Q1 2022 Victory Capital Holdings Inc Earnings Call
Yeah.
Good morning, and welcome to victory Capital's first quarter 2022 earnings conference call.
All callers are in a listen only mode.
Following the company's prepared remarks, there'll be a question and answer session.
I will now turn the call over to Mr. Matthew Dennis Chief of staff and director of Investor Relations. Please go ahead Mr dose.
Thank you 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 of 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.
It may cause actual results to differ materially from those expressed on today's call victory capital assumes no duty and does not undertake any obligation to update any forward looking statements.
Our press release that was issued after the market closed yesterday disclose 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 accompanying this call both of which are available on the Investor Relations portion of our website at IR Dot V. C. M. Dot com. It is now my pleasure to turn the call over to David Brown, Chairman and CEO David.
Thanks, Matt.
Good morning, and welcome to victory Capital's first quarter 2022 earnings conference call.
Joined today by Michael <unk>, our President Chief financial and administrative officer, as well as Matt Dennis our chief of staff and director of Investor Relations.
I'll start today by providing an overview of the first quarter.
Then I will cover our investment performance, which strengthened even further in the quarter and touch on our new equity buyback program.
After that I will turn the call over to Mike to review the financial results in greater detail.
Following our prepared remarks, Mike, Matt and I will be available to take your questions.
The quarterly overview begins on slide five.
We started 2022 on a high note as we posted our seventh consecutive quarter of revenue growth.
We also had robust gross sales and net flows which can be attributed to prior strategic investments, we have made and our focused execution.
$11 billion of gross sales achieved in the first quarter was the accumulation of positive contributions across each of our distribution channels and a well diversified mix of investment strategies and products.
Over the past few years, we have purposely diversified our business into new asset classes investment vehicles and distribution channels.
By example, recall our <unk> acquisition in 2015.
One component of its relatively small acquisition was the victory market neutral income fund, which had AUM of approximately $60 million at the time, we closed the acquisition.
Today, the fund has grown to more than $3 8 billion and is currently the top selling fund in its Morningstar category. While also being ranked five stars overall by Morningstar.
The recent addition of West end adviser model strategy and the launch of our alternative investments platform last year are recent examples of diversifying our investment vehicles and asset class offerings.
Investments in technology and data are also continuing to produce positive results.
As a data driven firm, we're making smarter decisions and becoming a more efficient organization through these investments.
On the institutional business front activities returning to more normalized conditions, we had a number of institutional fundings during the first quarter and we were able to successfully replenish our pipeline with additional wins that are expected to fund as the year progresses.
Our current book of won but not yet funded institutional business is not only robust, but also very well diversified across investment franchises and by institutional client types.
We are also making progress with THB, which we acquired early last year.
Jessica we have in the past we're following our proven playbook of building distribution pipes, and obtaining premium shelf space to generate sales activity with <unk>.
<unk> already secured by ratings with six institutional consultants and the THB small cap core strategy was recently added to the <unk> and SMA platform at a top tier wire house in March.
With approximately $15 billion of capacity and strong investment performance building. These pipes creates a solid foundation for stimulating future sales activity.
Our retail and intermediary teams also had a very productive quarter with a number of large wins and strategic product placements.
We are also seeing encouraging activity in this channel with our newest franchise west end advisers.
Positive momentum in our direct Investor business continued during the first quarter as well this.
This resulted in the best quarter of net flows for that channel since the acquisition.
Our 529 education savings plan experienced positive net flows in the quarter as well the.
The results were bolstered by integrated marketing campaigns targeting direct investors.
Looking forward on net flows we are seeing the same momentum we had in the first quarter carrying over to the second quarter. We are encouraged with the start of the second quarter from a net flow perspective, Lastly, we reported the highest level of GAAP operating income in our history exceeding $100 million in the quarter.
Despite the lower markets and then accelerating inflationary environment, our operating model flexed as designed to maintain very attractive margins. Our adjusted EBITDA margin was 49, 7%, which was in excess of our long term guidance of 49%. This is a very good example of the power of our operating model.
And how it performs well in many market conditions.
On slide seven you can see our strong investment performance improved even further in the first quarter of the year.
At the end of the quarter, we had 44 mutual funds and Etfs with a four or five star rating from Morningstar.
This translates to 65% of our mutual fund and ETF AUM with four or five star ratings by Morningstar.
The percentage of firm wide AUM that outperformed benchmarks rose during the first quarter for each respective measurement period.
We were particularly gratified to achieve outperformance over the key three and five year time periods with 78% and 83% of our total AUM outperforming benchmarks respectively.
