Q1 2021 Victory Capital Holdings Inc Earnings Call
Welcome to the victory capital first quarter 2021 earnings conference call.
All callers are in listen only mode. Following the company's prepared remarks, there will be a question and answer session.
To ask a question during the session. Please press star one on your telephone.
I'll now turn the call over to Matt Dennis Chief of staff and director of Investor Relations. Please.
Please go ahead Mr. Dennis Thank.
Thank you and good morning.
Before I turn the call over to David Brown, I would like to remind you that during today's conference call. We may make a number on forward looking statements. Please note that victory capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially.
Really from those expressed on today's call.
Victory capital assumes no duty and does not undertake any obligation to update any forward looking statements.
A press release that was issued after the market closed yesterday.
Close both GAAP and non-GAAP financial results, we believe the 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 earnings press release and in the slide presentation.
This call both of which are available on the Investor Relations portion of our website at IR Scott D. C. Dotcom, it's now my pleasure to turn the call over to David Brown, Chairman and CEO David.
Thank you Matt.
Good morning, and welcome to victory Capital's first quarter 2021 earnings call.
I'm joined today by Michael Pehl of Carbo, our President Chief financial and administrative officer, as well as Matt Dennis our chief of staff and director of Investor Relations.
I'll start by providing an overview of the strong operating and investment performance, we achieved to start the new year.
Then I will expand on our improving organic growth outlook with from detailed information.
After that I will turn it over to Michael to review, our first quarter financial results in greater depth.
Following our prepared remarks, Michael Matt and I will be available to take your questions.
The business overview begins on slide five.
Victory capital began 2021 much the same way we ended 2020.
Net asset flows continued their improving trajectory they began in the middle of last year invest.
Investment excellence persistent but the vast majority of our assets under management continuing to outperform respective benchmarks and achieve very competitive rankings relative to their applicable peer groups.
While the efficiency of our platform also resulted in robust profit margins and record earnings for our shareholders.
We ended the quarter with total AUM of $154 3 billion as well as long term AUM of 151 billion, both of which were records.
Net flows improved again for the quarter as well as during the quarter, culminating in positive net flows in the month of March.
We've maintained the momentum we had in March thus far in the second quarter as of today's call.
Revenues improved quarter over quarter by 6% on the higher AUM and improving average fee rate, which was the highest realized average fee rate in more than a year.
Adjusted earnings per share included tax benefit rose in line with revenues and also grew by 6%.
Moreover, adjusted EBITDA margins came in above 50% for the third quarter in a row.
Consistent with our stated capital allocation strategy, we deployed most of our excess cash flow to further reducing debt and paid down an additional $50 million during the first quarter, reducing our net debt to annualized adjusted EBITDA leverage ratio to one six times.
Our ancillary uses of excess cash flow included raising the quarterly dividend and continuing to repurchase shares in the open market.
With the <unk> 12 per share cash dividend declared yesterday, we've increased our cash dividend by 140% since this time last year.
Turning to page six investment performance continued to be excellent, which is a testament to our unique operating platform and culture.
The majority of our AUM has outperformed benchmarks for all standard measurement periods and a majority of our strategies have also outpaced their respective benchmarks on an equal weighted basis.
We provide our investment franchises with a centralized and fully integrated operating platform featuring best in class tools, which enables our investment professionals to focus their time on managing assets and servicing clients.
With the closing of our most recent acquisition THB asset management on March one.
We added their five star rated THB microcap fun to our lineup.
Our total number of mutual funds and Etfs with four or five star rating by Morningstar grew to 45% at the end of the quarter. Together. These 45 products represented 62% of our AUM in mutual fund and ETF wrappers.
Moving to slide eight I'd like to provide some color on why we are optimistic about our long term outlook for organic growth.
I will start with our recent acquisition of THB, <unk> investment and Alder wood.
Between the various strategies offered by THB, we've approximately $15 billion of open capacity.
These are micro small and mid cap strategies in the U S and international markets. These are capacity constrained asset classes, where active management is relevant and with Thp's exceptional long term investment track records and the added feature of our long history of ESG integration, we anticipate steadily filling that available capacity over time.
In September of 2020, we made our strategic investment in all the wood, which provided us with an entry into alternatives order would receive formal FCA authorization in the first quarter and has plans to begin fund raising for their initial funding in the second half of this year will be assisting alder within their fund raising there won't be any.
<unk> their net flows.
As a reminder, order book will be charging fee similar to other private closed end funds. Although it is targeting size of initial fund to be between one and $2 billion with a total life of 10 years.
Next we are well positioned to provide investors with highly rated products built for the cairn and quickly evolving interest rate environment. One examples or a five star rated Refinish Lipper award winning floating rate fund that has been accumulating assets with strong positive net flows and currently has approximately $1 3 billion in AUM.
This product is selling very well across a number of large intermediary platforms in our as we.
We expect this positive momentum to continue given many investors views on the future direction of interest rates.
Our high yield fund is also rated five stars and has the recent rofin at his Lipper Award winner.
Our market neutral income fund, which is managed by our solutions team has consistently been one of our top performing products from an organic growth standpoint over the past several quarters.
This product is unique and generates an attractive income yield for investors without using bonds.
As investors reevaluate their traditional 60 40 portfolios. They are attracted to differentiate and income projects such as this which is currently the third best selling market neutral income fund in the country. According to Morningstar.
