Q2 2022 Virtus Investment Partners Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yeah.
Good morning, My name is Andrew and I'll be your conference operator today.
I'd like to welcome everyone to the Virtus investment partners quarterly conference call.
Slide presentation for this call is available in the Investor Relations section of the Virtus website Www Virtus com.
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.
The speaker's remarks, there will be a question and answer session and instructions will follow at that time.
I will now turn the conference over 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 second 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 on this call may contain forward looking statements within the meaning of the private Securities Litigation Act of 95.
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.
<unk> 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 are certain non-GAAP measures to evaluate our financial results are 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.
I'd like to turn the call over to George George.
Thank you Sean good morning, everyone.
I'll start with an overview of the results we reported earlier today and then Mike will provide a little more detail.
Is it a traditional asset manager, we were not immune to the historically challenging markets and tumultuous macro economic environment achieved the first half of the year the steep market declines across asset classes set the context for our results, which were largely driven by sequentially lower average assets under management.
We reported lower AUM and earnings per share as adjusted.
I would note several important highlights, including our highest level of institutional sales and seventh consecutive quarter of positive institutional net flows.
How's it flows in Etfs in our private client business.
Solid operating margin increased capital return to shareholders and a modest level of leverage positioning us for continued balance sheet flexibility.
We believe the challenging environment is one in which active managers have the ability to differentiate themselves and the investments. We have made in a range of steady strategy and product offerings to appeal to clients across changing market environments preferences position.
Position us to capture assets as the market environment evolves.
Turning now to review the results total assets under management decreased 15% to $155 4 billion largely due to the significant market declines across asset classes. In addition to retail net outflows.
Sales of $7 9 billion compared with $9 4 billion in the first quarter as retail investor demand declined meaningfully amidst challenging financial markets and in an uncertain economic environment.
Those were lower across nearly all equity fixed income and multi asset investment strategies the alternatives increased sequentially.
On the institutional side. However, we reached a record level of sales of $3 5 billion again benefiting from a diverse set of mandates across affiliates and asset classes.
For net flows by product we had net outflows in open end funds, an intermediary distributor retail separate accounts, while institutional Etfs and private client generated positive net flows.
Fund if outflows of $4 5 billion were higher sequentially driven by bank loan strategies in international equity, while emerging market debt and domestic smallcap delivered a sequential improvement.
Retail separate account net flows turned negative.
Net outflows of <unk> 7 billion largely related to changes in investment allocations at several distribution partners in the intermediary sold channel.
Institutional which represents 32% of assets under management generated positive net flows for the seventh consecutive quarter. The investments. We've made in institutional have supported growth and the integration of stone Harbor is non U S distribution team has added depth to our global reach.
In terms of what we're seeing in July but retail open end funds continued to be in net outflows. The pace of net outflows has improved from the months of the second quarter and July is on track to be the second lowest month of net outflows this year.
Institutional pipeline remains strong with expected fundings over the next few quarters exceeding known redemptions and.
And with solid diversity across strategies affiliates and geographies.
Our second quarter financial results reflected the impact of the market declines have began early this year operating income as adjusted was $78 million down from 90 million sequentially and the related margin of $39 two declined from 46.
Earnings per share it suggested decreased 13% to $6.86, reflecting the 10% decline in average assets under management.
Turning now to capital, we continued our balanced and prudent approach to capital management, while again, increasing the level of capital returned to shareholders during.
During the quarter, we increased the level of stock buybacks to $40 million from $30 million in the prior quarter contributing to a meaningful reduction in our shares outstanding.
We also repaid $10 7 million of term loan debt ending the quarter with a modest net debt position of $12 4 million.
Against a more challenging market backdrop, given our balance sheet and cash flow generation, we continued to return meaningful capital to shareholders, while maintaining appropriate levels of working capital and leverage and are positioned to continue to be flexible and prioritizing capital allocation as circumstances warrant.
Before turning it over to Mike to provide more detail on the results I wanted to comment on our announcement earlier. This week on the expansion of our investment capabilities with the addition of two experienced portfolio management teams.
As indicated in our release, we are pleased to have added two teams Virtus.
Very systematic in Virtus multi asset that will add systematic quantitative investing in multi asset allocation capabilities that will broaden our offerings of individual and comprehensive investment solutions for clients.
We look forward to making these strategies, which are additive to our current offerings available to investors as well as broadening their strategies into other asset classes and investment products with that I'll turn the call over to Mike Mike.
