Q1 2022 Virtus Investment Partners Inc Earnings Call
Okay.
Ladies and gentlemen, this is the operator today's conference call will begin shortly.
Your lines will again be placed on hold thank you for your patience.
Again, ladies and gentlemen, this is the operator the conference call will begin shortly.
Your lines will again be placed on hold thank you for your patience.
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Okay.
Good morning, My name is Terry and I will 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 nuclear just website W. L. B.
Dot Com. This call is being recorded and will be available for replay under very just website. At this time all participants are in a listen only mode. After the speaker's presentation and remarks, there will be a question and answer period and instructions will follow at that time I will now turn the conference your host Sean work.
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 first quarter of 2022.
Our 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 in this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
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, we use certain non-GAAP measures to evaluate our financial results.
non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement which are available on our website.
Now I'd like to turn the call over to George George.
Sean Good morning, everyone.
I'll start with an overview of the results we reported earlier today and then Mike will provide more detail.
Our first quarter financial and operating performance in the context of the challenging market environment with strong is while we did have net outflows in open end funds causal. The quarter also included strong sales in all product categories, including meaningful growth in funds and institutional.
Positive net flows in retail separate accounts and institutional.
Higher operating income and earnings per share as adjusted compared with the prior year period, an increase capital return to shareholders.
This was also the first full quarter to include contributions from each of our three recent strategic transactions.
Gee I wish just to capital and stone Harbor that collectively added complementary and differentiated investment strategies significantly increased scale and enhanced our distribution capabilities, while being financially accretive.
I'd also note that a bar top 20 funds with positive net flows in the quarter nine were managed by either Agi with Chester or Stone Harbor.
For our most recent transaction stone harbor, the integration is proceeding as expected and going well, we are making particularly good progress integrating stone harbors global distribution, which will augment our existing resources and enhance non U S distribution opportunities for all of our affiliates, including in areas, where we previously had limited presence we also making.
Progress integrating stone harbor agenda, and operating platform, which will also be available to our other affiliates.
So turning now to a review of the results total assets under management after reaching their highest level last quarter declined 2% to $183 3 billion due to market performance and net outflows, mostly offset by the addition of $14 7 billion of AUM from Stone Harbor on January one.
Sales momentum continued despite the significant market volatility with $9 4 billion of inflows up sequentially from $8 seven the momentum.
Particularly in this type of market reflects the effectiveness of our distribution capabilities and attractive range of investment strategies that can appeal to investors in varying market environments, and as investor preferences and needs shift.
For the quarter open end fund sales grew meaningfully with increases in most strategies and institutional sales reached the second highest quarterly level.
For net flows by product we had net outflows in open end funds institutional and retail separate accounts continue to generate positive net flows.
Funded outflows were higher sequentially impacted by higher redemptions, driven by investor behavior in a volatile market, particularly in the more growth oriented equity strategies. So there were notable areas of strength, including strong positive flows and bank loans alternatives and smid cap equity.
Fund net outflows were more pronounced in January with some subsequent improvement thereafter.
Institutional net flows were positive for the sixth consecutive quarter with continued traction at multiple affiliates and from both existing mandates in new accounts, including a significant addition to with stone Harbor Mandy <unk>.
U S mandates contributed meaningfully to institutional flows, reflecting our investments in distribution and resources over the past several years.
Retail separate accounts generated positive net flows for the 16th consecutive quarter with a 6% organic growth rate.
In terms of what we're seeing in April open end fund flow trends remain consistent with the first quarter as does the market volatility.
Areas of strength and open end fund sales and flows continued to include bank loans as well as alternatives.
In terms of institutional our current pipeline of potential business is the strongest we have seen though it is early in the quarter and markets remain challenged.
Our first quarter financial results reflected the impact from the more challenging markets that began in January as well as our normal seasonally higher employment expenses.
<unk> decline in operating income and margin was primarily result of those items.
Looking at the more comparable year over year period operating income as adjusted increased 16%, reflecting revenue growth from higher average assets, including the benefit of the three transactions.
Earnings per share as adjusted increased 16% over the first quarter, 2021% to $7 87.
The sequential decline in EPS reflected the market driven revenue decline and the seasonal employment expenses.
Turning now to capital we increased the level of stock buybacks from 25 million in the prior quarter to 35 $30 million and net settled an additional 13 for a total of 43 million repurchased or net settled during the period.
Including our dividend, which we raised in the second half of last year, we returned $57 million to shareholders in the first quarter, which is more than double the $26 million. We returned in the first quarter of last year.
This increase return of capital is reflective of our balanced approach to capital management that provides flexibility to prioritize different elements as circumstances warrant.