It offers an attractive yield low volatility and risk characteristics similar to traditional fixed income products with low correlation to both the equity and bond markets.
On top of that it has a lower fee than many traditional fixed income products and provides the majority of its income in the form of qualified dividend income.
With the rotation from growth to value as well as into mid and smaller capitalization stocks. We have a host of highly rated products and strategies that could benefit from a continuation of this rotation and that are managed by a number of our franchises.
Those franchises, our sycamore integrity at THB to name a few.
Additionally, active global and international strategies are also on demand with investors, we have a sizable amount of open capacity in these asset classes supported by high performing investment franchises with RF and tried to on to highlight two of them.
Our victory shares ETF platform was net flow positive for the second quarter in a row.
With the continued industry wide momentum of Etfs and now with the emergence of thematic Etfs. We believe we are well positioned to be a beneficiary of this trend on.
Our CDC and CSB Etfs are five star rated and provide unique investment characteristics on both are resonating well with clients.
We have also had success with our NASDAQ next 50 product Triple QM, which was launched in September of last year.
Lastly, our new V T. Our end product is a good example of our thematic capability with its focus on veterans day.
This product is just being rolled out with the new digital marketing campaign and he is very applicable to our direct investor client base.
Lastly, as we look out beyond the next several months, we have a number of emerging opportunities to drive organic growth in fixed income products managed by our USAA investments franchise.
These include our newly launched SMA and to active fixed income Etfs that have excellent investment performance and our highly rated our estimates are now live at fidelity and Schwab.
We are in advanced discussions for these offerings with top tier wrap sponsors. We're also winning excellent shelf space for our USAA fixed income mutual funds, which is building the pipeline for the future.
I will review this point in more detail later in the presentation.
Turning to slide nine we present, a different view with specific in demand asset classes, coupled with franchises that managed products within those asset classes.
As you can see we have multiple franchises with multiple products in most of these asset classes.
If market leadership continues to rotate from momentum in either companies with strong fundamentals and sectors poised for earnings growth as well as into capacity constrained asset classes that make up a relatively larger portion of our current AUM and opportunity. It bodes well for not only continued strong investment performance, but also enhances our potential to further.
Celebrate our improving net flow trajectory.
Turning to slide 10, our institutional book of won but not yet funded mandates continues to grow.
While a few mandates did funds since the start of this year, we anticipate the funding on new mandates will accelerate as we progress through the year. These.
These wins have been achieved by many of our franchises and they had been awarded to us by a well diversified set of clients across our institutional footprint.
To give you. An example, the solid positioning of our institutional strategies, we had 15 different strategies that ranked in the top quartile by investment over both the three and five year periods ending March 31.
Given the aforementioned we are optimistic that we will continue to secure additional new mandates as the year progresses.
Starting on Slide 11, I will review, our direct Investor business, and then our USAA investments franchise, we've increased the products available to our direct investors to 56 mutual funds, which are made up of both USAA and victory mutual funds.
We also have launched a digital portfolio planner that offers investors a self guided tool that can assist them in their financial planning. We also now offer a customized fixed income SMA to this client base.
Our referral agreement with USAA continues to produce new accounts registration's, many of which have automatic investment plans associated with them, which are beginning to bring in meaningful asset flows.
As a reminder, the direct channel was closed prior to our acquisition. So we are very pleased with the traction we are beginning to see.
Our 529 College savings plan remains net flow positive since the close of the USAA acquisition and <unk> reached approximately $5 billion.
Many of our 529 planned participants utilize the automatic investment plan option as well, which brings in a steady flow of assets.
Lastly, the fixed income products managed by our USAA investments franchise continued to post excellent investment performance and we've been accelerating the reach of these products with our distribution partners, which is covered on slide 12.
Our retail retirement and national accounts distribution teams have made great progress on winning new shelf space for the fixed income products managed by our USAA investments franchise.
You have heard us refer to this as installing the distribution place that will help drive future organic growth in these products.
100% of these fixed income products outperformed their respective benchmarks for the one year period, and 94% of them outperformed for the three five and 10 year periods, creating meaningful tailwind for this initiative.
Our progress was somewhat impeded last year by COVID-19.
Is it proving new product placements took a backseat with many of our intermediary partners, who turned their focus to navigating the pandemic.
That situation has evolved in a more normalized environment is beginning to emerge.
We've significantly expanded the depth and breadth of our distribution reach for these products with new and expanded relationships at a very well diversified set of leading defined contribution and national retail platforms.
Many of them are also adding these products to their respective recommended lists.
We have executed brand new agreements with Ameriprise, a census, ADP Broadridge Lincoln retirement American funds, TIAA principal and empower which just acquired massmutual and retirement plan business, where we also had a new agreement.
The same goes for principal retirement, which just acquired Wells Fargo retirement, where we also had secured a new agreement.
On the retail side of Prudential, we now have multiple products on their true choice platform. We also recently added Morningstar, which came with the benefit of being including in boarding starts fiduciary product offered through voya.
I bought your retirement, we achieved inclusion on their clothes menu product, we have likewise secured space on Transamerica's closed menu product, which is similar to a focus list.
RBC wealth management added the victory shares USAA active fixed income Etfs fidelity direct added 15, USAA funds to their fidelity personal investors channel no transaction fee platform.
