Q2 2023 Virtus Investment Partners Inc Earnings Call
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Good morning, My name is Wanda and I will be your conference operator today.
I would like to welcome everyone to the purchase investment partners quarterly conference call.
The slide presentation for this call is available in the Investor Relations section of the birds purchased website.
Www dot purchase dotcom.
This call is being recorded and will be available for replay on the purchase website.
At this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer period and instructions will follow at that time.
I would now turn the conference over to your host Shamble, Sir you may begin.
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 2023 speakers.
Our speakers today are George Aylward, President and CEO .
Yourself 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.
95.
As such are subject to known and unknown risks and uncertainties.
But not limited to those factors set forth in today's news release and discussed in Hershey violence.
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 it.
It should be read in conjunction with the GAAP results reconciliations of these non-GAAP financial measures to GAAP.
<unk> 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. Thank you Sean Good morning, everyone I'll start with an overview of the results we reported earlier today before turning it over to Mike to provide more detail.
Key highlights for the second quarter included a meaningful improvement in net flows to breakeven.
Strong institutional sales and flows across affiliates strategies and geographies.
Positive net flows in global funds private client and Etfs.
Attractive investment performance, both long term and year to date across strategies continued investment in the diversification of the business with the addition of a new affiliate.
And we maintained a well positioned balance sheet and modest net leverage.
Turning now to review of the results total assets under management increased 9% to 168 billion due to the addition of alpha simplex and market appreciation.
Sales increased 22% sequentially to $7 6 billion due to continued momentum in our institutional business.
On the retail side sales decline primarily in domestic equity the global equity sales increased significantly weak.
Separate account sales were essentially unchanged from the prior quarter.
Our net flows were breakeven a significant improvement from the prior quarter Judy institutional.
By product institutional net flows of $2 2 billion improved from modest net outflows in the first quarter with strong sales and net flows across affiliates strategies and geographies.
Over the past four quarters institutional has generated 5% organic growth in a challenging environment.
Yeah.
But net outflows of $2 1 billion compared with $1 8 billion in the first quarter as an improvement in fixed income strategies was more than offset by lower equity flows consistent with the industry.
Within equities, both global equity and domestic smid cap generated positive net flows.
Retail separate accounts continued to be relatively breakeven levels.
In terms of what we're seeing in July our institutional pipeline remains strong with one but not funded mandates exceeding known redemptions and we see opportunities in the CLO market.
For open end funds trends have improved meaningfully including continued positive flows in our global funds as well as our Etfs.
Our second quarter financial results reflected the impact of market depreciation on AUM levels, particularly near the end of the quarter as well as the addition of a new affiliate at the beginning of the quarter.
The operating margin was 32, 3% up sequentially from $26 eight primarily due to the impact the seasonal employment expenses in the prior quarter.
Earnings per share as adjusted of 5040, <unk> increased from $4 20 in the first quarter.
Excluding prior quarter seasonal items earnings per share as adjusted increased 2% sequentially.
Yes.
Turning now to capital.
Our balanced and prudent approach to capital management supported by significant financial flexibility has positioned us to invest in growth initiatives.
Such a strategically adding affiliated managers, while returning capital to shareholders and maintaining appropriate levels of working capital and leverage.
During the quarter, we closed on offer simplex with existing financial resources, including utilization of our revolving credit facility.
We also repurchased approximately 52000 shares for $10 million and in June we repaid $10 million of the credit facility.
We ended the quarter with modest net debt positioning us to continue to be flexible and prioritizing capital allocation as circumstances warrant, including paying down the credit facility this year and repurchasing shares which are key priorities.
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 30th assets under management were $168 3 billion.
Up 9% from $154 8 billion at March 31.
The growth reflected the addition of $7 $8 billion of assets from Alpha simplex.
At $6 3 billion from favorable market performance.
Average assets in the quarter increased 7% to 163 billion and ending assets under management were 3% higher than the quarter's average.
Our assets under management remained diversified by asset class and product type.
We've continued to expand our investment capabilities and less correlated and alternative strategies, which now represent 11% of AUM.
Up from 7% prior to the acquisition of Alpha simplex.
Fixed income and multi asset where each relatively unchanged sequentially at 23% and 12% of AUM respectively.
So each increased during the quarter.
Notably institutional now represents 37% of total AUM.
Up from 32% a year ago.
And non U S clients are 17%.
Up from 15% last year.
We also continue to have compelling long term relative investment performance across products and strategies.
As of June 30 at approximately 69% of institutional assets at 89% of retail separate account assets are outperforming their benchmarks over five years.
In addition, approximately 62% of rated fund assets had four or five stars.
Up from 43% last quarter.
And 87% were in three four or five star funds.
We have 38 funds that were rated four or five stars.
Including 11, with AUM of $1 billion or more.