Our balance sheet remains strong we ended the quarter with modest net debt position of $48 million as the first quarter represents our highest quarter of cash utilization given the timing of annual incentives in the quarter also included transaction and revenue participation games.
With that I will turn the call over to Mike.
Okay.
Thank you George good morning, everyone.
Starting with our results on slide seven assets under management.
At March 31 assets under management were $183 3 billion.
Down 2% from $187 2 billion at December 31.
The sequential change reflected $6 5 billion of market decline.
And $2 billion of net outflows, which were largely offset by the addition of the assets from Stone Harbor.
Assets continue to be diversified by product type.
With U S retail funds, representing 36% of assets.
Institutional 31% and.
And retail separate accounts, 22%.
The recent strategic transactions have furthered our diversification by asset class.
Equity assets represented 56% of AUM.
Down from 63% in the prior year period.
Fixed income and alternative assets grew to 25% and 6% respectively.
Up from 21% and 3% a year ago.
We continued to generate strong relative investment performance across strategies.
At March 31, approximately 62% of rated fund assets had four or five stars.
And 90% were in three four or five star funds.
We had 12 funds with AUM of $1 billion or more that were rated four or five stars the same level as a year ago, representing a diverse set of strategies from five different managers.
In addition to strong fund performance as of March 31, 81% of retail separate account assets.
And 58% of institutional assets were beating their benchmarks on a three year basis.
And 82% of retail separate account assets.
And 64% of institutional assets.
We're outperforming their benchmarks over five years.
Also 80% of institutional assets were exceeding the median performance of their peer groups on the same five year basis.
Turning to slide eight asset flows.
Total sales were $9 4 billion up 8% sequentially from $8 7 billion.
By product.
<unk> sales of 5 billion increased 14% due to higher sales across most strategies.
Bank loan fund sales were particularly strong up 160%.
And alternatives were up by 44%.
Institutional sales increased 16% to $2 4 billion benefiting from both new mandates as well as inflows into existing ones.
Retail separate account sales were $2 billion down from $2 2 billion in the fourth quarter.
Overall net outflows were $2 billion as positive flows in institutional and retail separate accounts.
Were more than offset by net outflows in open end funds.
Reviewing byproduct institutional net flows of <unk> 8 billion were positive for the sixth consecutive quarter.
Again benefiting from mandates at multiple affiliates and across asset classes, including a positive emerging markets debt contribution.
In retail separate accounts net inflows were <unk> 6 billion driven by domestic smid cap core.
With an annualized organic growth rate of 6%.
For open end funds net outflows were $3 4 billion with net outflows in equity, particularly growth equity consistent with industry trends as well as in convertibles, while bank loans and alternative funds generated positive net inflows.
Okay.
Okay.
Turning to slide nine investment management fees as adjusted of $196 $3 million declined $7 $1 million up 4% sequentially.
Reflecting a lower average fee rate and.
And two fewer days.
Partially offset by higher average AUM due to the addition of stone harbor as institutional assets.
The average fee rate for the quarter was 41 nine basis points down one eight basis points sequentially.
The lower fee rate largely reflected a higher proportion of institutional assets due to the stone Harbor AUM.
As well as lower equity assets due to market performance.
Yeah.
Average assets increased $5 5 billion to 191 billion due to the addition of the stone Harbor assets in January .
However, excluding these assets average AUM decreased by approximately 8 billion due to market depreciation and net outflows.
Performance fees in the quarter of <unk> 6 million were relatively unchanged from the prior quarter level of <unk> 7 million.
Looking ahead for all products, we continue to believe the range of 41% to 43 basis points as reasonable with.
With the second quarter at the low end of the range.
Slide 10 shows the five quarter trend in employment expenses.
Total employment expenses as adjusted of $101 6 million.
Increased 10% sequentially, primarily reflecting $9 7 million of seasonal items related to the timing of annual incentives, including incremental payroll taxes benefits and accelerated stock based compensation expense as a result of equity grants made to retirement eligible employees.
Excluding the seasonal items employment expenses were essentially flat sequentially.
As a percentage of revenues employment expenses were 45, 8%.
But excluding the seasonal items they were 41, 4%.
The sequential increase excluding the seasonal items reflected market driven revenue declines.
Looking forward, we believe a reasonable range for employment expenses as adjusted would be 42% to 44% of revenues.
Subject to variability based on markets and sales.
For the second quarter absent a notable improvement in the markets, we would be at or above the high end of the range.
Yes.
Okay.
Turning to slide 11.
Other operating expenses as adjusted were $29 3 million up 28% on a sequential basis.
From $22 9 million.