Edward Jones added multiple USAA mutual funds, including the USAA intermediate term and short term bond funds to their approved and research list as well as their guidance solutions fund and Flex advisory platform.
This is the first time these products have been available to ever Jones brokerage and advisor accounts.
We see great opportunity for the USAA investments franchise as we are bringing together excellent investment performance with expanded distribution.
Lastly, I would like to mention that we continue to be extremely active in our pursuit of acquisitions. We are in various stages of our evaluation process with a number of potential opportunities with some getting into the very final stages there.
Environment for us is better than at any time I can remember.
We are very well positioned to participate in the consolidation of the industry given our track record and success acquiring companies. We have purposely used the majority of our free cash flow to reduce our leverage. So we would have the flexibility to execute which is where I believe we are today.
With that I will turn it over to Michael for a more in depth discussion of our financial results Michael.
Thanks, Dave and good morning, everyone. The financial results review begins on slide 14.
Revenue increased 6% from the fourth quarter, reaching $213 million in the first quarter of the year.
Our operating margin expanded on a GAAP basis from 39% in the fourth quarter to 42% from the first quarter.
Order over quarter margin improvement was the result of better operating leverage on operating expenses, such as general and administrative depreciation and amortization increased at a slower pace on our revenue growth.
We also recorded lower noncash acquisition related expenses on the first quarter, which contributed to the wider GAAP margin.
Adjusted EBITDA margin was 52% in the first quarter.
This was modestly impacted by seasonally higher payroll related costs associated with higher employee benefit and payroll taxes, which tends to be front end loaded in each calendar year.
Adjusted EBITDA set a new quarterly record of $106 $8 million in the first quarter income.
With $103 $8 million from the fourth quarter.
GAAP net income reached $65 $2 million or <unk> 88 per diluted share.
From $54 $9 million or <unk> 75 cents per diluted share in the fourth quarter.
Our adjusted net income with tax benefit of $1 13 per diluted share set another record high.
We're active on the capital management front in the quarter.
In February we repriced our debt for the second time since the beginning of last year.
With this latest repricing, we successfully lowered the interest rate spread by another 25 basis points, bringing.
Bringing the total spread reduction over LIBOR to 100 basis points when combined with the 75 basis point reduction in January of 2020.
We returned a total of $14 million to shareholders in the form of cash dividends and share repurchases.
During the quarter, we repurchased approximately 287000 shares and our board approved a 33 per cent increase from the dividend to <unk> 12 per share.
On June 25 to shareholders of record on June 10th.
Turning to slide 15 totaled.
Total AUM rose, 5% during the quarter to $154 $3 billion as of March 31.
Five per cent increase in AUM since the beginning of the year was due to positive market action and the acquired assets from the THB acquisition, which totaled $547 million.
This was partially offset by net outflows.
Long term asset flows are covered on slide 16.
We achieved an 18% increase in long term gross sales during the quarter and net long term outflows improved to $983 million, which was a 33% improvement from the $1 $5 billion net long term outflows in the fourth quarter and well below prior periods.
This was our third consecutive quarter of improving net flows.
Ethylene Dave's comments, we have many reasons to be optimistic about our organic growth prospects moving forward.
Turning to slide 17 quarter over quarter revenues increased by 6% on higher average AUM and slightly higher average fee rate realization from the first quarter.
Money market yield support and fulcrum fees on certain USAA mutual funds together negatively impacted your realization in the first quarter by approximately 1.2 basis points, which was an improvement from their impact from the fourth quarter.
Given the strong investment performance of the fixed income products managed by our USAA investments franchise, we would expect to continue to see the fulcrum fee impact on our revenue realization improve.
As we discussed previously beyond eventually reaching a neutral impact on fees, which we are not at today. There is the potential for the fulcrum fees to exceed parity and to positively impact our consolidated realized revenues by as much as one to two basis points.
Moving to slide 18.
The manner in which we illustrate our expenses to enhance transparency.
We've received questions related to the quarterly volatility in our reported GAAP expenses, which is often attributed to the accounting for the non cash mark to market impact of the investments in our deferred compensation plan, which has no overall impact to earnings.
So we are breaking that component out of our compensation expense, which you can see in the shaded grey Roe.
And to share the exact offset which is accounted for below the operating line in other income we have.
Also she did that line in gray.
With the updated presentation this offset should be more clearly seen.
We also added a yellow line across the bars illustrate the relatively consistent cash compensation ratio over the last few quarters that hovers around 23 per cent.
Total expenses increased slightly in the first quarter.
This reflects higher variable expenses associated with the higher AUM revenue and earnings reported as.
As well as the seasonality of certain payroll taxes and employee benefits expenses.
These were largely offset by the lower acquisition related expenses in the first quarter.
The quarterly adjustment on the fair value of contingent acquisition earn out payments on our balance sheet with $7 million lower than the first quarter compared with the fourth quarter.
The non-GAAP metrics for the first quarter are presented on slide 19.
Adjusted net income with tax benefit per diluted share of $1 13 was up 6% from the fourth quarter and up 23% from 92 cents per diluted share reported in last year's first quarter.
Adjusted net income of $83 $6 million generated in the first quarter set another quarterly record.
Includes a $6 $9 million tax benefit, which was up from the prior quarter due to a full quarter's impact of the first contingent payment to USAA, which was made in Q4 of 2020.