Up from seven last quarter.
On a five year basis, 77% of our rated fund AUM was outperforming the median performance of their peer groups.
I would also note that our managers performed well year to date and volatile markets with 67% and 86% of institutional and separate account.
Respectively, beating benchmarks.
For the period and 70% of mutual funds AUM outperforming the median performance of the peer group.
Okay.
Turning to slide eight asset flows.
Total sales were $7 6 billion up 22% from $6 2 billion last quarter due to strong institutional sales.
Byproduct institutional sales were $3 7 billion nearly double the prior quarter level due to a new larger low fee fixed income mandate and several significant contributions to existing accounts.
Fund sales of $2 6 billion declined from $3 billion at.
As higher global equity sales were more than offset.
By lower sales in other strategies.
Particularly domestic equity.
Retail separate account sales of $1 3 billion or largely unchanged sequentially.
Total net flows were breakeven with the improvement from $1.9 billion of net outflows in the prior quarter due to institutional.
Reviewing byproduct institutional net inflows of $2 2 billion increased from modest net outflows in the prior quarter with strong net flows across strategies.
Institutional net inflows also continued to be well diversified across affiliates.
For open end funds net outflows were at similar levels to the prior quarter with $2 1 billion compared with $1 8 billion.
We'll then open end funds, both global funds and Etfs had positive net flows.
Global funds, which had $4 2 billion of AUM at June 30th had.
<unk> had positive flows in both the global large cap growth and small cap focused strategies.
And while fixed income funds remained in net outflows nearly all fixed income strategies had a sequential improvement.
In retail separate accounts net outflows of <unk> 1 billion compared with net inflows of <unk> 1 billion in the first quarter.
As continued positive net flows in private client were offset by modest intermediary sold net outflows.
Turning to slide nine.
Investment management fees as adjusted of $171 1 million increased $13 5 million or 9%.
Reflecting the 7% sequential increase in average assets under management.
A modestly higher average fee rate and an additional day in the quarter.
The average fee rate of 42, two basis points increased by <unk> two basis points from 42 in the prior quarter.
The fee rate was unfavorably impacted by three basis points due to a discrete transitional expense item related to the alpha simplex funds that will not recur.
The sequential increase in the average fee rate largely reflected the addition of alpha simplex as higher fee rate alternative strategies.
Which was mostly offset by the mix shift given the relative growth of the institutional business.
Performance fees in the quarter of <unk> 3 million compared with <unk> 2 million in the first quarter.
Looking forward, we believe our range of 42 to 44 basis points remains appropriate for modeling purposes.
Which as always will be impacted by markets and the mix of assets.
Slide 10 shows the five quarter trend in employment expenses.
Total employment expenses as adjusted of $95 8 million.
Decreased 3% sequentially.
<unk> $11 4 million of seasonal items in the prior quarter.
Largely offset by the addition of Alpha simplex.
As a percentage of revenues employment expenses were 53%.
Up from a seasonally adjusted 49, 3% in the first quarter.
Due to the addition of Alpha simplex.
For the third quarter.
Given beginning AUM levels and continued market appreciation. It is reasonable to expect that employment expenses as a percentage of revenues will be toward the lower end of our 49% to 51% range.
As always it will be highly variable based on market performance in particular.
As well as profits and sales.
Turning to slide 11.
Other operating expenses as adjusted were $31 7 million.
Up $1 9 million or 7% from the first quarter.
The sequential increase was largely due to the addition of alpha simplex as well as the <unk> 9 million of annual grants to the board of directors.
Excluding alpha simplex other operating expenses declined 3% over the prior year period.
Reflecting continued close management of all discretionary expenditures.
Looking ahead, we believe other operating expenses as adjusted will be in a quarterly range of 31% to $33 million.
Down modestly from the previous range.
Slide 12 illustrates the trend in earnings.
Operating income as adjusted of $61 6 million.
Increased by $14 2 million or 30% sequentially due to the prior quarter seasonal employment items.
At a higher average assets under management.
Normalizing for the seasonal items operating income increased 5%.
The operating margin as adjusted of 32, 3% compared with 26, 8% in the first quarter or 33, 2% normalizing for the seasonal items.
Other income expense as adjusted increased by <unk> 7 million due to higher unrealized losses on investments.
Total net interest income expense increased by $1 1 million, reflecting the higher gross debt and higher variable interest rates.
Net income as adjusted of $5 43 per diluted share increased 29%.
$4 20 in the first quarter.
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Second quarter net income per diluted share included a <unk> <unk> per share reduction from the discrete item.
Regarding GAAP results net income per share of $4 10, compared with $5 21 per share in the first quarter.
That included 31 of net acquisition related expenses, including transaction costs, partially offset by fair value adjustments to contingent consideration.