Over the same time periods, our investment performance was well diversified across asset classes strategies and vehicles.
A few examples are 100% of west end adviser assets outperformed their benchmarks as did 96% of the AUM for products managed by USAA investments as of the end of this quarter.
Turning to slide eight in Yesterdays press release, we announced that the board approved a $100 million share repurchase program.
This is the largest program in our history and gives us the flexibility to do opportunistic and executing this program.
Although the buyback program is the largest in our history, our capital allocation strategy has not changed.
I want to make sure I am clear on this point we.
We are committed to reducing debt to increase balance sheet flexibility. So we can have the ability to make strategic investments by acquisitions to drive profitable and sustainable growth.
As our business has grown so has our cash flow. We now have the benefit of being able to execute on our capital allocation strategy, while also being able to return larger amounts of capital to shareholders by dividends and buybacks.
Before I turn it over to Mike I will mention that the M&A environment remains very constructive and we are continuing to conduct diligence on multiple perspective deals.
We have ample capital capacity and the financial wherewithal to continue executing both large transformational deals as well as smaller impactful ones.
Eight years, we've closed eight transactions and expect that cadence to continue going forward.
Our focus remains on acquisitions that are a strategic element and will make our company better stronger and more competitive.
With that I will turn it over to Mike for more details on the quarter's financials Mike.
Thanks, David and good morning, everyone.
Actual results review begins on slide 10.
Total AUM decreased by $5 6 billion.
Four 3% in the quarter to.
$178 1 billion at the end of March.
This decrease was driven by market action and was partially offset by the $3 billion of positive inflows during the quarter.
AUM at quarter end was 15% higher and at the same time last year.
Revenues rose to $230 million in the quarter rare.
Revenue was positively impacted by the businesses, we acquired in our asset mix shifted slightly due to the West Bend advisors acquisition, which I will cover in more detail momentarily.
During the quarter GAAP operating income was favorably impacted by lower acquisition related costs.
We had a $6 7 million swing related to the change in contingent consideration on our balance sheet.
This is the liability associated with contingent earn out payments that is valued quarterly with any quarter over quarter changes flowing through the income statement.
In the fourth quarter. This resulted in a noncash expense of $3 2 million and it reversed to a noncash $3 5 million positive contribution operating income in the first quarter.
Most of the difference quarter over quarter was related to changing interest rates, resulting in a higher discount rate being applied to the NPV calculation.
Partially offsetting the lower expenses depreciation and amortization expense increased by $5 2 million in the first quarter, reflecting the NAC and western acquisitions that closed in the fourth quarter of last year.
Adjusted EBITDA was $114 4 million in the first quarter.
Given the incremental expenses associated with the two acquisitions closing in Q4, we are pleased to see our operating model calibrate hesitant designed to do resulting in an adjusted EBITDA margin of 49, 7%.
We believe this is yet another proof point for our operating model and the benefits of our variable cost structure.
As a reminder, approximately two thirds of our expenses are variable and one third of our expenses are fixed.
GAAP net income was $71 3 million from <unk> 97 per diluted share.
And <unk> with tax benefit was $1 23 per diluted share.
We returned $27 million of capital to shareholders in the quarter through share repurchases and cash dividends.
The cash dividend was maintained at 25 per share for the current quarter.
On Slide 11, you can see total AUM was $178 1 billion at the end of the first quarter and well diversified from a distribution channel and client based perspective.
This is only down 3% from the end of the fourth quarter.
Long term AUM totaled 175 billion at quarter end.
This was 16% higher than the $151 billion of long term AUM at the end of last year's first quarter.
Turning to slide 12.
We have 3 billion of positive net long term flows in the quarter.
This was the third out of the last four quarters that we had positive net long term flows.
The strong first quarter net inflows resulted in trailing 12 month net long term flows turning positive as well.
Our sales activity has been very well diversified across franchises and distribution channels as Dave described.
Past investments made to enhance our distribution capabilities, which included advancing our use of technology and data.
Digital marketing initiatives.
And the addition of an experienced team of <unk>.
And multifamily office sales specialists are all yielding the results we expected.
Our ETF sales have also been strong.
The first quarter was our sixth consecutive quarter of positive net flows in our victory shares Etfs.
With March marking the 17th consecutive month of positive net flows.
Our ETF AUM has grown 18% year over year through the end of the first quarter and.
And is up 65% over the past two years.
Slide 13 illustrates our steadily growing revenue.
The increase in quarter over quarter average AUM.