Thank you George.
Good morning, everyone.
Starting with our results on slide seven assets under management.
At June 30 assets under management were $155 4 billion.
Down 15% from $183 3 billion at March 31.
The sequential change reflected $22 8 billion of market depreciation.
At $4 8 billion of net outflows.
Average assets under management in the quarter were $171 4 billion.
Down 10% largely due to market performance.
Our assets under management remained well diversified by product type asset class and we continue to see client diversification by geography with growth in non U S.
Over the past year non U S client AUM has increased by five percentage points to 15% at June 30.
Largely reflecting the addition of stone harbor as.
As well as increased non U S institutional sales across multiple affiliates.
And geographies.
We continued to generate strong relative investment performance across strategies at.
At June 30th approximately 57% of rated fund assets had four or five stars.
And 91% were in three four or five star funds.
We had 10 funds with AUM of $1 billion or more of them are rated four or five stars representing a diverse set of strategies from six different managers.
In addition to strong fund performance as of June 30 at 88% of retail separate account assets.
And 64% of institutional assets were outperforming their benchmarks over five years.
Also 75% of institutional assets were exceeding the median performance of their peer groups over five years.
During a challenging second quarter, 66% of equity assets beat their benchmarks, reflecting the quality of our managers and the benefit of active management.
Turning to slide eight asset flows.
Total sales of $7 9 billion compared with $9 4 billion in the prior quarter.
As lower retail demand was partially offset by our highest level of institutional sales.
Byproduct fund sales of $3 1 billion declined from $5 billion.
137% due to lower sales across nearly all strategies.
Institutional sales increased 41% to $3 5 billion benefiting from both new mandates as well as inflows into existing ones.
Retail separate account sales were $1 3 billion down from $2 billion in the first quarter.
Overall net outflows were $4 8 billion as positive flows in institutional were more than offset by net outflows in open end funds in retail separate accounts.
Reviewing by product.
Institutional net flows of <unk> 4 billion were positive for the seventh consecutive quarter.
Included a meaningful new global REIT mandate as.
As well as additional funding from an existing global growth client.
For open end funds net outflows were $4 5 billion.
With net outflows in essentially all strategies, reflecting the risk off environment.
I would note that ETF net flows are positive as they have been for seven of the past eight quarters.
In retail separate account net outflows were <unk> 7 billion largely driven by domestic small cap in the intermediary sold channel.
Several large distributors of our retail separate accounts changed investment allocations are weightings during the period.
Including one that went underweight small cap equities.
Others that repositioned to overweight value oriented stocks.
And our private client business net flows remained positive as they have for 14 consecutive quarters.
Turning to slide nine investment management fees as adjusted of $175 9 million declined $20 4 million or 10%.
Reflecting the 10% sequential decline in average assets and a modestly lower average fee rate.
The average fee rate of 41, two basis points compared with 41 nine basis points in the prior quarter.
With the modest sequential reduction.
Due to a lower equity AUM.
Performance fees in the quarter were modestly lower at <unk> 4 million compared with <unk> 6 million in the prior quarter.
For the third quarter, we believe the range of 41 to 43 basis points remains reasonable at current market levels, we would anticipate being at the lower end of that range.
Slide 10 shows the five quarter trend in employment expenses.
Total employment expenses as adjusted of $89 1 million decreased 12% sequentially, primarily reflecting $9 $7 million of seasonal items in the prior quarter.
A late into the timing of annual incentives.
Excluding the seasonal items employment expenses declined due to lower variable profit and sales based incentive compensation.
As a percentage of revenues employment expenses were 44, 8%.
Up from a seasonally adjusted 41, 4% in the first quarter.
Due to the market driven revenue decline.
For the third quarter, given beginning AUM levels at an uncertain market environment. It is reasonable to anticipate and employment expenses as a percentage of revenues will be above the second quarter.
Turning to slide 11, other operating expenses as adjusted were $31 million up 6% on a sequential basis from $29 3 million due to <unk> 8 million of annual grants to the board of directors and an increase in travel and related expenses.
Looking forward, we continue to expect other operating expenses in a range of 27% to $31 million per quarter.
While we're always thoughtful about expenses given the current market environment and the impact of inflation.
We have increased the scrutiny around expenditures and initiatives.
While continuing to focus on necessary investments.
To support organic growth.
As mentioned on the last call, we have made investments in global distribution, and our comprehensive investment and risk operating platform.