These payments increased total goodwill and acquired intangible assets, which we then amortize over a 15 year period for tax purposes.
In the event there is a corporate tax increase our gross tax benefits from this amortization would also increase.
Adjusted EBITDA margin was narrower versus the fourth quarter, which was expected.
For modeling purposes, we are maintaining our annual adjusted EBITDA margin guidance of approximately 49%.
And keep in mind. This includes investments we continue to make in the business to drive future growth.
Moving to our capital management activities on slide 20.
We paid down an additional $50 million from debt during the quarter and another $27 million subsequent to quarter end.
Since the origination of the term loan in July of 2019, we have repaid approximately $389 million or <unk> 35 per cent of the original outstanding principal.
As a result of our proactive measures to reduce outstanding debt and interest cost our cost of debt declined by 12% to $6 $8 million in the first quarter of 2021 versus the prior quarter.
This represents a 60% decline in our debt servicing costs since we originated the loan less than two years ago.
In absolute dollars this translates to more than $10 million and interest savings per quarter on a run rate basis.
Additionally, our $100 million committed revolver remains undrawn.
That concludes our prepared remarks, and I will now turn it back over to the operator for questions.
Okay.
As a reminder to ask a question you will need to press star one on your telephone.
Try your question press, the pound or hash key.
Yeah.
Your first question comes from the line of Kinder, Kenneth Lee with RBC capital markets.
Good morning, and thanks for taking my question.
The expense breakdown on slide 18 is very helpful.
I Wonder if you could just talk a little bit more about the components within comp expense.
Specifically it looks like there is some.
Seasonal increases and perhaps some items related to the fund sales on on the variable comp expense.
Items would you consider to be relatively non recurring thanks.
Yeah.
Thanks, Ken Good morning, it's Mike.
Yeah within the comp expense as we said on the prepared remarks, there is seasonality with respect to resets on payroll taxes and employee benefits the increase in benefits and payroll taxes.
We're about $2 $9 million quarter over quarter, Whats really we look at our seasonality and will even itself out over the course of the year as has in past years.
So that's one item that we think is nonrecurring.
From what's sitting within the compensation expense.
You pointed out we did also.
Highlights the mark to market on deferred compensation plan that.
That element was $2 $7 million, it's a noncash element that's offset in non operating income so the impact.
GAAP net income of zero, but that is included in the compensation line, but again, we've carved that out. So you can now see that much more clearly as well as the history.
And then lastly, yes, you did highlight that commissions will be have increased quarter over quarter really as a result of the higher long term flows as well as the funding of some on the institutional won but not yet funded that has now come in quarter over quarter. So we look at that as a great increase in compensation expenses.
We're growing the business so those would be the highlights I'd give you.
Great that's very helpful.
And just one follow up if I may.
And this is just on the th b.
I'm just wondering if you could just share with us.
As.
There is the potential ramp up in AUM.
Within THB as you leverage victories distribution platform just wondering how you think about the potential ramp up of AUM within THB. Thanks.
Hi, it's Dave I'll take that question.
We closed the <unk>.
T H B transaction on March 1st So we're integrating the platform into our distribution relationships and our distribution platform.
It'll take time I mentioned in my prepared remarks that we had about.
About $15 billion of capacity in the products that they manage I would imagine that capacity gets filled over a number of years and as we get out to the relationships that we have as we build new relationships, but it's going to take some time, but 2021 should be a year, where we begin to two.
Clothes business on that platform and as we go past 2021, I would imagine that would accelerate.
Alright, Thank you very much.
Your next question comes from the line of Mike carrier with B O N E.
Good morning, and thanks for taking the question.
First I just played maybe dig into the shift from outflows to inflows in recent months versus last year maybe.
Maybe and I know this is difficult, but can you quantify maybe how much is related to debt may less pressure from some of the USAA Schwab transaction.
Increased transaction some of the areas you mentioned like expanding your distribution relationships basically just trying to figure out like how.
How much upside potential do you see from some of those initiatives head versus what's already in the run rate.
Good morning, it's Dave.
Let me break that down first I think there is a lessening impact from the USAA Schwab transaction.
So I think that that's one contributor I would say that that has an impact I wouldn't say it has a material impact.
The other aspect so what's happening is number one I think you're seeing some of the investments we've made in distribution.
We're starting to get some returns on.
We've made quite a few investments over the last year and I think youre seeing a pickup.
We're also starting to see some of the distribution as we outlined in our prepared remarks around the USAA investments.
Getting to know platforms that they didn't have access to in the past and you're starting to see some results there and then.
You can see from the one page in our slide with all of those products with the excellent investment performance really in asset classes, where you're seeing investors allocate dollars, we have great product and really marrying that up with great distribution, that's probably the area of biggest inc.
Packed and when we look forward I think that there is a lot of upside in those areas, meaning areas, where investors are looking at products that fit their portfolio for this evolving market environment and we happen to have a lot of really well performing products that are.
Price competitively you know with good distribution and I think we're just starting to see the beginning of it.
And that's why we're so optimistic about what our organic growth outlook is we've steadily if you go back to last year, we've steadily improved quarter over quarter over quarter and as we said in our prepared remarks March was a net flow positive month and that momentum has really continued into the second quarter.
And we're pretty optimistic about the organic growth.