And the decrease in the fee rate realization are primarily due to the West Bend advisors acquisition and in line with our expectations.
Western advisors.
On average 30 basis points, which is below our firm wide historic investment management fee rate.
Moreover, Western advisors model business does not include any of the fundamentals strengthen distribution our transfer agent fees that are charged on our mutual fund vehicles.
As the quarter progressed, we benefited from a consistent reduction in money market yield support as interest rates rose.
This resulted in a drag on our consolidated average fee rate in the first quarter improving to one cap of the basis points.
Compared with a drag of seven tenths of a basis point in the fourth quarter.
Given the forecast for future interest rate hikes.
Anticipate that money market yield support will eventually not be needed and we will realize an increase in our average fee rate as a result.
We also experienced an improvement in the fulcrum fees associated with certain USAA mutual funds in the quarter.
This reduced our average fee rate by two tenths of a basis point in the first quarter.
Compared with a four tenths of a basis point reduction in the fourth quarter.
On slide 14, we breakout our expenses.
Total expenses of $139 5 million in the first quarter declined from the fourth quarter due to lower operating expenses.
This was partially offset by higher depreciation and amortization and higher interest expense associated with the incremental term loan used to finance the Westin advisors acquisition.
Compensation expense rose as a result of several factors.
First the normal seasonality, we experienced in the first calendar quarter of every year associated resetting payroll taxes and benefits on January one.
Which had approximately 100 basis points impact on the cash compensation ratio.
Additionally, Q1 was the first full quarter of compensation associated with the acquisitions closed in the fourth quarter and we experienced higher sales commissions related to the strong gross and net flows in the quarter as you may recall from our call last quarter.
Some of the performance based acquisition earn out payments are being recorded as compensation.
As a result, we are proving that potential compensation that is steel related and breaking it out here to enhance transparency.
GAAP operating expenses declined $10 $8 million quarter over quarter.
This was primarily a result of lower acquisition restructuring and integration expenses.
We recorded a $3 $4 million benefit to operating income versus a $13 $3 million expense from the prior quarter.
We also incurred slightly higher non compensation expenses associated with a full quarter of expenses related to both the NAC and west Penn Advisors acquisitions.
Despite all the noise in our GAAP results. This quarter. These increases in cash expenses were essentially absorbed by our variable cost structure automatically reducing expenses in other areas for.
For example, we reported lower distribution and other asset based expenses as well as lower general and administrative expense in the quarter.
That leads us to slide 15, where we cover our non-GAAP metrics.
Needless to say, we are satisfied with the way our operating model adjusted expenses in the quarter to maintain healthy margins.
We continue to invest back into the business to support future growth, while simultaneously generating attractive margins.
System with prior investments the investments, we're making today in technology.
Data distribution and product development are intended to underpin future success.
You can see in the chart on the slide that our cash tax benefit increased $2 million to $9 $3 million in the quarter.
As a result of the western advisors and NMC acquisitions.
The appendix of the slide deck, we have included a graphic that lays out the predictable cash tax savings.
We are scheduled to realize over the next 15 years.
Assuming a 25% tax rate these total approximately $525 million of future cash savings.
Turning to slide 16.
On the capital management front, we repaid $70 million of debt during the quarter.
Our net leverage ratio at quarter end was two two times and.
And we repaid an additional $20 million, thus far in the second quarter for a total of $90 million year to date.
Our blended interest rate on debt during the quarter was approximately two 9%.
As we reduce debt, we're electing to pay down the incremental term loan portion first.
We believe that the interest rate hedge we have in place on $450 million of the original term loan is beneficial to us in a rising rate environment.
Currently we're paying three 2% on that hedged portion of our debt.
In addition to the debt reduction, we returned $27 million of capital to shareholders via share repurchases and cash dividends in the quarter.
That concludes our prepared remarks, I will now turn it back over to the operator for questions.
Thank you.
At this time, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Craig Siegenthaler with Bank of America. Your line is open.
Hey, Good morning, David Michael Hope, you're both doing well.
Good morning, Craig.
So my first question is on <unk> can you update us on the strategic cross sell opportunities at victory can harvest to this recent acquisition and also how is it playing out to date.
So let me start off on how it's playing.
To date.
We've seen as we've said in the script, we've seen a lot of good momentum.
With that product and are different.
Relationships and really since we acquired the business, we have not seen a drop off on the organic growth.
We are really just getting started there so the opportunity to cross sell victory products with existing western relationships and then the opportunity to sell western products with existing Victor relationship is starting to take shape and as I as we move through the end of the year I would imagine.
And that those.
