adjusted EBITDA margins, expanding 320 basis points to a record 57% in the third quarter eclipsing the previous record of 47, 5% established in the second quarter of this year.
Slide 20, with a snapshot of our capital management activity in the quarter.
We returned a total of $13 $9 million to shareholders in the form of share repurchases and dividends.
During the quarter, we repurchased 529000 shares at an average cost of $17.72 per share.
The $15 million a share repurchase authorization that commenced in early June has been exhausted and the board authorized a new share repurchase program of the same $15 million size that will commence when our trading window reopens next week and be effective through the end of 2022.
At the same time, we pay down an additional $44 million in debt during the quarter and held $56 million in cash a quarter and.
Some of that cash bill is earmarked for the payments USAA and.
In the past few weeks subsequent quarter, and we paid down the additional $20 million a desk.
Ah rapid deleveraging the lower interest rate environment, and our first quarter that repricing have significantly lowered our total cost of that.
And the top right of this slide we've included a chart illustrates this sharp decline.
As you can see our total cost of debt, which includes amortization of debt financing has been reduced by more than half since the third quarter of 2019.
Last year, our interest rate was five 6% in the third quarter.
And that has been reduced to 3.1% and this year same quarter.
Moreover, we have mitigated interest rate risk by instituting a heads that essentially fixed the interest rates under three 5% or more than half of our outstanding debt through its duration for perspective, our interest expense has declined almost 60% from $15 $3 million and last year's third quarter to <unk>.
Six $2 million and this year's comparable quarter.
And something to note that the annualized savings on our that is generating more free cash flow for us and the cost of accelerating our share repurchases and both of this year's cash dividend increases.
But total debt reduction approaching $300 million since we originated or term loan and the realisation of the anticipated earnings tower, our net debt to annualized adjusted EBITDA ratio has improved to two times and is training down quite rapidly from our actions.
Or $100 million committed revolver remains undrawn and we continue to generate substantial cash flow.
GAAP net cash flow from operating activities in the nine months of this year totaled $183 million, which does not include more than $20 million with booked as cash tax benefit during the first three quarters of the year.
521 with several of the objectives, we laid out in 2018 at the time of our IPO.
We announced another accretive acquisition with PHB asset management, becoming our tempt franchise.
PHP also hits on our desire to broaden our distribution and as a proof point that our platform represents a genuine value proposition for high performing investment managers seeking to accelerate growth.
As you can see from the table at the bottom we have generated substantial profitable growth through the first three quarters of the year.
The strong performance can be attributed to our integrated model combined with Chris execution by our team throughout the organization.
Over the past two years for the nine month period, we've achieved an 81% increase in revenues.
Expanded margins by 860 basis points more than tripled our GAAP earnings per diluted share and more than doubled adjusted net income tax benefit.
At the same time that we are achieving notable profit margins and earnings growth. We are reinvesting significantly in the business to obtain the best technology and people to maintain our competitive edge.
We believe it's mistake from management team to be overly focused on the short term and while we are focused on executing every day. We also know that lasting value creation happens over a longer time periods and feel the bottom chart has our report card prior evolution as a public company, which we are quite proud of.
We have a couple of additional slides at the end of the deck for your reference. The first one contains a chart illustrating are anticipated cash tax deductions scheduled over the next 15 years.
That is followed by our capital allocation strategy, which is essentially unchanged our.
Our priority remains using excess cash flow to reduce debt and enhance the flexibility of our balance sheet.
However, as we evolve as a company on our financial condition continues to strengthen it is gratifying to be able to return even more capital to shareholders. While continuing full speed ahead of executing on a strategy for long term growth.
This concludes our prepared remarks, I will now turn it back over to the operator for questions.
Okay reminder, to ask a question please press.
Number one on your telephone keypad.
Thank you.
I think I remember one.
So just a moment you can probably Q&A last time.
Yeah first question and some crazy with brilliant plan.
Hey, guys good morning.
Dave do expect more.
Th be like deals over time, it would seem like the infrastructure makes sense would seem like a nice opportunity given your.
Distribution capabilities marrying those with smaller firms that have strong investment performance I know you're trying to balance.
Larger deals with smaller deals because they both take a lot of time, because it makes sense kind of bifurcate the investment function and focus on both at the same time.
Hi, Chris Good morning.
Let me start off by saying the THB acquisition fits perfectly into a model. If we can find deals where we don't use our capital we can bring on tremendous investment talent.
Classes, where we know them well, where we can distribute them, where we think we're experts in them.
And put them into our network and accelerated their growth, we would do them all day long.
That being said.
We definitely are looking for a larger acquisitions that we're spending a lot of time around and doing due diligence on the larger opportunities.
Of a deep enough team or we can do both and I would expect as time moves forward because of the platform. We've built that we'll be doing both of these kinds of transactions.
The sequencing will depend on what the opportunity you said is but if you. If you looked at it THB and you look at the asset classes you looked at.
<unk> <unk>.
Considerations they use in their investment processes and quite honestly look at the performance in the rankings.
Those are tremendous opportunities for us to bring on organic growth.
THB is all about growing.
It is accretive day, one, but it's really all about organic growth in the capacity.