The sequential increase of $6 5 million reflected the addition of operating costs for Stone Harbor.
And $1 3 million of business initiative discrete expenses.
The incremental expenses from stone Harbor include valuable enhancements to our global distribution resources.
And a comprehensive investment and risk operating and technology platform.
That will eliminate previously planned multiyear initiatives and enhancements.
Each of which can be leveraged across our affiliates.
Looking forward, we would expect other operating expenses in a range of 27% to $31 million per quarter.
With this range, reflecting a more normalized level of travel and entertainment activities.
For modeling purposes keep in mind that our annual board of directors equity grants occur in the second quarter.
Okay.
Slide 12 illustrates the trend in earnings operating income as adjusted of $90 1 million declined $26 7 million or 23% sequentially due to lower revenues and higher employment and other operating expenses.
Compared with the prior year quarter operating income as adjusted increased 16%.
Due to the growth in the business.
Including accretive strategic transactions.
The operating margin as adjusted of 46%.
Compared with 52% in the fourth quarter.
Excluding seasonal employment items, the operating margin was 45% down sequentially due to lower revenue.
Net income as adjusted of $7 87 per diluted share, which included 91 cents of net seasonal expenses.
Compared with $10 36 in the fourth quarter.
And $6 78.
In the first quarter of last year.
Regarding GAAP results net income per share of $4 22.
Decreased from $6 29 per share in the fourth quarter.
And that included the following items.
$1.97 of realized and unrealized losses on investments.
61 cents of acquisition and integration costs.
And a 57% reduction reflecting the increase in the fair value of the minority interest liability.
Okay.
Yeah.
Yeah.
Okay.
Yeah.
Slide 13 shows the trend of our capital liquidity and select balance sheet items.
Working capital was $196 million at March 31.
Down sequentially from $220 million.
As cash generated by the business was more than offset by $56 million in return of capital to shareholders.
As well as the closing payment for stone Harbor.
Cash and equivalents declined sequentially to $225 million from $379 million at December 31.
Cash utilization in the quarter.
The payment of annual incentives and the Allianz Gi revenue participation.
As well as the return of capital and Stone Harbor closing payments.
As a reminder, the first quarter typically represents the low point.
Of our cash during the year.
At March 31, gross debt to EBITDA was <unk> six times the same level as December 31.
And down from two eight times at March 31, 2021.
Net debt at March 31 was $48 million or one times EBITDA.
We generated $101 million of EBITDA in the first quarter down.
Down sequentially due to seasonal employment items and lower AUM.
But up 16% from the prior year level.
During the first quarter, we repurchased 125452 shares of common stock for $30 million.
Bumps the prior quarter level of $25 million.
And net settled an additional 61859 shares for $13 4 million to satisfy employee tax obligations.
Over the past year total outstanding shares have been reduced by two 3%.
Looking ahead with respect to capital management.
They were in the first quarter share.
Share repurchases will continue to be a priority given the stock's recent trading levels.
With that let me turn the call back over to George George.
Thank you Mike.
We will now take everyone's questions Jerry would you open up the lines. Please.
As a reminder to ask a question you will need to press star one on your telephone again Thats Star then the number one on your telephone keypad Billy Joel. Your question you May press the pound key.
Please standby, while we compile the Q&A roster.
Yeah.
Your first question comes from the line of so Amit <unk> from Piper Sandler Your line is now open.
Hey, Thanks, good morning, guys.
Just wanted to start on the SMA and institutional businesses. It's good to see another quarter of inflows for both just wondering if you could help us frame how to think about client demand for those products that I, maybe contrast that with what youre seeing I guess, the kind of retail and then what dynamics, we should be thinking about from the outside that allow for such kind of consistent inflows.
Mostly performance based as a major driver there or any kind of particular market environment do you think that demand can maybe reverse out.
Sure no.
It's a great question because there is different there is different behavior within those three categories of open end funds retail separate in institutional even for the very same strategies right. So it's not unusual for us to actually have a strategy that could be net negative on an open end side, but actually be positive on either Institute.
<unk> retail separates so so they can have different behavioral patterns.
More extreme being the institutional versus the open end fund where as the.
The drivers of a lot of the institutional activity because they're usually based upon.
Asset allocation in longer term.
Component building of our portfolio and sometimes behave differently in including what's in favor and what's out of favor on the institutional side a lot of times, we will see much more of a.
[noise] appetite.
<unk>.
Use markets, where our strategy is out of favor as an entry point.
Whereas on the retail side, you, sometimes see people behave as an exit point for the very same strategy.
So going through the three pieces the institutional we highlighted a bit because I think as you know over the years, we've talked about a lot that it was an area of focus for US we've invested resources we've hired people.