And we will continue to support these activities, which we believe will position us well for future growth and operating efficiencies.
Slide 12 illustrates the trend in earnings operating income as adjusted of $78 million declined $12 1 million or 13% sequentially.
Due to lower revenues.
The operating margin as adjusted of 39, 2%.
Compared with 46% in the first quarter.
Excluding seasonal employment items, the operating margin declined sequentially by 580 basis points.
From 45% due to lower revenues.
Net income as adjusted of $6 86 per diluted share declined 13% in the quarter.
Regarding GAAP results net income per share of $2 29, a decrease from $4 22 per share in the first quarter.
And included the following items.
$4 11, a realized and unrealized losses on investments and.
And a 28% reduction.
Reflecting the increased fair value of the Westchester capital contingent consideration.
Partially offset by 51 cents of fair value adjustments to affiliate Noncontrolling interests.
Slide 13 shows the trend of our capital liquidity and select balance sheet items.
Working capital was 185 million at June 30 down.
Down sequentially from $196 million.
As earnings were more than offset by $53 million in return of capital to shareholders.
Debt repayment of $10 7 million.
At June 30th gross debt to EBITDA was <unk> six times the same level as March 31.
Net debt at June 30 was $12 million down.
Down from 48 million at March 31.
We generated $85 million of EBITDA in the second quarter down sequentially due to the lower AUM.
Okay.
During the second quarter, we repurchased 221903 shares of common stock.
Or two 6% of basic shares outstanding for $40 million.
Above the prior quarter level of $30 million.
Over the past year, we have reduced total basic shares outstanding by four 9%.
With that.
Let me turn the call back over to George George.
Mike will now take your questions Andrew would you open up the lines. Please.
Certainly ladies and gentlemen, if you have a question at this time. Please press star 111 for your telephone.
Once again to ask a question. Please press star one one.
Okay.
Sure.
And our first question comes from the line of Sumit, Marty with Piper Sandler.
Okay.
Hey, Thanks, good morning, guys.
Just wanted to start on the Allianz mutual funds saw some press reports regarding some of the sub advisory relationship changes with that I was wondering if you could talk about it and maybe how this new agreement will impact.
Okay.
Oh sure Yeah. So so for the series of mutual funds that were previously managed by Allianz.
As youre well aware.
As a result of events the teams and the businesses that manage those affiliates those funds moved over many of them moved over to Voya not all of them.
So as a result of all of those changes we had to assign new sub advisors to the various funds.
The majority of the closed end funds and the large open end funds.
Were assigned to Voya as the managers, so that'll just be subject to a normal sub advisory agreement and we look forward to that relationship. We know those teams managing those funds. So theyre now just part of Voya and then for other funds where either the teams werent transitioning over over there there are other alternative.
<unk> that met the fund objectives, we made reassignments. So there was just a set of reassignments of sub advisors across those funds.
Okay, great. Thanks, and then.
Shifting over to capital return here on the.
On the buyback can you just remind us about the the window around when you guys can buyback each quarter and then maybe just talk about.
Especially with the market environment being as volatile as it is.
In your current valuation how are you guys approaching it was nice to see the bump up this quarter, but going forward.
What's the strategy around that.
And again as we commented given our balance sheet and the cash flow generation that we continue to have we do have the flexibility to sort of be thoughtful every quarter as we sort of approach the optimal use of our capital and as you note. We did clearly view the second quarter as an opportunity to further.
<unk> the return of capital through the stock repurchases given our view of the relative value of the shares and how they were training. So we continue to do that and we continue to have the flexibility to do that while also as you know as you may have noticed we resumed started.
Lastly, paying down some of our outstanding debt.
This rising interest rate environment again, we have the flexibility to do those mikes point to speak on the window of the timing of the yes, I think just from an execution standpoint, there are various ways that you can.
Execute the buybacks and we've consistently done that.
Generally on a balanced approach throughout the quarter.
And.
We'll continue to evaluate.
The trading level of valuation and other factors as we make capital decisions going forward.
Okay, Great and then just one more here on sort of the non comp expenses and margins just wondering where you guys are at with your normalization on <unk> expenses.
I know you guys maintained the range of other this quarter, but over time do you still expect that to kind of March upwards, and then how does that impact your margin expectations through maybe let's call. It the next 12 months.
Yes, we certainly did see it tick back up.
Travel during the quarter it was good to see.
For the distribution team visiting clients and.