Those opportunities would would start to materialize even more than they are today, but we're very encouraged by the.
The activity, we've seen the growth we've seen and as we said when we announced the transaction we think that this product.
This team is excellent and it's going to be a big growth driver for us going forward.
Thanks, David and just for my follow up can you walk us through any any ceased fundraising pipeline.
And any color on timing magnitude as we think about forecasting net flows for your <unk> segment and then also how will this translate into incremental management fee growth.
So as far as any sea, we are executing on our growth plan.
And it always imagined that NFC would grow through our help in further existing LP relationships, where we're executing on that plan.
As far as magnitude I'm not in a position to say what the sizing of that growth will be but our original plans had been growing more aggressively than they have grown in the past as far as management fees I'll, let Mike take that.
Yes, the management fee rate for any fee is.
Consistent with what you'd see with alternatives.
Which is above the levels, obviously that we have seen as a firm in the 53 basis point range.
Based on the size and will drive incremental expansion of our overall fee rates currently.
The AUM and the ops.
The segment is relatively small compared to the overall business, but we do expect that to grow as Dave said and as we go out and we will expect to see the overall fee rate increase.
As we accumulate the growth across cell tentative segment.
Thanks, Michael I, just wanted to congratulate you guys on a strong quarter. Despite the backdrop for flows I think it was your second strongest flow quarter ever.
Correct. Thank you Craig.
Okay.
Our next question is from Kenneth Lee with RBC capital markets. Your line is open.
Hi, Thanks for taking my question.
In the prepared remarks, you mentioned institutional pipeline.
Being greater than historical levels.
Wondering if you could just provide a little bit more color, which strategies are you seeing making contributions or gaining traction there. Thanks.
Okay. So good morning, our institutional activity in the first quarter.
We had funded a number of things that were in our won but not yet funded pipeline.
We've been able to rebuild that so what we are sitting with today is really replenish won but not yet funded institutional pipeline very similar to what we've had in the first quarter.
As far as the product set that is in that one but not yet funded pipeline.
Its pretty broad.
Spans from some of our global and international products to U S products.
And even to some of our solutions products. So we're pretty excited about the activity. There is a lot of money in motion as you know as the market has turned over as people have rethought their portfolios. It has put money in motion and money in motion usually seeks out different types of.
Strategies, and we've seen a big benefit from that and you can tell from our from our flow quarter.
Alright helpful.
And just one follow up if I may you mentioned that for the THB franchise getting some buy ratings cornerstone.
Institutional consultants.
What are you sort of looked at the next steps.
You would expect as you continue to ramp up this franchise and when can we start seeing some some client contribution to organic growth. Thanks.
So we're about a year into the close of the acquisition and with THB our strategy as with other acquisitions is to really build the distribution pipes and so we're in the process now of building those distribution pipes.
We are by ratings six institutional consultants, we mentioned one of their products securing really good shelf space on one of the major platform distributors and we're going to see more of that as we move forward and then the next step from there will actually be to start to work with those platforms and those consultants to get allocation.
So I think as we move through 2022 and into 'twenty, three you'll see growth in THB.
And that really has been our plan and that has been if you go back and look at our acquisition that is acquisitions that has been our.
The model I think of greed.
Way to think of it as I mentioned in the script, the kampa acquisition and the growth of the market neutral income product. We did the <unk> acquisition in 2015 here. We are in the first quarter of 'twenty, two and that product today has over actually $4 billion and that start out with 60 million.
So it takes time to build the distribution pipes and but over time. It grows once you have the.
And I think THB is going to take the same path as some of our other franchises we've acquired.
Right very helpful. Thanks again.
The next question is from Alex <unk> with Goldman Sachs. Your line is open.
Thanks, Good morning, guys.
Dave I was wondering if you could expand on your comments around the M&A landscape, a little bit broadly it sounds like the activity continues to be fairly healthy on both larger deals and smaller deals.
Obviously in prior cycles, we've seen periods of volatility tend to kind of stole these things out a little bit.
Does it feel different this time around and if so why and then maybe you could comment on multiples as well have we seen multiples come down as well in your conversations reflective of the environment.
Yeah, Good morning, Alex.
This is a very unique time for our industry and if you go back and look at periods of volatility things did slow down I would say that things are different this time at least in the period were at right now we have not seen a slowdown at all I think there's really two re.
Actions with what's happening in the environment today from sellers.
One is you do see some sellers pull back and say I will wait.
And Thats, a smaller amount that we're seeing but youre seeing a lot of other sellers actually accelerate into it so it's really.