30, <unk> of net realized and unrealized losses on investments.
And 21 of favorable fair value adjustments to affiliate Noncontrolling interests.
Slide 13 shows the trend of our capital liquidity and select balance sheet items.
On April 1st we completed our acquisition of Alpha simplex for $113 million in cash.
Including $50 million drawn on our revolving credit facility.
In June we repaid $10 million of the revolver.
<unk> ended the quarter with net debt of 99 million, representing net leverage of four times EBITDA.
We continue to expect to repay the $40 million outstanding on the revolver over the course of the year.
Largely as a result of the transaction closing payment working capital declined to 124 million at June 30th from $184 million at March 31.
In addition, during the quarter, we repurchased 51840 shares for $10 million.
We continue to have a strong balance sheet.
With more than adequate levels of working capital and modest leverage providing meaningful financial flexibility.
With that.
Let me turn the call back over to George George Thanks, Mike We will.
I'll now take your questions to one or would you. Please open up the lines.
Thank you Les.
Ladies and gentlemen to ask a question. Please press star one on your telephone you within your automated message advising your hand is ray.
And then wait to hear your name announced.
Draw. Your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Summit <unk> with Piper Sandler Your line is open.
Thanks, Good morning, guys.
I just wanted to start on the fee rate.
AUM was up a bit sequentially still came in at the.
The fee rate on the AUM was up a bit sequentially here.
Just wondering with the large institutional inflows may be offset a bit by bayelsa simplex.
Can you unpack the dynamics around what drove the level here in the second quarter kind of net.
Net of any of those one timers.
Sure Ann.
The fee rate again, the geography me underlying changes in either AUM mix strategies that are either redeeming or pulling in assets can create.
A little movement within the components and.
The sub components, particularly in a quarter like last quarter, where you kind of had a rising market and then you had flows going in a different fee rate differentials, Mike do you want to go through the pieces yes.
I think as we look at the fee rate, providing it by product.
The mix shift certainly impacts the overall fee rate, we look at it by product. It's stayed in a relatively tight range, even increasing in the quarter. As you noted from from Alpha simplex and institutional has become a bigger part of the business. We noted it's now 37% of the business up.
<unk> 32, a year ago, so youre seeing that impact.
The overall fee rate I think adjusting for the discrete item, we kicked up from 42 to 42 and a half.
And reiterated the range, but that range will be impacted by the mix shift and by the market the.
The market action. So we will continue to update accordingly, but from our standpoint. The fee rate has been resilient has been resilient on each of the product categories and were were impacted more again by markets and the mix shift.
Got it thanks, Mike and then.
Nice to see the institutional wins in the quarter. Just wondering if you can get update on that pipeline for July to date and then.
How that demand for kind of institutional and SMA funds that have kind of tried it there.
Yeah on the institutional side, we continue to be pleased with the strength of the pipeline and as we speak to strength generally.
We prefer to see is diversity in terms of either strategies affiliates as well as geographies and I think we highlighted that in our comments.
We continue to see that.
<unk> is a nice pipeline again.
It's a very lumpy business. So of course there'll be different timing aspects of some of the mandates versus the others, but it is nice to see not only some of the fixed income strategies being attractive, but then that are at one fee level.
As well as some of the growth equity side, which is slightly different which sort of then lends to the changes in our fee rate, but we continue to be pleased with what that looks like and how diverse it is.
Great. Thank you and then last one from me here just on the fixed income side of the business I was just looking at retail outflows have been pretty consistent since rates started increasing last year.
<unk> did a bit slowing a little bit in recent months with a range of strategies that you guys have across fixed income can you talk about your expectations for the demand kind of across retail and institutional given the mix and then maybe you can add some commentary on that market neutral merger fund as well with an alternative Scott, it's a context environment.
Thanks.
Well on this on the second piece I think.
The macro view on mergers and acquisitions is not the most favorable that it's been so that's going to have an impact on how people look at strategies like that so again with some of the headlines and some of the transactions.
I think unfortunately, some retail investors are incorrectly.
Being a little more negative on those types of strategies than they should be going back to fixed income.
Our view is that they really should be a lot more of an interest in some of those strategies. We've seen some increases in some of our strategies improvements from where they were but not to the levels, where we need to be but the hope would be as people start getting a little more clarity on the rates.
Going forward they'll they'll start taking advantage of some different strategies than previously what they've been doing.
Great. Thanks for taking my questions.
Yes, no problem.
Thank you ladies.
Please standby for our next question.
Our next question comes from the line of Michael Cyprus with Morgan Stanley . Your line is open.
Hey, good morning, Thanks for taking the question maybe coming back to some of the commentary on the institutional pipeline I guess my follow up question here would just be how do you sort of characterize the fee rate on the pipeline compared to the 31 basis points or so institutional fee overall and I think you mentioned that you're at a low fee institution.
