Q4 2021 Virtus Investment Partners Inc Earnings Call
Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience. Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Good morning, My name is Gigi and I'll be your conference operator today I would like to welcome everyone to the Virtus investment partners quarterly conference call. The slide presentation for this call is available in the Investor Relations section of the Virtus website Www dot virtuous dotcom.
This call is being recorded and will be available for replay on the Virtus website.
At this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer period and instructions will follow at that time I will now turn the conference to your host Sean Rourke.
Thank you and good morning, everyone on behalf of Virtus investment partners I would like to welcome you to the discussion of our operating and financial results for the fourth quarter of 2021.
Speakers today are George Aylward, President and CEO and.
Mike Ingersoll Chief Financial Officer.
Following their prepared remarks, we will have a Q&A period.
Before we begin please note the disclosures on page two of the slide presentation certain matters discussed on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act.
995 and.
And as such are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's news release and discussed in our SEC filings.
These risks and uncertainties may cause actual results to differ materially from those discussed in the statements.
In addition to results presented on a GAAP basis, you're certain non-GAAP measures to evaluate our financial results are non-GAAP financial measures are not substitutes for GAAP financial results should be read in conjunction with the GAAP results reconciliations.
Reconciliations of these non-GAAP financial measures the applicable GAAP measures are included in today's news release and financial supplement which are available on our website.
Now I would like to turn the call over to George George.
Thank you Sean good morning, everyone I will start today with an overview of the results. We reported this morning, and then Mike will provide more detail.
We are pleased with the significant strategic and financial accomplishments of the past year, which position us well to navigate what may be a challenging market environment in 2022.
Over the past year, we have meaningfully increased scale with assets under management up by more than 40% genera.
Generated positive organic growth for the second consecutive year.
<unk>, our highest levels of operating profitability and earnings per share.
Significantly increased cash flow, including nearly doubling EBITDA to $440 million increase.
Increased return of capital through higher share repurchases in a meaningful increase in our dividend and finalized three strategic and highly differentiated transactions, including Stone Harbor investment partners on January one, which you had $14 $7 billion of emerging markets debt and multi asset credit strategies and the title of the team that we are excited to welcome the new affiliates.
The strategic transactions, which also include Allianz Gi and with just the capital added nearly $50 billion of assets under management, and complementary and differentiated investment strategies and enhance our distribution breadth and capabilities.
These transactions were executed with existing balance sheet resources and meaningfully increased our cash flow generation.
We ended the year in a net cash position, providing ongoing flexibility to invest in the business and continue to return capital to shareholders.
For the fourth quarter, specifically, we delivered very strong financial and operating results, including our highest level of earnings per share as adjusted.
<unk>, 50% operating margin.
Continued strong investment performance.
Positive net flows in retail separate accounts, Etfs, and institutional and continued return of capital, including increase in our level of share repurchases.
Turning to a review of these results.
Total assets under management were $187 2 billion up 14% from September 30, due to market performance and the addition of Westchester capital, which closed on October one.
Sales momentum increased with $8 7 billion of inflows up sequentially from $7 6 billion and with growth in all product categories.
Net flows were essentially breakeven as ongoing positive organic growth in retail separate accounts institutional and Etfs was offset by open end fund net outflows.
Byproduct retail separate accounts generated positive net flows for the 15th consecutive quarter with an 11% organic growth rate.
Institutional net flows were positive for the fifth consecutive quarter with continued traction at multiple affiliates and from both existing mandates and new accounts.
Etfs generated positive net flows for the sixth consecutive quarter and open end net flows were negative consistent with industry trends and largely due to outflows from emerging market at domestic growth equity strategies.
In terms of the flows we saw in January the fourth quarter trends continued including positive flows in retail separate accounts institutional and Etfs and open end funds international domestic equity strategies continue to be in net outflows and we are still seeing positive net flows into alternatives and bank loan strategies, where inflows have access.
Right.
Our financial results for the quarter reflected AUR growth and the benefits of our variable expense structure.