One extreme or the other and there is more people accelerating into a transaction I think than pulling away from a transaction. So.
<unk> in the past I don't expect the acquisition activity at least to slowdown.
There could be challenges with financing and other things that could slow it down depending on the market conditions, but as far as the activity in the conversations.
We've actually seen a little bit of an uptick which is a little bit different in times in the past.
As far as multiples.
I think the multiples today.
We've not seen them come down yet.
<unk> that the multiples will come down.
As the.
The market that we're currently in starts this season.
But we haven't seen them come down yet, but I anticipate they will.
Great very helpful.
My second question was around the fixed income business and we've obviously seen a lot of dislocation fixed income markets, particularly with core core plus type of products.
Over the course of the last few months how was your fixed income franchise position in this environment could there be an opportunity to pick up extra share specifically from the legacy USAA channel.
Yes so.
Our USAA investments franchise, which is one of our two fixed income franchise.
He's done excellent from an investment performance perspective.
These types of markets are actually markets. They do very well and you can see from the investment performance. So we're super excited about the investment performance I think there is a lot of money in motion in the fixed income world today, and I anticipate that with our performance over a period of time and some of our peers and competitors.
<unk> performance, which has not been as as good as ours I would anticipate we would be able to pick up market share from a from a flow perspective from a retention perspective, I think we've done very well relative to the industry and I think some of that has to do with our existing.
Client base and then a lot of it has to do with the excellent investment performance. So I'm really encouraged we've always thought when there is going to when there is a market disruption.
In fixed income debt that we would have a great opportunity with money in motion to capture some of that money in motion and also pick up market share.
Awesome, Great just maybe one quick cleanup question modeling related given your comments around both the fee waivers and the fulcrum fees getting better as you roll forward into this quarter. The second quarter, how should we be thinking about the effective fee rate given all the kind of puts and takes in the business. Thanks.
Thanks, Alex.
Yes, I think we said in the script that the impact of the money market waivers in the first quarter was five basis points.
With recent rate hikes, we expect that to phase out in the second quarter, but we will expect to see the pickup where we'll be making kind of a full fee on the money market business.
Also highlighted the <unk> competes with her on the USAA mutual fund products with select USAA Mutual fund products.
The drag on that in the quarter was two basis points.
And what we've said there I think with the.
The span in which <unk> covered from a product perspective that has the opportunity to expand our overall basis points by one to two.
Continued to see strong performance I think Dave you some statistics on USAA fixed income products.
We continue to see strong investment performance that continues to improve so there is some opportunity to see expansion on that as we move forward as well, but the 53 basis point range really is the level. If you think about the <unk>.
Infuse it in the acquisition of West and from a base perspective, So start with 53 method. We've got some upside with those elements and then of course going forward asset mix client mix and product mix will continue to move that around a little bit, but we do see some opportunity going forward.
One additional point Alex is if you think about last quarter or some of our historical fee rates.
The drop in the fee rate from the fourth quarter to the first quarter is primarily almost entirely because of the west end revenue and the amount that they earn on the revenue that is just purely a function of math.
Yeah got it thanks for clarifying that and not have a good weekend guys.
Okay.
The next question is from Ken Worthington with Jpmorgan. Your line is open.
Hi, Good morning, maybe start with the modeling question in terms of the acquisition related compensation, what drives that up and down is it is it AUM is it sales is it profitability.
Maybe next is there seasonality to it is for Q1 Q going to be unusually big in the rest of the quarter small or is it pretty even throughout.
Then is there like almost an accrued figure.
That we should be thinking about that's going to be paid out over time given.
The one two level of whatever it is AUM sales profitability that ultimately drives it.
Sure Ken So the acquisition related compensation that was recorded in Q1 really had two components. There is an element associated with them for some seller financed retention incentives that will be paid out at the end of this year, that's a smaller component of it the other element is the <unk>.
<unk> earn out.
The composition of that from an accounting perspective, we're taking the estimated earn out which is about $35 million to be paid over five years is being taken through the P&L on that line item and we're taking it really ratably.
Over the five years, so I think it's about $1 million $5 in the first quarter that will be paid out as we've said as the targets are fit from a revenue growth perspective.
And that will be paid out again in future period. So it really is a noncash expense at this point in time.
But I think for modeling purposes.
$1 a quarter is what you should expect for any fee and then there are some short term elements of retention incentives put in place through west and that really will be accrued over the course of 2022.
Okay brilliant.
And then wanted to just dig into solutions and mid cap a little bit.