We've tried to introduce as many of our affiliates.
On the institutional side, particularly the non U S. Over the last few years and then one of the benefits we highlighted from the stone. So on hardware transaction was to have even more expanded resources, we truly looked at the institutional channel and particularly the non U S is a great opportunity for us because many of our affiliates haven't.
<unk> had opportunities there so over the last year or two you've heard us speak to several mandates at multiple affiliates.
Commented about non U S.
A portion of our business, which again, thank Mike May made some reference to it which within our institutional where we hit our second highest level of sales included in that is continued strength in that non usp's, which we're really excited about.
And as I commented in the in the outlook for April .
The pipeline is strongest we have seen the pipeline still early in the quarter.
But we see a lot of strength in terms of the diversity as well as the size of some of the potential mandate. So still don't know what will fall or what might redeem but it's really that's a positive sign for us the retail separate accounts again sort of behave sometimes in the same vein as the retail open end funds.
But generally those are going to be used as parts of.
Longer term portfolios with less trading activity right. So the average holding period for an open end fund is significantly different than the average holding period for an SMA.
So you can see again strength on the retail separate so we've continued to grow those as we noted for 16 quarters a lot of that will really be driven by investor demand and what they're looking for in their opportunity. So our hope there would be certain people, who are looking to take money off the table and some of those strategies others will see that.
It's an attractive entry point and lastly, just.
As a reminder included in our retail separate accounts are two channels intermediary sold but also the private client high net worth business.
At one of our affiliate Kayne Anderson Rudnick.
Who is a wonderful business on the private client side.
Great. Thanks, that's really helpful. George.
Just turning to.
The capital allocation strategy I mean, I know you guys are always talking about the kind of primary balanced strategy going forward, but given the draw down we've seen over the course of the first quarter ended April .
The cash flow generation capabilities that are improved.
The market environment, and kind of the balance sheet capital.
Is this elevated level of buybacks a decent assumption for the appetite going forward as you trade at such a deep discount to the peer group and how should we think about the quarterly capacity you guys are comfortable buying back in an environment like this.
Yes.
<unk>.
As I commented again, we do have a balanced approach. The good news is we have strong balance sheet right now and we still have good cash flow at a high margin.
So we have the flexibility to do multiple things.
As we sort of indicated and highlighted the fact that our approach is flexible and given what we saw in the first quarter, even though it was our highest quarter of cash utilization, we increase our stock buybacks and particularly with the net settlement.
Quite a robust amount.
So I kind of highlighted as flexible as well and I think as Mike also indicated that as we sort of look at what the highest and best use of our capital is.
Again feel very comfortable we have a very strong balance sheet, good cash flow and that and our views around what to do with that cash.
Particularly given where our stock is trading absolutely will factor in.
Thanks, So much one more from me here on just the structure of the distribution effort can you just remind us Scott.
How much is centralized how much do you have kind of on a specialist sales side and as you kind of continue to scale the franchise and <unk>.
Centralization of that sales, making it make any sense for you guys or is that kind of on how you guys think about the long term strategy around the structure of the distribution effort.
Well I'd break it into two pieces right. So on the retail side, particularly the intermediary distributor retail that is effectively a shared or centralized service right. So.
This does face off in the retail space at one point access to collection of very different managers, who specialized in different asset classes. So whether you talk about our sales force our national accounts.
On the ETF side as well as on the retirement side that is generally done through one coordinated team that works hand in hand with each one of our individual affiliates.
So that really is the model that we use there and we've been very successful with that and I think our value proposition as one point access to very different managers.
Is an effective one on the institutional side that business is different where it really is affiliate driven in the sense that a lot of those clients wanted to have that direct contact with the individual affiliates.
Because we've commented before we do make available to our affiliates a an array of resources to support them in their efforts and in areas, where we do can do the most our areas where an individual affiliate may not personally invest in something so non U S. Distribution is a perfect example of that where we can make.
Talented sales professionals in the non U S market available to sell multiple of our strategies.
So institutional is much more of a hybrid and much more of an affiliate driven kind of sales, whereas the retail is highly coordinated entirely done through that shared service leveraging specialist from each of our affiliates.
Got it thanks, so much George Thanks for taking my questions. Thank you.
Your next question comes from the line of Mike Goss you, Chris from Morgan Stanley . Your line is now open.
Great. Thank you good morning.
On the SMA.
Part of the business can you just remind us which some of the largest strategies and affiliates that you currently have available on the SMA platform.
And then could you also maybe talk about some of the initiatives that you have in place around getting more strategies, our affiliates onto the SMA platform and some of the initiatives youre getting those onto broader distribution in intermediary platforms.
