Q1 2024 Victory Capital Holdings Inc Earnings Call
Good morning, and welcome to the victory capital first quarter 2024 earnings Conference call.
Oh colors 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.
Matthew J. Dennis: She's chief of staff and director of Investor Day.
Director of Investor Relations.
Please go ahead Mr. Dennis.
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 that may cause actual results to differ materially from those expressed on today's call.
David Craig Brown: Victory capital assumes no duty and does not undertake any obligation to update any forward looking statements.
David Craig Brown: 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 earn.
<unk> press release and in the slide presentation accompanying this call.
Of which are available on the Investor relations portion of our website at IR Dot <unk> dot.
Dot com.
David Craig Brown: It's 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 2024 earnings Conference call I'm joined today by Michael Pellekar problem, 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 quarter. After that I will provide a quick summary of the memorandum of understanding with the Monday that we announced last month before I turn the call over to Mike to review the financial results in greater detail.
David Craig Brown: Following our prepared remarks, Mike, Matt and I will be available to take your questions.
Okay.
Mike: The quarterly business overview begins on slide five.
During our last earnings call, we commented on our improving business dynamics and the beginning of a constructive environment. We were seeing in sales activity as 2023 came to a close.
David Craig Brown: This momentum continued through the first quarter with both gross and net sales, reaching their best levels in more than a year during the first quarter of 2024.
Our net long term flows are positive in March and total client assets rose more than 5% in the first quarter.
David Craig Brown: By positive market action.
We ended the quarter with a little more than 175 billion in client assets, providing us a good jump off point as we entered the second quarter.
The fee rate on our AOS was 53 basis points and has been consistently within a basis point of the same level for the past year.
Adjusted EBITDA margin was 52, 1% for the quarter, which is industry, leading and a testament to our focused execution combined with the efficiency and effectiveness of our operating platform.
Overall, we have an optimistic outlook for our business and are beginning to realize benefits from the investments we've been making across our platform.
For example, the work and investments made securing attractive shelf space on numerous intermediary platforms for the products managed by our fixed income group victory income investors is paying off as the franchise turned net flow positive in the first quarter.
Victory income investors, specifically generated strong momentum in the retail and retirement channels, which is carried over to the second quarter as well.
We continue to strategically invest in areas that will have a positive impact on gross such as new products and new vehicle wrapper is for existing strategies.
We are spending a lot of time on our ETF lineup associated staffing and the positioning of our products as we continue to build on our momentum in.
In addition, we are making investments in people and technology, particularly when it comes to data and analytics across our platform.
Turning to slide seven our investment performance remains strong with 69% of our AUM in mutual funds or Etfs, earning overall four or five star ratings.
This is broadly diversified encompassing 45 different products up from 42 products at the beginning of the year.
Over the critical three and five year periods, 61% and 85% of our total AUM outperformed their respective benchmarks.
And on a relative ranking basis for the trailing three years 34 funds, representing nearly half of our AUM in mutual funds and Etfs were ranked in the top quartile of their respective categories by Morningstar as of the end of the first quarter.
On slide eight you can see our capital allocation strategy Flywheels.
After returning a record amount of capital to shareholders. In 2023, we were restricted from conducting share repurchases due to our negotiations with the Monday throughout the first quarter, we anticipate that to change as we move through the year and progressed through the different stages of the transaction.
As a growth company reinvesting in our business for organic growth.
The acquisitions are the best way for us to deploy capital and increase shareholder value.
During the quarter, we made our first earn out payment to west and advisors.
Western has continued to generate positive net flows and grow revenue since the acquisition.
With the addition of West end models onto new distribution platforms with expanding the number of financial advisors that are using their products. We expect this success to be sustained and accelerate moving forward.
David Craig Brown: We are projecting a much lower leverage ratio upon the close of the pending transaction with the Monday given the transaction doesn't include any debt.
This will give us more flexibility as we look out at future acquisition opportunities.
Moreover, this will provide us with a great Foundation return shareholder capital multiple forms an even higher rate moving forward.
One of the major objectives for the transaction is to provide a Monday as global distribution network with more U S managed investment products and strategies.