Gross inflows picked up a bunch I assume this is the fundings on the institutional pipeline that you guys talked about in your prepared remarks.
<unk> brands in mid cap are driving the success. There I think you've got a couple of different brands that that we could choose from but which are the ones that are driving our success here.
And then within solutions.
Any more color you can give us on which part of the solutions franchise.
<unk> is driving the pop in the gross sales we saw during the quarter and then just in mid cap the market impact was.
Strong in the quarter.
It looks like Sycamore seems to be doing great.
Got some exposure to oil and gas.
What is ultimately.
Driving the strong results and mid cap is it again it seems like it might be an overall exposure to oil and gas but.
It could be off there.
So number of questions in there, let me try to unpack them one by one so first when you think about what's driving some of the flows in our mid cap.
Asset class I would say, it's led by Sycamore.
And Thats, probably a good way to think about it.
They actually I think as you've stated they have excellent short and long term investment performance.
I can't point to one.
Point of their portfolio, which is driving the performance there.
We're well diversified portfolio.
It's been a number of different sectors. So I don't think that the more exposure to oil or less exposure to oil I think its really just around their investment process. So so theres not one piece of their portfolio I would say is driving that as far as solutions on what's driving some of the flows in there.
<unk> West end advisers.
Our new acquisition and franchise resides within our solutions bucket, our ETF business victory shares, which I think was mentioned has been NEC.
Net flow positive for.
Probably over the last year and a half.
And thats driving it.
Those are probably the two big buckets, if you think about.
What youre able to see that are driving that growth as.
As far as investment performance.
You go back and you look at the improved investment performance quarter over quarter just generally.
Overall our firm.
We think of Sycamore.
Think of our ETF business West end advisors USAA.
<unk> global product of our RF value product.
Those all are really doing well.
<unk> done well in the first quarter and continued to do well.
These challenging markets.
The volatile markets. We believe are going to allow the really good active managers to shine and so we're excited.
To have our franchises and maneuver through these markets and put up really strong competitive performance and Thats. What we saw in the first quarter and Thats what were seeing so far in the second quarter.
Awesome. Thank you for answering all the questions I appreciate it.
The next question.
<unk> is from Robert Lee with <unk>. Your line is open.
Great. Good morning, Thanks for taking my questions hope everyone's doing well.
Can you maybe put a little bit more color on the flows some kind of.
Economic contribution perspective, so if you can give.
The flows on an organic basis and is hovering around 7% annualized but.
Really think of that as kind of an organic revenue or EBITDA contribution just given that.
Yes.
<unk>.
West end is no more modern fee rate how should we think.
Revenue or EBITDA contribution similar to the flow as it has.
Trying to get some better sense.
Some of.
Of that contribution.
Hey, good morning, So let me start off by saying.
As we have said over a number of years.
Our margin focused.
So we've always looked at our business. We think we have a unique operating model and operating platform. We are margin focused we've guided to 49%.
Exceeded that over a number of quarters and actually exceeded this quarter and a really volatile quarter in a really challenging quarter.
So when I think of fee rates and I think of organic growth.
It's close to the growth is close to what our average fee rate is so there isn't.
A scenario, where we are selling are growing and showing some very low fee product.
And losing very high fee product effects.
Part of your question.
In general it's around what our average fee rate is.
Specifically west end advisors West end advisors average fee is about 30 basis points that is as I said earlier probably the.
If not all a material amount of the drop in our average fee rate, but keep in mind Western advisors.
Margin exceeds our margin so its actually margin additive.
It's fee rate.
Less than our fee rate that we have from an overall perspective, but I'll go back to what I start off with we are 100% focused on margins from a product perspective, not necessarily fee rates, just because our operating model and our operating platform. We think is unique and allows us to do that.
Okay.
Okay, great. It means a follow up just on capital management and buyback so.
You're a majority PEO and those have obviously started to monetize part of that position.
You have a bigger buyback.
How do you think of.
Who knows what the intention is to monetize over the near term but.
How do you think of the trade off between if they were to come to market given where the stock is trading plus your desire to deleverage.
Company kind of reload.
<unk>.
Would it be something that is there was stock available at a cheap price you would slow the pace of debt reduction for a couple of quarters to take advantage of that what's your current thoughts on.
How you maneuver through that.
So as far as.
Our corporate strategy and our capital allocation nothing's really changed although we.
Has the board approve our largest buyback in our history at $100 million.
Nothing has changed from our mindset or our capital allocation policy.
Our number one priority is to pay down debt to provide a flexible balance sheet a balance sheet, that's ready to go and do accretive profitable acquisitions that make our company better that is our number one priority.