No different than what we've been saying all along is when you look.
In larger or longer periods, we think we can grow organically and some of the issues. We've had in the past had been very transactional or onetime in nature.
And we're moving further away from that.
And thats been a little bit of a drag, but I think it's really that the future that we're looking at and how we're positioned and why we're so optimistic.
Great. Thanks, and then my.
Maybe just on the fulcrum fees I know you mentioned them, but can you provide just a negative impact in the quarter and then the delta that would get you to breakeven and I think that the Max benefit I think you mentioned would be like one or two basis points I just want to make sure I have the degrees of a benefit from here that we could see.
Performance.
Are you all.
Sure.
That's a good question so.
As we did say that the maximum benefit.
Between one to two basis points on the overall business.
Where we are today and what we included in the fourth quarter.
Impact of the fulcrum fees was negative <unk> four basis points on the business.
Oh, I'm, sorry on the first quarter.
<unk> <unk>, four which was an increase of net 0.2 basis points from the fourth quarter of last year. So we have seen some.
Some improvement quarter over quarter, but again to reiterate it was negative <unk> four in the first quarter and the upside really for those funds as we look at the performance improvement that we've seen on continued to see across the board.
One to two basis points on some level.
Alright, Thanks, a lot.
Your next question comes from the line of Alex Blaustein with Goldman Sachs.
Hey, guys. Good morning, Thanks for taking the question.
Hey, Dave I wanted to dig into the M&A pipeline, a little bit more it sounds like you guys are getting closer maybe to some of these deals.
Being an ounce of any way to help us kind of think through the investment management and kind of styles or types that are a little bit towards the front on that pipeline.
Yeah, let me.
Take that in two pieces, but first is just our strategy.
We have historically done two types of deals we've done deals, where we'll call them transformational at the time of the transaction.
USAA Rs and wonder at the times, where transformational on size and scale.
And that's one big bucket for us and we are actively pursuing those types of transactions and then the other types of deals we've done I would call them as impactful.
Which are smaller in size, but very strategic you know I'd called out of THP or the <unk> deal. We did years ago and that's another big bucket for US that were you know that we're working on and again actively discussing in there. There are difference in size, both our strategic both add a lot of value to.
Our business and on a lot of different ways. When we think of our pipeline today as I said in the prepared remarks.
We're moving some of the opportunities into the very very final stages.
Our balance sheet.
We spent a lot of our excess cash flow paying down our debt to really have a balance sheet that gives us the flexibility to really execute on the opportunities and I think that's exactly where we are today is we have that flexibility to do a transformational transaction or and at the same time do an impactful transaction as I've.
As ive categorized them.
The environment is better.
I have seen at any point really in my career.
There are lots of conversations happening we're involved in many of them.
And it is an issue of opportunity for us it's an issue of selecting the right opportunity then.
And so I would tell you that you know we bucket them in transformational on impactful and we're evaluating both of those types of transactions as far as product set.
You should expect as we've said before we got we start with the client portfolio, where we want to be in products that matter, where where investors are allocating dollars and that can be in traditional long only products. It also would be in alternatives I mentioned into my prepared remarks, we've got all the wood.
It was our first.
Entrance into alternatives that isn't an area that we have historically.
Acquired into I think looking forward, it's an area that we're very interested in and an area that we're working on and I would anticipate longer term that's an area that we're gonna be involved in.
And it's going to keep the same principles that we have today on our platform, but that's an area, where we know we can add a lot of value to those firms looking to partner up.
Got it.
Well thanks, Mike.
Mike a follow up for you.
I heard it right, but the EBITDA margin guide for the year adjusted EBITDA margin I think you said, it's 49% unchanged.
I think you guys did a little over 50 in the first quarter. Despite the you know obviously seasonally higher expense I didn't mention and it feels like the revenue momentum in the business is obviously.
Quite strong between the markets flows in the fee rate, so maybe give us some thoughts around sort of sensitivity around that 49 per cent for the year.
Are there things, where you're kind of investing in incrementally more in that sort of the offset that we need to be thinking about or is it just kind of a level of conservatism given uncertainty one by COVID-19 savings come back and things like that.
Yeah. Thanks, Alex Good morning, as you said I think we did post our third consecutive quarter over 50% from our adjusted EBITDA margin perspective.
And in the prepared remarks, we did say that we the guidance really remains unchanged at 49%.
But as you also mentioned I think we are making investments in the business around distribution as Dave highlighted in his comments digi.
Digital marketing around our digital platform products.
Data and analytics. So we are making investments so our quarter to quarter margins could fluctuate based on the timing on the opportunity that we see in making some of those investments.
Clearly we've demonstrated a strong operating model.
And it does flex with with the variable expenses that we have in the business with growth and or decline from a market and revenue perspective.
So there will be quarters, where we'll be above that but again, we've kind of kept the 49% long term view just as we think about whether that's investments we need to make or.
On some level of Costco.
Post COVID-19 and travel on some of those things. So I think we're comfortable with the 49%, but we do think there's opportunity.
Quarter to quarter as we think about the investments we're making.
Great. Thanks, so much.
Your next question comes from the line of Ken Worthington with J P. Morgan.
Hi, good morning.
In terms of the M&A environment, I think part of the solution victory provided for smaller asset managers with access to better distribution as wire houses and brokers reduced the number of managers on their platform over the last number of years.