This perfectly aligns with our inorganic growth strategy of bringing new products onto our platform through acquisitions and these new products will be distributed through their global distribution network.
Turning to slide nine I will quickly recap our Mou with the Monday. This is a strategic and multi dimensional transaction that will materially and positively transformed our company in many ways.
The exclusive 15 year global and reciprocal distribution agreement will greatly enhance the globalization of our firm by both expanding our distribution reach outside of the U S market and by obtaining access to a wider range of high quality investment products managed outside of the U S to distribute in the U S.
The ability to feature of victory capital's products in and sell through arguably one of the top global distribution networks in the world is extremely exciting and powerful through.
Through these agreements Ah Monday will become the exclusive distributor of all victory capital products outside of the U S and victory capital will be the exclusive distributor of Monday products in the U S.
Victory capital will also be the exclusive provider of U S manage active asset management products for money's distribution network outside of the U S, thereby opening a large and robust international distribution channel for our products to reach clients around the world as a reminder, our Monday has a local presence in <unk>.
35 countries and relationships with 1003rd party distributors, reaching more than $100 million retail clients and more than 500 institutional clients.
Another important aspect of the transaction is the contribution of our Monday's U S business in the victory capital in exchange for a 26, 1% economic interest in victory capital that carries voting rights of four 9%.
This ownership stake in our firm is intended to align incentives and sets the foundation for success with the reciprocal distribution agreements.
The combination of the Monday U S business into our business adds significant size scale, along with complementary investment capabilities in fixed income equity and solution strategies.
It also immediately Diversifies, our client base with an increased international presence as more than a third of a Monday <unk> AUM is currently from non U S clients.
While the transaction is dynamically strategic it is also very attractive financially the combination of the Monday U S business onto our platform aligns very well with our proven acquisition and integration playbook.
We anticipate the low double digit EPS accretion by the end of the first full year of ownership and to achieve a $100 million of expense.
Synergies within the first two years of ownership with the majority of that realized within the first year.
David Craig Brown: Just to be clear that doesn't include any revenue synergies.
Since we are not using cash or debt as consideration the incremental earnings will significantly reduce our leverage ratio and provide additional strategic and capital flexibility.
This will allow us to continue reinvesting in our business to drive organic growth as well as continue pursuing our inorganic growth initiatives, while returning capital to shareholders in multiple forms all of which is consistent with our long term strategy.
On slide 10, we highlight publicly available data from Morningstar on the Monday U S. Mutual funds illustrating recent net flows and fund ratings.
This information represents approximately $45 billion.
David Craig Brown: Keep in mind that the total AUM for the Monday U S business is approximately $104 billion and a total U S portion is $70 billion.
So the $45 billion is just a piece of the overall total but it does give some valuable insight into flows and investment performance.
Moreover, note that we disclosed in our analyst call announcing the Mou that the non U S portion of their business has had an average of $12 billion of annual gross flows a year over the last five years and that each year has been net flow positive for this segment of their business over that same timeframe.
David Craig Brown: Net flows are shown by asset class as you can see there are total U S Fund complex has been net flow positive for year to date 2024 with net inflows in fixed income and solutions products being partially offset by net outflows in equity funds.
Given our Monday U S is strong investment performance and the fact that 77% of their mutual funds were rated four or five stars overall by Morningstar. We are projecting that the net flow profile of the business will continue to improve and benefit further from our added distribution resources and relationships post the close of the <unk>.
<unk>.
We are continuing to work through the final pieces to get to a definitive agreement and expect to announce the completion by the end of June with the closing expected by year end.
With that I will turn the call over to Mike to go through the quarters financial results in greater detail Mike.
Thanks, Dave and good morning, everyone.
The financial results review begins on slide 12.
Average AUM increased 8% quarter over quarter, and revenue rose $10 1 million to $215 $9 million.
Mike: Revenue realization remained steady with any quarter over quarter change the result of asset <unk> vehicle mix.
GAAP operating income was $84 8 million and GAAP net income rose slightly to $55 7 million or.
Or 84 cents per diluted share.
Mike: Up from 82 per share in the prior quarter.
Adjusted EBITDA rose, 4% to $112 4 million in the quarter, marking the highest quarterly level in over a year.