We've grown over the years and so as our cash flow. So our cash flow has grown and has allowed us to be flexible in our buyback and our dividend policy and.
This $100 million.
Approval of this buyback program gives us the ability to be opportunistic and flexible.
With market conditions that allow us to go to go in and buy our stock at a very advantageous price.
We think that.
The $100 million.
Is the right number to provide that balance.
But the balance is always going to lean for us to really pay down debt not only does it reduce our interest expense not only does it lower our leverage amount, but it really allows us to have the fuel to go out and do additional acquisitions and if you look at our history of doing acquisitions I think they've been really.
Shareholder accretive create a lot of value and we think theres a lot of opportunities in the market.
And that's how we're going to use our capital and.
Being able to do the buyback program at the levels, we are being able to pay the dividend at the levels. We are is really a reward to our shareholders for our growth and our cash flow growth.
Great. Thanks, and maybe just one quick follow up on capital management. So.
This was the first quarter in a while you actually didn't increase the dividend which was expected but.
Dividend strategy mean, some companies have a long term strategy. They just won't be able to increase it every year.
Long term record of any.
Raises.
Is that.
Is that sit within your longer term capital management strategy I mean, even if it's a modest increase in your payout ratios models is that something you think about where you want to be one of those companies that can.
10, 15 years from now you can say Gee, we've increased every year for a decade.
Or is that.
So historically, we have increased our dividend.
Every quarter, we went last quarter or two.
A larger increase for that quarter over quarter and now we're doing an annual review.
We think with the growth of our business.
And our future outlook that we will be able to continue that but everything is going to be based on facts and circumstances.
With a business that's growing with cash flow that is growing and our ability to convert.
Earnings into free cash flow.
I would anticipate.
That we will continue down the same path, we've been on but that's going to be facts and circumstances based.
Okay, great. Thank you for taking my question.
The next question is from Brennan Hawken with UBS. Your line is open.
Good morning. Thank you for taking my questions I'm curious on all its were really strong contributor here to the flow the flows this quarter.
Was there anything that was chunky such as like the launch of a fund or strategy or whatnot that contributed just trying to get a sense of that.
Good morning, nothing that's chunky.
Our market neutral income product is within our alts.
Category and I think as we said in our script that was.
A fast grower.
Given its strategy and so that is a driver of most of the growth within that bucket.
Yeah, let's see how that a product like that would be appealing in this market so that makes sense.
Okay. So then second one west end.
I know that this is a product that's on a bunch of them, maybe roughly a dozen platforms.
When we think about the typical pattern.
Flows that west end fees when they are added to our platform is that a fairly linear trajectory or is there some parabola to that.
That line as more advisors signed up and when you think about that based on the cadence of platforms that they've been adding recently is there any way to think about what that might suggest for flow trajectory from that business from here.
Sure.
Just maybe to go back a little bit on western.
They did prior to the acquisition they did $4 $4 billion of net flows in 2021, they did about over $8 billion.
For the five years.
They were independent from up to 'twenty, one so they have historically grown at a very very fast rate.
They do business.
Today, a little over 3000 advisors.
We do business with over 100000 advisors across the industry and so there is a lot of opportunity.
To sell west end products on the existing platforms that they're on and that we have relationships on just to expand their reach within those platforms.
Getting on new platforms is partially what we're focused on and when they get on a platform. What typically happens is you are going to work with an advisor and adviser is going to start to use the product and over time when they see the value of the Prada.
They see the value of the collateral that's being provided to them.
Historically, what they have seen is that that advisor will use more of their portfolio and allocated more to west end advisers. So over time, what <unk> seen is as they have.
Worked with an individual advisor by advisor actually allocate more to them over time. So so all of that would tell you that when we think about west and going forward, we think of that.
<unk> form that franchise.
Those products growing at an accelerated pace, because we're building out distribution.
On the new platforms, and the new advisors and keep in mind that the new advisor doesn't necessarily have to be on a new platform.
They're going to use more of the west end product as they tried out as they see the value of it as they see and use their collateral.
Great. Thank you for that color.
The next question is from Michael Cyprus with Morgan Stanley . Your line is open.
Hey, good morning, Thanks for taking the question. It's been a number of years that you guys have had the direct channel. So just curious what lessons learned do you have from the direct channel from that experience and what do you know today that maybe you wish you had now three four years ago and to what extent does that entice you to go.
Direct in a broader way beyond the USDA network right you have a platform you have technology I guess, what would hold you back from doing direct in a much broader way.