Victory is still seeing access to distribution for smaller asset managers.
Under increasing pressure or if we reach sort of a steady state with regard to their access.
Hi, Ken it's Dave.
I'd say our value proposition for smaller managers really is multifaceted first as you mentioned, it's access to distribution that they just wouldn't have access to a smaller size or smaller scale or.
Channels that they would not be staffed up to penetrate we also have a pretty well developed operating platform that we think is best in class that they get access to.
And then I think the stability and the experience of just a larger money manager that's that.
That can add a lot of ancillary things too to what they do specifically on distribution as you can see with with what we've done with USAA investments and we went into quite a amount of detail in our prepared remarks, I think that there is plenty of opportunity for managers that are.
Smaller in size that have investment excellence in the REIT asset classes that are priced right to get distribution, specifically on the retail side on the retirement side in certain institutional situations in the U S outside of the U S.
So we're still seeing that as far as the industry goes I believe that a lot of the platforms.
Are reducing the number of firms they are working with them I would say that on most of the platforms. That's not us we have great relationships and great distribution on a lot of the asset classes, though that we're in are capacity constrained on warm day challenges for platforms is how do you add.
Access new managers.
In this capacity constrained asset classes.
And we solve an issue for them. So a long way of answering is we still think that that value proposition on the distribution side holds true for small managers in THP has a really good example, as we continue to build out their distribution now.
Awesome. Thank you and then you said that maybe just a moment ago that the environment is better.
Better than you had seen.
From an M&A perspective. So the question is what why is it better. It seems like you know from the seller's perspective, you know market levels are at all time highs. So.
So it makes sense to me that they might be looking to monetize their investment.
And their franchises, but that doesn't mean, it's necessarily better for for.
For you in terms of that meeting of the minds and finding a price. So could you just flush out your comments why you think the environment.
Has improved what are the characteristics that have driven driven your comments.
Sure I think pricing is one element of it.
Although the market has.
Has increased.
But I still think that.
The investment managers are not priced.
To the value that they bring so I think that the the investment managers are still inexpensive on a historical basis.
So I'd start there, but price is one aspect of it the reason I feel that as you know pretty an environment, where there is a lot of opportunity as the issues that managers face today, they've not change with the increase in the market access to distribution access to technology.
The need for scale all of those things have been.
Further to long, meaning that you know if you had that issue in the past you have more of that issue today and so when you have that coupled with you know.
Realization that the market is up.
And you know you have more people discussing the future and looking for partners and because of that there are a lot of firms that.
About our thinking about doing something that in the past would've never thought about it we've seen some of the larger higher profile transactions occur that I think some of the firms. If you went back a few years you would say that that those firms would never have transacted and I think there's a lot more to come.
And so the issues with the industry really the haves and the have nots have really been highlighted and because of that I think it's the best environment like I said I've seen in my career.
Awesome. Thank you very much.
Yeah.
Your next question comes from the line of Cullen Johnson B Riley Securities.
Hey, good morning, this call on Johnson I'm on for Randy This morning at B Riley. Thanks for taking my question.
<unk>.
We touched on flows a bit already but I just wanted to look specifically at the fixed income segment. This quarter was there anything that stood out in fixed income you think.
Drove those positive net flows in the quarter.
It's Dave nothing specifically I think many of you know the the allocators are thinking about increasing interest rates or potentially increasing interest rates and how they switch around their portfolios.
We've also built out the USAA investment distribution on which I think has given us.
Some increase in flows and then as we highlighted on the the one slide we have a number of really really good performing and kind of a product for the times on the fixed income side, our floating rate product or high yield product.
Those have really.
Done well with our investors given what's happening with the interest rate environment.
Got it that's helpful. And then we noticed there was a there's a buyback as well as an increase from the dividend. This quarter. So you're just kind of wondering how do you evaluate the relative benefits of buybacks relative to dividends when youre looking at returns on capital to shareholders.
Good morning, It's Mike Yeah, I think we've been pretty consistent on our capital management strategy and it really remains unchanged.
We want the flexibility to execute our business strategy.
And as we talked about our primary use of our free cash flow has been to de lever.
We paid down $77 million year to date.
35% of the original term loan from July of 2019, and significantly lowered our leverage ratio.
We've done that as well as looking at being opportunistic in repricing our debt. So we've seen a significant rig.
A reduction in our interest carry.
On both in the reduction of the principal debt as well as the reduction in the range so were down over 300.
Almost 300 basis points from a interest cost perspective, since we took off the loan in July of 2019.
So as we've done that we've introduced really what we'd call on ancillary shareholder return program through buybacks and dividends.
And really we've been able to take the savings from an interest perspective.
And drive that back to the shareholders. We think that's important.
And that's something that we've continued to do as we've grown the business, while still balancing the allocation between debt paydown and shareholder return.
As far as the metrics, we look at you know going on.
Going forward I think it really depends on facts and circumstances. They've mentioned you know our primary goal is to really recoil our balance sheet.
So to look at and be able to execute on M&A.
And the balance sheet today is ready for that even inclusive of the shareholder return components and the deleveraging component. So we balance a lot as we look at it and really it really is based on the current facts and circumstances in the environment that we're in.
We think we've been very successful in being able to manage our way through all of those things and to deliver shareholder return and financial returns.