This was more than 13% higher than in the first quarter of last year.
Margins were 52, 1% for the quarter, which includes the impact of seasonally higher payroll tax and benefits that reset at the start of the year.
We continue to guide to a long term adjusted EBITDA margin of 49%.
Adjusted net income with tax benefit per diluted share increased 9% from the fourth quarter and.
And by 16% from the same quarter in 2023.
Reaching $1 25.
We continue to hold elevated cash balances to enhance our flexibility and ended the quarter with $80 million in cash.
During the quarter, we made an earn out payment of $80 million for the western acquisition, reducing the overall earn out liability on our balance sheet.
Our net leverage ratio remained at a modest 2.0 time at quarter end.
We returned $35 million to shareholders in cash dividends and share repurchases in the quarter.
And announced a 10% increase in our quarterly cash dividend to <unk> 37 per share in the second quarter, which will be paid on June 25 to holders of record on June 10th.
Turning to slide 13, our total client assets remained balanced from a distribution channel perspective, but the channel mix remaining very consistent over time.
I would highlight that approximately 97% of our AUM is being managed for U S clients.
Enhancing our geographic diversification is one of the benefits of the Monday transaction.
On a pro forma basis post the close of the Monday transaction, approximately 15% of our assets will immediately come from non us clients and.
And a global distribution agreement to promote and sell our products through the Monday distribution engine is expected to increase the proportion of assets that we manage for non U S clients over time.
Slide 14 illustrates our flows.
Long term gross and net flows improved quarter over quarter and year over year.
Reaching their best levels in more than a year.
With long term gross sales of $7 billion and net long term AUM outflows of $1 billion.
Positive momentum accelerated towards the end of the quarter with long term net flows turning positive during March.
We have continued confidence that our investments to support organic growth have us well positioned.
We have very competitive investment performance and five of our investment franchises for net flow positive for the quarter.
That list includes victory income investors West.
Western advisors integrity, sofas and Rs global.
Moreover, our institutional channel continues to be an area of strength as it posted another quarter of positive net flows.
Revenues are highlighted on slide 15.
To enhance transparency, we began breaking out other assets in the first quarter. Because these assets are managed uniquely and Carey unusually low fees that are not representative of our typical client assets for consistency prior periods have been restated firm wide the average fee rate on total.
AUM remained steady at 53 basis points.
Within our expected range.
This 53 basis points excludes the $5 $1 billion of other assets that had an average fee rate of just three five basis points.
Turning to expenses on slide 16 on a GAAP basis operating expenses rose, mainly due to higher noncash expenses.
Mike: In particular, the change in valuation of contingent earn out payments rose to $12 $2 million, which was more than $8 million higher than the fourth quarter.
We also incurred over $1 million more of acquisition related expenses in the quarter and had higher compensation expenses related to the higher level of earnings and the seasonal resetting of employment taxes and benefits in the first quarter.
Mike: These increases offset lower general and administrative expenses and depreciation and amortization in the quarter.
Nonoperating expenses were essentially flat on a quarter over quarter basis.
On slide 17, we cover our non-GAAP metrics.
Adjusted net income with tax benefit was $82 $3 million.
Adjusted EBITDA was $112 $4 million, representing the highest level in over a year.
Adjusted EBITDA margin was 52, 1% and 51, 6% for the trailing 12 month period, which is ahead of our long term guidance of 49%.
We are maintaining our current guidance at 49%, which continues to provide us with the flexibility to invest in our platform.
Moreover, as we have stated in the past the margin will fluctuate quarter to quarter based on the timing and nature of investments.
Finally, turning to slide 18, we continued to demonstrate strong balance sheet flexibility as we ended the quarter with $80 million in cash our debt level remains the same.
With our $100 million revolver Undrawn.
That concludes our prepared remarks, I will now turn it back over to the operator for questions.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
In order to ask a question.
Star then the number one on your telephone keypad.
Your first question comes from the line of Alex.
<unk> <unk> with Goldman Sachs.
Please go ahead.
Morning, All of this is Luke on for Alex Thanks for taking the question.
With the products that you're set to onboard and integrate following the partnership with the <unk> and the acquisition of Pioneer brand. How are you thinking about the organic growth trajectory of the business longer term.