For their products as nature today somewhere between $15 billion to $20 billion and we think we can plug them into our distribution system quite quickly and so these are really tremendous opportunities in years ago, we would not have been able to bring.
Team on like this but with the platform. We built we can do it and we can also pursue the larger acquisitions.
Okay. Thanks for that Dave and then.
Two two quick follow ups on the financial side. So first on EBITDA margin can you give us a sense of.
More to essentially remained flat from 930 like would you expect that margin to be down.
How many basis points I guess versus the Q3 level and then.
On the fulcrum fees can you help us understand with the improved performance in Q3 does that help to see race looking out the queue for I just want to make sure I understand the mechanics of how that works.
Good morning.
Yeah, I think with respect to the margins. Obviously, we're pleased with the margins record results talks about our ability to execute.
As we said in the script.
Sizable amount of the margin expansion that we experienced.
Will be sustained and it's not attributable to any sort of a covid reduction an expense anything we're doing and seeing an deduction expense related to covid.
There were reinvesting that today and other ways to access distribution.
With that said.
I do think.
Going forward, we are going to continue to reinvest in the business.
So I don't think the levels that you see.
They they will ebb and flow quarter by quarter as we've said in the past.
We're continuing to evaluate kind of a longer term margins of the business as we digest the investments that we're making in technology and data and the direct channel.
And don't have at this time updated guidance for it but.
But I would say again, we continues to believe we've got a superior business model that can drive strong investment performance and strong financial results.
With respect to the four confused which I think was the second question that you asked.
The impact though to fall confused as we said was was eight basis points negative for the quarter and a reminder, how those work. So so we wave the impact of frequency as for one year post the USA transaction.
That begun if you will with the start of Q3.
And we are building up to a 36 month interval.
As we see investment performance improve and we mentioned that 89% of the USA fixed income products are outperforming their benchmarks over a trailing for your period as of 930 as we see that to continue we will see impact of that going forward to the positive.
We talked about the impact potentially was one to two basis points on the firm positive or negative.
Then we would say with the performance that we've seen we would expect that to continue to see improvement as we go out.
And the impact as we build to the full 36 months will be reduced by that short term period of under performance that we saw in Q1 on the USA fixed income products.
So fair to think that Q, just Q3 was downpour eight basis points.
In terms of impact that queue for us.
But less than so you recoup some of that negative pointed it basically queue for but probably not all of it.
Yeah, that's yeah tables, I mean, it depends where midway through Q4 at this point in time, so it will depend on what the performance looked like but yeah. The the impact of it going out will be.
Become less and less as we build a track record to the three year 36 months kind of full impact that's rolling once we get to it.
It makes sense. Thank you.
Alright financing costs kind of comes down and rates are relatively low does that.
In any way make get paid on maybe a little bit less attractive relative to other forms the use of that capital like a buyback or something.
What we're doing is we're striking a balance and I think the balance that we have today, we're we're increasing our dividend we've done that over the last few quarters.
We have a buyback program I think it represents our opinion of what the value of the stock is.
Along with paying down the debt pretty aggressively our strategy is to continue to pay down the debt aggressively that's not changing because for us. The best use of capital is to have the flexibility on our balance sheet to go and do acquisitions that are accretive in that or value added for our firm so even though the call.
Cost has come down and even though the balance and we're at.
As we said in the script, where it two times, we still are going to continue to pay down aggressively but we are looking at other ways of returning capital to shareholders and we're doing that through the dividend and increasing the dividend and through our buybacks.
Great. Thank you.
Your next question is boxing.
Last name with Goldman Sachs.
We in our legacy channels. If you will we feel great because we have great product with excellent investment performance key HB will help that.
Build out of the direct channel and I'd remind you on the direct channel once were able to launch our digital experience that will allow us to more effectively and efficiently market and go after not just existing members.
But but other people that aren't even USA members that will give us and a wider opportunity.
And then we've also added products.
Right and were starting as we said in the script, we're starting to see the light in some of the other areas.
Where we think we can make an impact.
That's very helpful. Thanks, and I guess, maybe just a clarification on the institutional pipeline that you talked about.
Any sense for what strategies and what sort of associate fee rates are with that pipeline given institutional tends to be obviously lower than the retail channel.
Yes. So there are standard fees, there is not any excessive discounting and fees are dependent through channel and their sub channels on the institutional side and also by product as far as the franchises Sycamore, It's RMS growth, it's our us global which try balance it so for us.
It's our solutions platform and our EPS and I think you'll see we'll.
You will see a wide range of our franchises will participate in the won but not yet funded bundles as well as in our pipeline and I would also add the USA a fixed income franchise. We have been building out distribution takes time, we articulated at just a few examples we thing.
That that over time, especially with the Tailwinds in that asset class, we can be very beneficial to our net flow profile and we really have not seen that.
Greg and our conversion from EBITDA to free cash flow and I think being at two times and and articulating today, but the reduction in not just the expense of interest, but actually the cost just allows us I think every quarter to reevaluate it and.
And we're looking at rewarding shareholders in a couple of different ways and one of them is definitely going to be through dividends and buybacks and the other way is going to be paying down debt. So we have the flexibility in the balance sheet to do accretive deals like we like we did with USA and others.