Operating income as adjusted increased by 6% sequentially to $117 million and the related margin of 52% was relatively consistent with the prior quarter and up nearly 10 percentage points from the prior year period.
Earnings per share as adjusted increased 7% sequentially to $10 36.
Our highest reported level, primarily due to higher revenues.
Turning now to capital during the quarter, we increased the level of stock buybacks repurchasing approximately 82000 shares for $25 million up from $20 million in the prior quarter.
Our balance sheet remains strong and we ended the quarter at a net cash position as you continue to generate significant cash flow with that I'll turn the call over to Mike Mike.
Thank you George and good morning, everyone.
Starting with our results on slide seven assets under management.
At December 31 assets under management were $187 2 billion up 6% from $177 3 billion at September 30th.
The sequential increase reflected $6 3 billion of market performance and $5 1 billion of assets from Westchester capital.
Assets continue to be diversified by product type with open end funds institutional and retail separate accounts.
Representing approximately 41%, 26% and 24% of AUM, respectively.
In terms of asset classes equity assets represented 62% of long term AUM with.
With 75% of that in domestic equity and 25% and international global or specialty.
The addition of Westchester capital increased alternatives to six 1% of total assets from three 2% in the prior quarter.
On a pro forma basis, including Stone Harbor.
Which closed on January one.
AUM of 202 billion included 29% in institutional accounts.
And 24% and fixed income strategies, compared with 26% and 18% respectively at December 31.
We continued to generate strong relative investment performance across strategies.
At December 31, approximately 66% of rated fund assets had four or five stars.
And 96% were in three four or five star funds. We had 14 funds with AUM of $1 billion or more that were rated four or five stars up from nine funds a year ago.
Representing a diverse set of strategies.
From six different managers.
In addition to strong fund performance.
As of December 31, 65% of institutional assets.
And 82% of retail separate account assets were beating their benchmarks on a three year basis.
And 65% of institutional assets and 88% of retail separate account assets were outperforming their benchmarks over five years.
Also 86% of institutional assets were exceeding the median performance of their peer groups on the same five year basis.
Turning to slide eight asset flows.
Net flows were essentially breakeven for the quarter as retail separate accounts.
Institutional and Etfs all generated positive net flows that were offset by net outflows from open end funds.
Reviewing byproduct.
In retail separate accounts net flows were $1 1 billion driven by core domestic equity with an annualized organic growth rate of 11%.
Institutional net flows of <unk> 5 billion were positive for the fifth consecutive quarter again benefiting from mandates at multiple affiliates.
Etfs had <unk> 1 billion of positive net flows.
For open end funds net outflows were $1 7 billion largely driven by emerging markets, but domestic growth equity strategies also contributed which is consistent with industry trends in the retail channel.
By asset class for all products International equity specialty and fixed income flows were negative.
Domestic equity global equity multi asset and alternatives each continued to generate positive net flows.
Total sales were $8 7 billion up 14% sequentially from $7 6 billion.
Byproduct funds sales of $4 1 billion increased 14% due to alternative equity and fixed income strategies.
Bank loan fund sales were particularly strong up 24%.
Retail separate account sales increased 12% to $2 2 billion with particular strength in smid cap.
Institutional sales increased 16% to $2 1 billion largely due to global equity strategies.
Turning to slide nine investment management fees as adjusted of $203 4 million increased $13 4 million or 7% sequentially.
<unk>, 3% growth in average assets.
And a higher average fee rate.
Performance fees in the quarter of $7 million were relatively unchanged from the prior quarter level of <unk> 6 million.
The average fee rate of $43 seven basis points up one seven basis points sequentially.
The higher fee rate largely reflected the impact of Westchester capital.
With respect to open end funds the fee rate increased to $49 three from $46 three in the third quarter.
Reflecting the addition of the Westchester capital strategies and.
And market driven growth in equity assets.