Mandate funded in the quarter, maybe you can help quantify is that single digit sort of ZIP code and what sort of strategy that was in the quarter.
Yes, and on that because I think Mike referred to it as lower fee.
So again, we're in the mix in terms of what we see going forward I think in the comments basically indicated that we still feel very comfortable with the range of 42 to 44, which again given the mix.
Good move up and down a little bit but to some of my earlier comments.
Sometimes we will see some larger mandates because of their size of their strategies, such as investment grade will be lower than other fees and then other strategies more sophisticated or high conviction equity strategies will up higher so we kind of look at that collectively in terms of the bucket because you'll be having some coming in and going.
So.
That one account did not impact the guidance that we're giving in terms of what the reasonable fee rate is because there'll be there are a lot of moving parts and then including.
The underlying assets, which for institutional our mix of fixed income as well as equity their relative sizes based upon market depreciation will also change anything else you'd add.
I think George you sum that up pretty.
Pretty well I think and specifically Michael looking at the at the pipeline.
It does support the current quarter's level of institutional.
<unk> just above that 31 five.
The rate level and it has given the breadth of it as fixed income as well as equity it has a breadth across geographies as well and looking at the new business that was also part of the strength in institutional in the current quarter.
Excluding this this larger mandate youre actually.
Above the fee rates. So you've got some puts some takes but when we look at the breadth of the business I think the current quarter's level is appropriate for modeling and supports against some of the strength that we're seeing on that institutional side right.
Alright.
Great. Thanks, and just maybe you could update us on how youre thinking about capital allocation here and M&A on the capital allocation side I hear you on paying down the $40 million revolver. It sounds like by the end of the year. Just how are you thinking about buybacks as well into the end of the year as well as M&A. How much time are you spending on that these days. It maybe you can give us.
An update on what sort of properties you are seeing out there where you might have interest from here.
Sure so in terms of the capital priority so.
The comments kind of indicated we do believe that it's appropriate to pay down what we drew on the credit facility. So our goal and I think we commented on last quarter as well as in our comments earlier today.
By the end of the year, bringing that down and again, given our current low level of leverage on our cash flow generation. We can certainly do that and we continue to believe that repurchasing our shares.
In view of the current valuation is a great use of our capital. So we purchased.
He has $10 million last year, and we continue to see that as an opportunity in terms of M&A continue to be as active as we've always been which really refers to the amount of activity and work that we're doing sometimes which turned into transactions and sometimes don't we continue to see that to be.
An area of opportunity for US again, we always do try to prioritize organic growth, but we continue to consider inorganic opportunities.
Do you think there is continues to be a lot of activity going on in the M&A market in our sector. We continue to evaluate things that we think will be strategically additive to the business in terms of further diversification.
Particularly as it relates to clients and geographies as well as you've seen in our last two transactions were also kind of focus towards less correlated investment strategies from the traditional long only equity and fixed where we have always had a pretty good.
Array of that so we'll continue to evaluate that.
But again, we'll continue to take the cash that we generate.
And make sure that we we have a comfortable level of leverage as well as returning.
Returning capital to shareholders through both our both our repurchases as well as our dividend and as you know we've increased our dividend annually over the last few years.
Mike anything else you are greater.
I think George the only thing I'd I'd reiterate on what.
What you indicated in part of the prepared remarks on capital we do continue to invest in the business George alluded to the fact that we are seeing CLO opportunities.
Wood.
Use capital to support that.
The teams in CLO issuance, which.
It's something that the current market environment.
Seems that may be conducive so we're.
Balancing all the priority as George alluded to as well as continuing to support our affiliates growth.
Great and just final question for me you guys have done a number of acquisitions over the past couple of years.
<unk> also had these contingent payments our earn out so I was hoping you might be able to remind us on what's still to come through from a cash standpoint over the next couple of years that that could be paid out.
Yes.
We have.
The contingent consideration that we look at each quarter on the on the balance sheet and you may recall that each first quarter, we have <unk>.
<unk> of the revenue participation payments.
That had been in the <unk>.
$25 million range over the first two periods. This.
Would be the third period coming up and we had talked about the the bulk of that being over a five year period. Then there is also some longer tailed contingent consideration related to Westchester capital, which would be out.
Years.
405 post that transaction, which closed in 2021 so that's.
Two to three years from now so.
Or imminent over the next two years, so the first quarter of each year related to the revenue participation payments.
Great. Thank you.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would now like to turn the conference back over to Mr. <unk>.
Great. Thank you so much and I want to thank everyone today for joining us and as always if he has any additional questions. Please feel free to reach out with further questions. Thank you very much.
Ladies and gentlemen that concludes today's call. Thank you for your participating you may now disconnect.
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