And I would add it's Dave I would add just a few things to that one is we bought double the amount of shares in 2020 than we did in 19 and I believe we bought more shares back.
In the first quarter of 2021 than we did in the fourth quarter of 'twenty I think that that should give you an indication of what we think the value is in our stock at this point.
That being said you know we have increased our dividend pretty aggressively over the last a year and over the last quarter on.
It's a facts and circumstances analysis, meaning we look at our.
On tire.
Portfolio on things, we can do with our free cash discuss it with our board and we set our policies.
I would say that we have been the beneficiary and our shareholders are going to be the beneficiary of really good capital management around the cost of our debt reducing the debt.
And I think as we look forward, we think we can actually hit on all three pieces continue to buyback.
Our shares continue to pay a dividend and also most importantly.
We continue to pay down debt to recoil the balance sheet to do really accretive transactions.
Yes.
Great that's helpful I'll leave it there thanks.
Your next question comes from the line of Jeremy Campbell with Barclays.
Hey, thanks.
Maybe just another one on M&A Optionality, Dave I know you talked a little bit about the value prop here on the call two of distribution to smaller managers, but maybe just as you survey the landscape of what sounds like an active deal market.
Are there inorganic opportunities to onboard a manager Thats strong in a district channel that you're still kind of building out like SMA or retirement of retail direct.
Where there might even be greater two way synergistic fit to more typical deal flow, where it's mostly just a really nice product fit.
Good morning, correct I think on the acquisitions, we've done in the past a lot of the businesses. We have bought have brought things to us as well. So it isn't always one sided use the example of SMA.
That's an area that we're building out pretty pretty nicely with our USA business, we're entering into that market. If there were a manager that was already established there that would be value to us and remember our acquisition strategy starts off with it.
Is it strategic does it make our company better we don't really do just financial deals. We're not interested in just a financial deal where we can increase earnings and there's no. There's no strategic value to it. So when we look at the transactions there are situations where for example.
Maybe on the international distribution in a certain country where.
We can gain distribution THB. He's a great example, they have a presence in Australia. They have a relationship on Australia, we did not and when we bought their business.
We started.
Our new relationship on Australia same thing when we did the Rs investments transaction that gave us access to Japan. So when we look at transactions, we do evaluate that and there are opportunities.
You know where as you said it actually makes our business better from a distribution perspective.
Got it great and then I know you are probably going to say this is an and proposition but on the organic growth side, where you have a lot of momentum. What are you. Most excited about is the capacity and performance you guys nicely laid out on slide eight is it expanding distribution to amaze further building on our retail direct to what what are you most excited about here.
Yeah.
I really think it is.
All of the above but if I had to highlight a few areas, where I think that we have great opportunity I would say Inc.
Investors are rethinking their portfolios today, there's a shift in the market happening.
And there's also potentially a pretty significant change in interest rates coming.
And then put on top of that a potential tax.
Change and I think it has.
On investors' rethinking their portfolios as they rethink their portfolio Theres a couple of key areas, where I think we have great investment performance.
Long track records and distribution set up so when you think about some of the interest rate change.
Changes I think about our floating rate fund as we highlighted on <unk>.
Actually on market neutral income fund or high yield debt.
That's very interesting.
Two to investors and I think that's exciting for us our ETF business to.
Two quarters in a row.
Organic growth.
Great product, we have the size and the scale and I think some of the tax changes could move some investors into Etfs and I think we're well positioned there to be a specialist ETF provider and then when I think about some of the portfolios moving from maybe the growth and momentum type.
Stocks and portfolios into a different type of portfolio. We have a lot of products that are pretty well established great track Records five star rated four star rated funds.
That have pre existing distribution that gets me excited.
And then lastly, we haven't talked too much about ESG, but THB on has a long history of integrating ESG principles into their investment portfolios and I think that that's another area of growth.
I think we have about 70% of our assets today integrating ESG principles into the portfolios and I think that's going to be another area that youre going to see a lot of growth in the industry as well as with us.
Great. Thanks, a lot.
Yeah.
Your next question comes from the line of Robert Lee with K B W.
Oh, great. Thanks for taking my questions. This morning.
The first one Mike you can.
Hum.
Thresholds on a day.
But maybe it's a year that USDA I think.
On the licensing agreement is up for.
Renewal I'm, assuming you win something conversations loans and then is there any any color you can give.
On on your expectations around some incremental costs around that or.
B net.
At this point on whenever revenue share you have with you would see a that's kind of where you can continue going forward.
Sure it's Dave.
USA has been a great partner to us.
You can see some of the numbers and the new account registration.
Since we've.
Announced the transaction.
And I would say that.
We're we're pretty ingrained partner in a lot of different things with them.
And there's really no change to the.
The licensing or.
We're the brand agreement, we have with them.
And as we get closer to the exploration of it we'll sit down with them and talk about what the best.
Route forward.
Okay.
Sorry, David on the way it apologies, but.
Second question.
Just kind of curious Inc.
Arguably one of the challenges your stock maybe has from a valuation perspective.
Needed quantity.
And you get your PE owners and assume that the vast majority of stock and you know one of them.
Also on investing arguably competing business.
Shortly.
I'm just kind of curious.
You know with one of your board members now owning or seem to own competing business should we be thinking it's going to be.
Possible.
Hang on.
Issuing stock.