Looking ahead for all products, we would anticipate a fee rate in the range of 41 to 43 basis points, which takes into account. The addition of stone harbors primarily institutional assets.
Slide 10 shows the five quarter trend in employment expenses.
Total employment expenses as adjusted of $92 million increased 6% sequentially, primarily due to higher profit and sales based variable incentive compensation.
As well as the addition of the team at Quest Kessler capital.
As a percentage of revenues employment expenses were 39, 6% essentially the same level as the prior quarter.
Looking ahead for 2022.
We believe a reasonable range for employment expenses as adjusted would be 40% to 42% of revenues, which is subject to variability based on markets and sales.
For modeling purposes. The first quarter will include seasonal employment expenses, which are not included in this range.
Turning to slide 11, other operating expenses as adjusted were $22 9 million up 13% on a sequential basis from $20 2 million.
The sequential increase of $2 7 million reflected growth in the business, including the addition of Westchester capital.
As well as a continued increase in travel and related expenses.
Though not yet back to pre COVID-19 levels.
As a percentage of revenues other operating expenses were nine 8%.
Up 50 basis points sequentially.
From the prior year period, however, they were down 130 basis points, reflecting the leverage ability of the business.
Looking forward, we expect other operating expenses in a range of $25 million to $29 million per quarter, reflecting.
Reflecting the addition of stone Harbor.
Select investments in our infrastructure and technology.
And our estimate of travel and related expenses, which are still uncertain.
For modeling purposes keep in mind that our annual board of directors equity grants occur in the second quarter.
Slide 12 illustrates the trend in earnings.
Operating income as adjusted of $116 8 million increased $6 7 million or 6% sequentially due to higher revenues.
Compared with the prior year operating income as adjusted increased 89% due to significant growth in the business, including highly accretive strategic transactions.
The operating margin as adjusted of 52% compared with 56% in the third quarter.
And increased $9 nine percentage points from 43% in the prior year quarter.
Net income as adjusted of $10 36 per diluted share increased by 65 or 7% sequentially due to higher revenues from the increase in average assets under management.
Regarding GAAP results net income per share of $6 29 decreased 15% from $7 36 per share in the third quarter and.
That included the following items.
A $2.30 reduction, reflecting the increase in the fair values of both the minority interest liability.
And the revenue participation liability.
47 cents of expense for our CLO reset transaction.
28, <unk> of realized and unrealized losses on investments.
Okay.
Okay.
Slide 13 shows the trend of our capital liquidity and select balance sheet items.
Working capital was $220 million at December 31.
Down sequentially from $345 million as $155 million in consideration for Westchester capital.
And $37 million in return of capital more than offset cash generated by the business during the quarter.
Contingent consideration, which includes the estimated agi revenue participation.
And Westchester capital earn out payments was $163 million at December 31.
This amount will vary over time based on changes in Agi and Westchester revenues.
At December 31, gross debt to EBITDA was <unk> six times.
Down from seven times at September 30, and from <unk> Nine times at December 31, 2020.
Due to significant growth in operating income over that period.
We generated $124 million of EBITDA in the fourth quarter up.
Up 6% sequentially and 80% above the prior year level as AUM growth from Agi in Westchester capital.
Market appreciation and positive net flows has meaningfully increased quarterly cash flow.
On a run rate basis.
EBITDA approached $500 million based on the fourth quarter.
Up from $440 million on a trailing 12 month basis.
During the fourth quarter, we repurchased 81866 shares of common stock for $25 million.
Above the prior quarter level of $20 million.
We ended the quarter in a net cash position with cash exceeding gross debt by $105 million.
First quarter 2022 cash obligations include the payment of annual incentives as well as approximately $65 million for our first revenue participation payment.
And the closing payment for stone Harbor.
In addition, cash outlays in the first quarter will include return of capital, including share repurchases, which remain a priority given our stock's recent trading levels.
As well as other opportunities to invest in the growth of the business.
With that let me turn the call back over to George George.