Sure. So on retail separate accounts Kayne Anderson Rudnick is the largest we also have strategies available in the fixed income space as well as on the value space.
We do spend a lot of time trying to introduce.
One of the uses of our seed capital, which you see in our balance sheet is to incubate track records ultimately to make available and a lot of times, what we'll be doing is seeding track records to ultimately make available in the retail space. So actually a lot of the strategies that we're gathering assets for today than last year.
Here, our strategies, we probably seeded three years or four years ago, a couple of the cane ones in particular, where.
<unk> strategy of building the track record, we've been able to bring them to market. So we continue to see the retail separate account opportunity is a good one we continue to look to.
Expand to as many strategy just sort of fit into that space.
As indicated before there are some differences in what works really well in our retail separate account versus a fund.
Because of the way that they're tailored and manage for individual clients.
But continue to see that as an attractive area for us.
Great and then can you just remind us I believe you guys, mostly have a revenue share model can you just remind us how that sort of flexes and operates in a down market like what we're seeing year to date and month to date.
Sure, we actually have a profit.
Based model right. So our alignment of interest is designed to really.
Incent, everyone to generate operating income.
So our affiliates share.
Share in the profit that they bring to the bottom line, which is what is the profit to divert shareholders. So we think that's a good model in terms of how we run it.
And it does facilitate everyone managing to a.
A good margin and managing through difficult times, so that our.
Phil you have incentives are all profit base.
Yeah.
Great and maybe just last one around capital management I heard you mentioned the buyback in terms of that being a priority I didn't hear anything on the debt Paydown is that off the table for now how are you thinking about that maybe bringing that back to the forefront at some point and then also on M&A something you guys have spoken about in the past and clearly have executed well against.
Over the years, just curious where that is on your priority stack today, maybe you could kind of give us a little bit of flavor or color for what youre seeing in the marketplace today and how the current market volatility is is maybe accelerating or delaying any sort of potential things you may be thinking about.
Sure So I'll.
On the capital side so.
We feel very comfortable because because our balance sheet is strong and because of our cash flow is strong that we have the flexibility to do multiple things, we do prioritize different things at different points in the cycle.
So again and evaluating.
Alternatives between buying buying.
Buying back stock or paying down debt that will be influenced by how we believe our stock is trading relative to actual valuation.
So again, given the current environment no Mike we're in a rush to pay down.
That per say I think our stock prices right now probably slightly more prominent when I would go into the M&A.
The M&A environment continues to be incredibly active.
Again as you noted we have been very active over the years, even though we fundamentally want our growth strategy not to need M&A, we're continuing to look.
Look at multiple opportunities I think the general level of those opportunities has increased in.
In terms of the impact of market volatility.
It's interesting because I think market volatility.
We will do two things it might put something on hold or it might make something want to move forward faster in advance of more prolonged down markets.
So I think net net theres still very active.
We've been very active in terms of.
The amount of things that we've looked at and considered.
And I continue to think that that will continue on.
I could just sneak in one additional one in there just around the types of things that you're interested in potentially on the M&A front I think in the past.
Suggested on product areas with uncorrelated returns and international distribution are those still the top at the top of the list any others that you would flag in terms of what you are prioritizing and looking at.
Sure No I think I think you hit it right. So again generally across the traditional.
Types of long only strategies, we have very good coverage with great affiliates. The areas that we have been focusing on have included other specialized asset classes like emerging market debt, which is one we didn't necessarily have but in particular alternatives and less correlated strategies rights of Westchester.
It was a perfect example of the type of thing we wanted something that had less correlation to the market in the event that the markets became more volatile.
Now as you've seen in the first quarter. We're very pleased that we did at that time period, because those are the kinds of strategies that would be attractive. So we continue to be interested in things that are less correlated.
<unk> traditional long equity or fixed income products.
Things that will expand our distribution footprint, particularly on the institutional and the non U S side and again, we're always looking for things that will have a strategic rationale I feel.
<unk> been very disciplined in what we do so sometimes we will look at things and will ultimately concluded. It is not a good fit for us which may mean, we may spend some money and then not do anything so I think we have the ability to be.
Very strategic about what we do but it will be some things that will sort of build out the foundations for continued future growth.
Great. Thanks for taking my questions.
Okay.
There are no questions at this time. This concludes our Q&A session I would like to turn the conference back over to Mr. <unk>.
Great.
As always I just want to thank everyone for joining us today and we certainly encourage you to reach out do you have any other further questions. Your the rest of your day.
That concludes today's call. Thank you all for your participation you may now disconnect.
And then.
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Yes.
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During the second quarter.
David.
No.
Sure.