Great. Thanks very much.
Your next question is from Jeremy Kim Campbell with Barclays.
Hey, Thanks, and Dave maybe sticking on the M&A point you just ended there on I remember going back early summer you guys were very excited about potential M&A activity in the space for the back half and it seems like it's eaten up a little bit.
Mostly airport seem to be around these scale type deals that aren't really your bread and butter here, but just kind of wondering if you can provide some high level color on what you're seeing around M&A discussions in industry versus what maybe we see kind of reflected in the press are there kind of disproportionate scale deal conversations versus.
Deal the characteristics that victory would normally look at as everything a robust how would you how would you characterize it.
Well I would start off saying there has been a lot of discussion and activity in the M&A market for asset management as we all know from from all the things that have happened over the last couple of months for US we've been active for seven and a half years, so even though the industry now.
Taking up the consolidation, we've been doing and evaluating for seven plus years, So we've been pretty consistent.
We've done a number of transactions consistently over years and they vary in size and scope, but they all have one common theme, which is to make our company better.
We have looked at very large deals and are looking at very large deals and we're looking at smaller things. Good example, CHP I do think that things would have been in the press has skewed everything up to these large consolidations for us.
Do you need to try and tap into the superannuation program down in Australia or are there other opportunities outside that.
Well THB has a footprint distributions footprint in Australia as well as in Europe. So part of the opportunity for US is to first of all help tht expand their footprint in Australia and Europe.
With our resources and what we can bring to the table, but part of that also has to take some of our franchises that do fit for an Australian investor at one of the larger funds.
Structure in the operating platform that we have the margin on those.
You are tend to be at or above really where our margins are at so I think it is a byproduct of what we win and the acquisitions that we look at.
As well as the fee rates that are competitive from a marketplace perspective.
Yes, I would add its Dave I would just add one one other point that to go back and look at previous quarters and look at the fee rates have actually come down our average fee rates have come down, but our margins have expanded and I think thats, just really a testament to our model and so we care about fees.
They may may maybe for another year and a half or so if you could just refreshing to that and.
Since I assume you have to re enter negotiations them that much sooner than later kind of how we should be thinking about maybe for.
Ah cost perspective.
How we should.
Later that into the forecast.
So let me start off with the pipeline and the size I would.
We don't report into a quarter flows.
We don't report.
The size of a pipeline or the size of our warm, but not yet funded book I would just say that it's sizeable and leave it at that.
On the U S a.
Name.
We're building a business we're building a business that goes direct to investors. The USA brand has been important and will be an important but I think the most important thing is we are building a business that really directly interacts today with the majority of our clients are USA.
Members in the future.
There might be more clients that actually aren't USA member's maybe their military but they haven't signed up with USA.
But it's really about the business that we're building and the capabilities. We're building a commercial business that ultimately will be a marketplace for investors to invest with us in a way where they can get really good product really good service and a really good digital experience we do have.
The brand.
From three years, it's publicly disclosed three years from the clothes.
I'm not going to predict anything around that USAA has been great partners to us we have been great partners to them and I think that has always been the opportunity and I fully expect going forward that we're going to have a great relationship like we have with them today.
And May maybe just follow up on key M&A.
Just.
Maybe.
Right corner, where you would view.
TG priorities in any M&A when I mean by that is under certain.
<unk> expenses and spill, but understanding likely with specific guidance, but.
In or is there.
In a way that we should think ignace going forward that.
The opportunities outside of the U S that could be available through the elder wood.
And specifically how could this help potential acquisition prospects. Thanks.
Sure it's Dave.
All their wood opportunity for US first is we're making an investment in a firm and we're taking the small stake in a general partnership.
Also be committing some capital to the the fund DLP over a number of years and that'll be depend on a number of things, but it won't be a large amount of capital the opportunity for us number one is.
Outside of we think it's going to be a great financial return.
Is potentially to increase our pipeline through that channel.
And opportunities who wouldn't normally see and that's outside of the U S.
So that's the first thing is really giving us the ability, giving us a channel. If you will to look at transactions that are outside the U S.
The second pieces.
Hey, Good morning, maybe just one question for you guys. Just curious as you, bringing on more investment teams and franchises and putting into your distribution can you just talk about how your distribution team would approach prioritizing what could be.
A number of different small cap or or mid cap strategies.
Sure Hi, Michael.
It's Dave So that is our model we have multiple franchises in the same asset class.
I would just say going forward the digital platform, we're gonna roll out the new digital experience I would think would help with new accounts and I think would help with.
Everything that we're trying to do I'm not going to adventure to predict.
What will happen with the asset growth and what happens with.
How were interacting with the.
New clients, what I would say and as I said earlier is signing up a 100000, new registrations is real it is.
Not a one time event, it's been very consistent we're getting great feedback and some of the challenges we've seen in that channel.
As well as the channel.
We're we're interacting with Schwab a lot of that are one time.
The new account registrations are consistent and that is as I used determined to green shoot and I think if you. If you look into it you can see what what's happening in that were signing up new new.
New clients.
Got it.
Yeah.