Thank you Mike we will now take your questions Gigi would you open up the lines. Please.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Amit <unk> from Piper Sandler Your line is now open.
Hey, Thanks, Good morning, George Good morning, Mike.
Just wanted to follow up maybe on some of the commentary you had on the beginning of your prepared remarks, George given the market backdrop with kind of rate increases and inflation kind of rotation and devalue we've seen thus far this year.
Can you remind us first what the firm wide mix of growth versus value and the strategies and then secondly, what's your view on kind of how you think virtus performs in an environment like this throughout the year or do you kind of view it as an opportunity to outperform the benchmarks or kind of just the growth that sort of maybe stall out performance and can impact from flows.
Sure Great question I'll give you some thoughts.
I can follow up so I think we absolutely look at this as an opportunity I think as as believers in active management. These are the environments. We're thoughtful portfolio management teams executing their strategies have that opportunity to show how they've Sean.
We've done that in prior periods of volatility if you recall in the first quarter of 2020, we sort of commented on across the board how most of our managers demonstrated the value of active management.
Go into the beginning part of the question.
The whole strategy behind the multiyear.
Multi affiliate model and our collection of managers is really to have that broad offering.
<unk> for the changing market cycles in investor preferences, right. So we designed it so that we're able to participate when things like growth equity are in fever, but when theyre out of fever, we have several offerings that are on the value side.
And then as it relates to things like rising interest rates a comment.
Commented and I think Mike did as well on our floating rate fund.
Opportunity set which again is that a fever when rates were not going up.
And we've been pleased to see the increase in the fourth quarter I think makes it 24% and I commented that those flows accelerated in the first quarter. So the balance of our offerings you sort of meant to allow us to sort of navigate the changes in the markets as well as the investor preferences.
But generally overall, we look at the volatility in the markets and I think I speak for all active managers as a great opportunity for us to show what we have Mike if you want to add to that.
Yes, I'll just add a bit on the diversity of the portfolio. We gave some stats on the overall diversity and on a pro forma basis, adding stone harbor increases the institutional in the fixed income I think looking just solely into the equity portfolio. It is well balanced.
I would think about it not just growth value, but growth value and core and growth is probably slightly less than half, maybe 45% of the equity assets and looking at <unk>.
Core and value would be.
The remainder of that.
And obviously, that's diverse across our managers our equity managers Kayne Anderson.
<unk>.
NFPA and others.
Got it thanks, guys that's really helpful.
Just turning to stone Harbor I know, we're only a month and maybe you can just update us on the institutional kind of performance and flows there thus far how it is integrating the platform and then kind of what what kind of impacts you expect to see from that platform. This year.
Sure well, we're very excited to have stone harbor join us and I think as I've commented previously we've actually been having a lot of conversations with stone harbor over a period of time as we've reached our agreement to.
To bring them into into the complex. So a lot of work has been done in terms of how to optimize the opportunity set as theyre part of Virtus and latter part of your point on how to sort of integrate them.
Into what we bring in terms of our support services and distribution.
But as I've also mentioned there is also some great capabilities and technology from their side that will also integrating to make available to our other affiliates. So I think that has gone incredibly well and I think a lot of that is.
Due to the people, but as well as the.
As a great opportunity.
Okay.
And Mike. Thank you are cutting out here I can hear you.
Yeah got it so I think George was in the process of just finalizing the.
The closing and bringing on the team at at Stone Harbor and there.
Certainly now that they've come on this as the permanent home that they've.
That they joined us in the first quarter and we look forward to.
<unk> to bring their strategies to their clients going forward.
Got it. Thank you and then just one last for me.
Just on the M&A front.
Whether it's in the non correlated asset classes or through kind of expanded distribution is there.
Has the recent volatility opened up any new conversations there how are you viewing those opportunities here early in the year.
Sure well I mean talking about M&A.
Again this is Ben.
Part of our strategy over many years.
Fundamentally don't want M&A to be necessary for our long term growth strategy.
That being said I just referred to the third in the last 12 months that we've completed.