Can I get a little more liquidity or.
Or if not how do you kind of manage tech tenant concentrations.
No.
So.
Our private equity partners have been tremendous partners to us their board members first and our board has been excellent and supportive and our success over the years in our growth and I think we have a pretty great track record of where we started to where we are today and they've been extremely supportive.
Of how we've gotten there.
As far as their day.
XI or to put shares into the market as you've referenced or anything else.
That's their decision and their decision solely.
They have their fiduciaries on.
So our company they sit on the board and they are well experienced so I am not in a position to speak for them.
As far as a.
Our board member.
Working or being a partner and a firm that has made another investment in another investment management firm.
Any any potential conflicts if there ever was would be dealt with at the board we don't see any.
And.
I'll go back and say that our success that we've had over the years has been because.
Because we have great partners and in a great Board and a great group of employees.
Okay, great. Thank you so much for taking my questions.
Your next question comes from the line of Michael Cyprus with Morgan Stanley.
Hey, good morning, Thanks for taking the question I just wanted to dig in a little bit more on the direct channel as you look at the direct channel on the customer sat there I guess, what strategies and capabilities do you see a demand from these customers that you do not already have on your platform. Today are don't have capacity on your platform strategies, perhaps that you see he was white.
Space that maybe you would think about selling either organically or inorganically.
Hi, Mike It's Dave.
Couple of pieces to that one is we've added a number of products to the direct to investor business. We have now have 56 mutual funds, which has increased pretty significantly from when we started.
We added on a portfolio of planner, we've added the fixed income SMA and we have more things to come to add.
And that will that will satisfy a lot of our.
Investors needs there.
And I would imagine over time, you should expect over time that are.
Product set there is going to expand and potentially expand us into some it's from different areas that we're not into today, that's part of the investments that we're making.
But today as we said I think that there was a wholesome product set there are definitely opportunities in different areas.
And we will we will we are evaluating them, we're investing in them today and this has always been for US a block by block building opportunity. We have set a really great Foundation with service, we set a great Foundation with products, we set a great foundation with performance.
And now what we're doing is really going to the next level, where we're going to expand our products out there.
And continue to kind of drive the growth debt debt, we think we can accomplish and in that part of our business.
Great and just a quick follow up if I could just on older would I was hoping you could elaborate a bit more on the strategic relationship with older would your aspirations there and maybe you could just remind us of your ownership level. There on what's leading you to include their eight women flows in your numbers.
So so all their wood is going to be you know.
A private fund battle that you know they'll raise their first fund here in the second half of this year and into next year.
We'll help them in distribution.
So from our perspective in the U S. We will help them sell that that product that fund.
We own a 15% stake in the business and.
Will account for it as I said in our prepared remarks on the way that most managers accounts for ownership Stakes that way are including their flows in our flow profile.
Great. Thank you.
Our final question will come from the line of Owen Lau with Oppenheimer.
Good morning, and thank you for taking my questions.
Dave you touched on this a little bit but could you. Please add a little bit more color about the impact of potential cash tax change on victory overall thanks.
Sure.
First there's a number of proposals out there today, we don't think that the proposals as they sit today will actually get through and become law.
La I think you'll see a negotiated or a slimmed down version of what's out there, but that being said I think on one of the one of the areas of impact could be you know an increase from capital gains for high earners.
And from there I think there could be some movement out of mutual funds you know potentially into Etfs are into SMA.
But remember there is still a very large part of the mutual fund industry that's in retirement assets.
So so you could see an impact of some outflows in mutual funds, but for US specifically you know our ETF platform, our SMA business that we're building and then you know how are you.
Deep we are into retirement I don't anticipate really any impact to our business you know potentially maybe in a positive way for some of the other areas, but I don't see a major impact there.
And then I would also say a lot of the tax changes when you think about capital gains probably doesn't.
Effect of fixed income products a lot of the fixed income products you know maybe people will move into.
Municipal bond funds or funds that have on.
On an advantageous tax treatment, we have a number of products there that are high performers and our really good distribution istar.
Established so I think we potentially could see.
On some additive flows there, but when you really take a step back for our business, specifically I think there could be potentially some moving of assets in the one structure into another but I don't see it having a material impact on our flow outlook or are you on outlook.
Okay got it and then quickly going back to USAA would you be able to provide more information about the non 529 plan, including maybe like retention rate even flow and fee rate any more color would be very helpful. Thank you.
We've provided the new account registrations I think there was a lot of noise around really two transactions acquiring.
On the mutual fund and 529 business and then schwab acquiring the brokerage business I don't think there's a lot of value to be had in drilling down into some of the detailed numbers. It's just not how we reported what I can tell you is.
We're making great progress.
I think you can see that in the overall flow numbers.
And how optimistic we are.
But we're making great progress in that part of our business.
We've expanded the product set we have aspirations to continue expanded our service is excellent.
And I think it's an area when we when we look out longer term is going to be potentially a differentiator for us having on a sizable direct to investor business debt.
We'll be growing and I think that that will be a differentiator for our business. When you. When you look at a traditional money manager.
That's helpful. Thank you very much.
Yeah.
At this time I will turn the conference over to Dave Brown for closing remarks.
Thank you. Thank you for attending our call and I Hope all of you have a great day, and we'll talk to you next quarter.
Okay.
Thank you for participating you may disconnect at this time.