Good morning, Mike.
First.
Let me point out that we had our best quarter from a flow perspective in the direct channel this past quarter, we've actually seen consistent.
Sure.
Progress every single quarter, I think for the last year and a half or so so we're really quite pleased with what's happening there.
From a lessons learned perspective.
We have gotten a lot better on servicing on technology on training.
And there has been a lot of lessons learned and I think that we have done a good job and we are now doing a great job.
There is nothing holding us back from expanding our direct business.
In any way at all.
Today, our business is available to USAA members and non USAA members and in fact, there is a portion of the new accounts that are people that are not USAA members. So we look at us as a platform.
As we think about the industry going forward, we think about our capabilities, we think it's unique.
For a firm like ours to have this direct business and we plan to capitalize on it going forward through product expansion through expanding our marketing campaigns.
We have done it slowly.
Managed it well.
We've learned along the way and I think we have a phenomenal.
Platform.
<unk> for the future and we're looking out not just quarters. We're looking at years, we see a lot of the trends and we think we have a really valuable asset here and having a direct to.
To consumer platform.
Great and then just on digital marketing.
Mentioned that earlier I was just hoping you could expand a little bit about what exactly that means for victory. Maybe you could talk about how much success, you're having with digital marketing initiatives. How do you think about measuring the return on digital marketing and maybe you can elaborate on how much you're spending there.
So on the digital marketing I think most firms during the period of Covid, we're forced forward.
Two to really increase the amount of digital marketing to really gain the capabilities and we were part of that I think the thing that's unique about US is we have a large part of our business where we are.
Marketing digital marketing to our consumer through our direct business, we do it through E mail campaigns and other.
Through social media and other ways and we have made a lot of progress there we have some internal proprietary measuring statistics.
That we use that are unique to our business and as far as the costs.
Don't breakout the costs, we have built really a shared services platform, which is part of our operating model and the best part about that is all of the learnings we have in our direct business.
With digital marketing and really direct marketing, we are applying those principles and some of those campaigns to our other parts of our business, which I think is really value added.
So again.
It's not the entire.
Future of the industry.
It is going to be a bigger piece.
Year in year out and I think we had the benefit of having this direct channel and direct business.
Go out and to really refine what we're doing and then we can apply to a larger base on the other parts of our business.
Great. Thanks for taking my questions.
Our final question is from Owen Lau with Oppenheimer. Your line is open.
Good morning, and thank you for taking my questions.
And Dave going back to your earlier comment about the uptake maybe an M&A.
So all conversations this time compared to auto volatile market historically speaking.
If you take out a little bit deeper.
It's different is it because people feel like this time to correction will last longer than malkin gets a hat or anything else and also want mattress you would look at and finally pull the trigger and start to make an acquisition. Thank you.
Yes, I think what has changed.
<unk> is really our industry and so the challenge is that.
Would cause.
Consolidation or a manager to sell themselves.
Those challenges have not changed in fact, you could argue that a market like we have today actually accelerates those challenges. So I think in the past when you've had this kind of market disruption the challenges werent as president.
As highlighted where today if you fast forward from from years ago. Those challenges investment managers are facing have not gotten any easier they've actually gotten harder in a hard market is actually accelerated even more so.
So I think that that's what's different.
This is a long correction or short correction.
Don't necessarily think that plays into the acceleration of our firm that wants to sell themselves.
At least not materially as.
As far as our evaluation.
We always start off with.
A simple question of does this acquisition make our company better does it make us more competitive does it give us certain characteristics that we don't have today or does it move us forward in certain areas to make us more competitive generally so we start there and then we work our way down.
We always look at.
Pricing, where we want to be competitive.
And we also look at the market, we look at multiples.
And so we don't have one core metric that says we should do this transaction or not we have a core concept of does this make our company better and that is always the check.
To really do a transaction.
Got it and then.
And then a follow up along that line. So what do you see about active versus passive investing in current environment. I mean, you obviously had a strong inflow in the first quarter is at the beginning of the shift toward.
Active investing if the current volatile market continues or two still too early to say.
I'm glad we're an active manager.
It's how I would answer that.
I think that.
Markets like this with the volatility good active managers will excel and <unk>.
I'm glad we're an active manager.
Alright, Thank you very much.
That concludes the question and answer session I'll turn it over to David Brown for any closing remarks.
Thank you for participating todays call. We appreciate your interest in victory capital and look forward to keeping you updated on our progress later this month, we'll be attending the B Riley annual Investor Conference in Los Angeles, and we hope to see you all there.
Have a great rest of your day. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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