The amount of activity, we're seeing continues to be.
Quite robust we're very selective in terms of what we look at we will consider.
So to the extent that we find those opportunities we will absolutely evaluate those but there will be through the filter of.
What is the strategic value to the business in terms of either.
Select additions of capability to expand our offering.
Access to different markets as well as general scale and increasing of the cash flow.
Accretion to our shareholders. So.
We think the conversations in the industry will continue we think it's a very active and there.
In a environment across the board that includes our sector and we will certainly be participating as others will as well.
Great. Thanks, George Thanks, Mike.
Thank you.
Thank you. Our next question comes from the line of Michael Cyprus from Morgan Stanley . Your line is now open.
Hey, good morning, George Michael Thanks for taking the question just given the increased cash generation of the business I guess I was hoping you could talk a little bit about how you think about deploying all of that cash flows here it looks like the <unk>.
Buy backs.
Modest amount in the quarter or is this a good run rate to think about or can that accelerate here and when we look at the dividend payout ratio to think of about 14%.
I guess, what do you think is the appropriate level for Virtus.
For dividend payout and on the M&A side, maybe you can just give us a little bit of color around how much time are you spending on that today versus a year ago, and what sort of areas because it makes the most sense I know you spoke high level on the last question, but what sort of products or distribution areas can make the most sense sorry for the multi pronged question.
No thats fine so ill break them into two pieces. So in terms of capital as you noted the generation of cash flow for us significantly increase Mike gave the stat on the run rate of our EBITDA, so significant generation of cash flow.
Always.
Ed about our capital management strategy is really balance all elements of it because with cash flow that we have and the lower level of leverage that we currently have we have the ability to continue to return capital to shareholder invest in the future growth of the business on the organic side as well as selectively.
Valuation and execute on an M&A transaction to the extent that they make sense. So.
So we continue to balance all of those as we've said in the past, we generally will evaluate.
The balancing of those opportunities in any given quarter right. So last quarter, we did uptick.
Stock buybacks.
To a higher level and that was reflective of our views of <unk>.
Other opportunities as well as our stock I think Mike actually referred to that as well.
And how we trade in our available cash flow that will evaluate into our decision and we continue to invest in.
The growth of the businesses. We are excited about our opportunity to continue to grow things like the institutional business, our non U S business those are all.
Great opportunities for us.
So we will continue to balance that I think on the dividend side, we had a very meaningful increase this year. So we've had multiple years of consecutive increases.
In our dividend. So we think that that has been the right thing to do for our shareholders. So we'll continue to evaluate those.
Those opportunities.
And then I'll go to the M&A and then Mike can go back to capital after I finish on the M&A.
I think I think like a lot of people everyone is busy.
<unk> M&A opportunities.
So we are per taking in those things that makes sense for us.
As we sort of look at it in the context of the types of activities we've done over the last.
10, or 12 years, we look at one different product capabilities that are additive to what we have complementary and differentiated so westchester installing harbor, obviously, we're right along those lines.
So we continue to look for those things, which would be complementary in that redundant with what we currently have so.
In that area I also think about things that are less liquid and less correlated asset classes for.
The Westchester was an example of that I think I commented at the time that we do view an opportunity for us to grow our capabilities of less correlated types of strategies, which would also then gets you into less liquid types.
Types of strategies, we think those are great opportunities to add to what we have.
We do view R. R.
Client footprint being more predominantly U S based than we'd like as an opportunity for us to look the things that expand that opportunity set which we will do organically through institutional resources.
But that would be another area that we look at and again, we're always looking at things that we will do.
Generally increase the scale of the business, allowing us to generate cash flow that we can either returned to shareholders or used to invest in future growth the business.
Mike you want to.
I'll comment on our capital management strategy.
Yes, I mean, I think you touched on a lot of the key components.
The capital management, and notably <unk>.
<unk> into the recent trading levels of the stock in <unk>.
Share repurchases do remain a significant priority for us given that both on an absolute basis of the stock on a relative basis.