Getting back to.
Travel activities, although not all the way back to pre pandemic levels and we will continue to monitor that.
Certainly our business has changed significantly since.
The pandemic.
So we're monitoring that we've added non U S distribution resources.
So I think we've tried to capture.
That with the range of other operating expenses, which we believe is still 27% to $31 million.
And we'll we'll monitor that and expect to see.
Stay within that range as we look forward.
And from a margin perspective, I think incremental margins as we look at them would still be in the ranges that we've talked about around 50% to 55% going forward structurally the infrastructures in place to continue to deliver those incremental margins going forward.
Okay, Great I'll hop back in the queue. Thanks, guys.
Thanks Tommy.
Thank you.
Our next question comes from the line of Michael Cyprus with Morgan Stanley .
Hey, good morning, Thanks for taking the questions, maybe just coming back to <unk>.
Maybe you could just talk a little bit about the new relationship that youre going to have here with boy, how those economics may be compare versus what we saw with agi.
And is there any potential here to bring any assets in house I heard you mentioned some potential re Simon.
Is there any sort of potential impact that we could see to the P&L just coming from the movement of these assets here.
Yeah, sure and I'll start off with you you should not really look at this as having an impact one way or the other on our P&L.
So for the strategies managed by the teams that are now part of Voya.
We are sub advisory arrangements are on the same basis.
So there's really no change as it relates to how do we sort of approached that.
And even with some of the other assignments when you put it all together collectively I would not look at it as something that would have.
A noticeable impact on our P&L.
And you had mentioned reassignments any potential to bring any in house, how are you thinking about that.
All of these signs have been made so there were a few select strategies, where we're leveraging some of our strong performing managers with track records in those specific areas.
In other instances again, the overwhelming majority of the assets in the funds all of the closed end funds are with the voya as well as in other sub advisor.
Okay. It sounds like even in those cases, where you're bringing them in house not much if any impact to speak up to the P&L.
Right because collectively we have added some new teams to manage some of those funds and then we've made reassignments and then the rest of it is business going forward. So again I would not look at any change on the P&L as a result of it.
Got it and is there any broader opportunity to broaden that relationship with buoy up more strategically as you kind of think about that capability sets that you have and what I was looking for more broadly in their distribution.
Well, we're very good at the teams that are currently managing those assets where were familiar with because they've been managing it. So we're very confident in those teams and very excited about any other opportunities. We continue we could have.
As it relates going forward again, we'll see what happens there, but again, we do selectively partner with individual firms and once we have a relationship to the extent that there are ways that we can be mutually beneficial we would absolutely.
Looking to those types of opportunities, but nothing specific to speak about it.
Got it Okay, and then just wanted to follow up on the systematic and multi asset portfolio teams. I was just hoping you could elaborate a little bit on why those strategies why those teams. How you kind of came across those teams what was so compelling there and are there any other opportunity sets to add other teams and how you might approach that thank you.
Yes.
Some of this.
Arise as a result of some of the Feds fund transitions that we had to make so these are two teams that were familiar with because they were managing.
Our funds and had supporting on the 529 side and.
And very impressive teams that we've always thought highly of and because there was an opportunity to have them join us we availed ourselves of that opportunity. Those are two capabilities that we have had as things were very interested in that being the systematic as well as the the multi asset asset allocation capability. So we're very excited.
About having those and as indicated in the release and I think in the comments, we look forward to taking those teams are not only having the management they manage but more importantly, making those strategies available to other institutional clients as well as in other types of investment vehicles.
Got it Okay, and maybe just one last quick on M&A, just curious thinking about the opportunity set here given the evolving macro backdrop, how that's impact.
And any potential timing and the broader opportunity set for M&A.
Yes, I mean, the market is always have some kind of an impact but again I still think there is.
Lots of activity ongoing in the M&A World. It will continue to go I think the nature of the conversations or length of the conversations could alter.
A little bit, but again, we're strategically it makes sense for our firms.
Firms to do with transactions those will still be there though.
The volatility in the market, obviously does have an impact but in some ways could create opportunities where they otherwise wouldn't be opportunities and again, we positioned ourselves.
To be able to take advantage of opportunities.
Should they arise and have a good long term strategic fit for us.
Great. Thanks, so much.
Yeah.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Mr. Aylward.
Great and I want to thank everyone today for joining us and certainly encourage you to give us a call. If you have any other further questions. Thank you.
This concludes today's call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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