Well.
We take that and other factors into consideration when we evaluate our return of capital strategies.
And approaches and that'll be something we focus on certainly in first quarter.
As we're looking at.
At that.
And then we balance that as well with <unk>.
Investing in the business.
We do have meaningful payments in the first quarter upcoming as I noted there as the closing payment for stone Harbor in the first Daniel.
Revenue participation payment all of those will be occurring in the first quarter, along with annual incentives. So we're balancing that but.
Meaningful priority of share repurchases will look closely at it and we think that's an important component of returning capital to shareholders.
Great. Thanks, so much and maybe just a follow up question if I could on expense efficiency you guys delivered positive operating leverage in 2021 for what I think is the fifth consecutive year, if I have that right, which I don't think many other listed money managers have achieved so I guess congratulations on that.
<unk>, maybe you could just talk a little bit about your philosophy, and how you are able to deliver positive operating leverage.
Where others, perhaps struggle in the industry and as we think about the market volatility in 'twenty two with the new deals that have come into the run rate with Westchester and stone Harbor.
What extent does that alter your ability to generate positive operating leverage and if markets are down a bit maybe you could just give us a sense of how you might be able to flex that expense base.
Sure ill give some thoughts and then Mike.
To that.
I think we are pleased that we have been able to demonstrate that.
Leverage ability and capture incremental.
Incremental basis.
That expansion of the margin. So again the markets have been helpful to that I think the nature of some of the transactions that we've done it well had been helpful. There and as you kind of see in our sales history over the past couple of years in particular.
Generally been at the higher fee rate, so our fee rate.
Generally has been counter cyclical to some of our peers and that it's actually increased.
Our expense base, we tried to maintain a very flexible and variable expense base, but to your point if markets go down and revenue goes down there will be implications there, but again generally, particularly on the compensation side, we have a particularly high percentage of compensation.
That is generally variable in nature. So we continue to hope to pull in that the incremental margins that we spoke to previously and again the market will assist.
Assist us or make it a little bit more of a challenge over the next few quarters Mike.
Yes, I think you touched on really the key drivers of that operating leverage in the incremental margin I think for the full year was.
A little bit above the historical range that we've talked about of $50 to 55%.
And I think that the topline revenue contribution and being able to maintain.
The fee rate over that period has been a key contributor.
We're also adding the accretive strategic transactions that we alluded to.
Which were at the higher end of our incremental margins has enabled us to increase.
The margin by nearly 1000 basis points year over year in the fourth quarter.
And.
Just to reiterate George's point on the variability of the cost structure more than 50% of the employment expenses.
Do vary based on different metrics, whether it be profitability or sales and I think thats. It.
A key driver but.
Certainly those are factors that we.
We took into consideration with some of the outlook that we provided and we.
We will be impacted.
Markets to do shift meaningfully here.
And just.
A follow up point on the expense side, just any color on what's baked in to your expense guidance in terms of equity market appreciation, what sort of market levels or changes in the broader markets what kind of shift you to one end or even out of the range or said another way if markets are down too.
90% how would your expense.
Guide flex higher lower than out of the range et cetera.
Yes, but I think we tried to capture a range that is reflective of current market Q4 markets certainly there was a drawdown.
In January in the markets and then kind of a recovery of sorts. So these are obviously.
Volatile market environments, and we tried to capture that in the range that we provided especially on the on the employment side.
We will update you.
<unk>.
As those ranges might might shift over time, but we tried to capture the current market environment. If markets continue to be volatile we will update you as appropriate as a reminder, the first quarter will include the seasonal items. So capture that in your in your modeling as well, but to the extent. This variability continues we will update you.
As appropriate.
Great. Thanks, so much.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Mr. Al Award.
Great well, thank you and I want to thank everyone on the call today for joining us and again as always we encourage you to send that message or give us a call. If you have any other questions. Thank you very much.
That concludes today's call. Thank you for participating you may now disconnect.
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