And are there any areas of the pioneer business or aspects of the agreement that most excites you as it relates to potentially underwriting and improvement in organic growth.
Good morning.
I'd start off by saying the business today as it sits.
Monday U S businesses is growing in 2024 as we showed at least on the mutual fund side on the publicly available data is actually in a positive organic growth mode.
<unk> got excellent investment performance and they have a lot of momentum and I don't see that changing throughout the year. So we're pretty excited about generally the product set that they have.
And what they're doing today and when you put that into our distribution network coupled with their existing distribution networks I think that sets up to really accelerate the momentum.
Specifically they are fixed income platform given the environment that we're in and the environment I think we're going to be in over the next couple of years is an exciting part of what.
Speaker Change: What they are Brean.
Additionally, a third of their existing assets are outside of the U S. So they have a pretty well developed dish.
Distribution infrastructure outside of the U S. And then the ability for us so the victory legacy victory products to plug into that is really exciting.
And then generally speaking just having in the U S more distribution marketing resources and then the exclusivity outside of the U S through the Monday network.
It really sets us up for.
An opportunity to have really good organic growth.
And I would say that.
Given.
Given the environment, that's coming around fixed income with our existing fixed income platform I think we see we see the tide turning at least from an organic growth perspective.
Got you awesome. Thank you and one quick follow up if I can can you just give color on the asset mix and flow trends at <unk> across the data that we can't see publicly through Morningstar. Thanks.
Speaker Change: I can't it wouldn't be it wouldn't I don't have full transparency into and it wouldn't be appropriate.
One thing I would add to what I had said before is keep in mind. The Monday U S business does not have an ETF platform.
One of the things we are anticipating is using our ETF platform and their investment manufacturing capabilities and bringing those things together. So I think that thats. Another added component of what the opportunity is.
I appreciate the color.
Our next question comes from the line of Ken Worthington with Jpmorgan.
Please go ahead.
Speaker Change: Hello. Good morning. Thanks for taking my question. This is Michael Cho in for Ken Worthington Today, I, just wanted to touch on a Monday distribution partnership.
Here again, I realize now they have a clear economic stake to help incentivize that partnership but can you also just talk through how some of that sales force or the operating level incentives might be executed, which gave us some confidence around that access of the 15 year partnership.
So outside of the U S.
We will be the exclusive provider of U S manufactured active asset management capabilities. So all of the distribution outside of the U S that is drawing upon U S manufacturing so any of.
The products any of their clients that are desiring products that are manufactured in the U S will come from victory capital the pro forma victory capital.
So do you think about portfolios outside of the U S and the allocation to the U S markets.
Going forward, we will be the exclusive provider of all of those allocations.
That's pretty powerful given Mondays too.
<unk> trillion dollars in there and they've got 500 institutional clients.
Our local presence in 35 countries around the world and I believe they are in about 1000 distributor network. So very very powerful distribution and then we'll be providing them. The U S manufactured aspect of it.
<unk>.
As today, the Monday U S businesses and others will now have the exclusive right to do that.
Okay, great. Thank you and then just just just to follow up on some.
Near term trends I think you called out net flows turned positive in.
Speaker Change: And Mark just curious what was kind of the key drivers for that inflection exiting the quarter.
And then any thoughts on flows that you saw in April and maybe into may as well. Thanks.
So we've seen a turn as we highlighted in the prepared remarks on the fixed income side.
Victory income investors.
Our ETF platform victory shares.
Our institutional channel continues to be strong.
And then generally speaking our investment performance is really really solid and thats supporting good momentum.
Looking into the second quarter.
We don't we don't give guidance quarter by quarter on flows, but we don't see.
Any of that really changing.
Ex any market change in market conditions.
Great. Thank you.
And next question comes from the line of <unk> Chen.
Richard.
BMO capital markets.
Please go ahead.
Thank you and good morning team, so clearly another strong margin quarter as.
As you look Q2 closing day Monday U S transaction.
What gives you confidence that victory can maintain.
Our operating discipline and margin levels, considering that meaningful increase.
In other words, we typically think of scale as an advantage for margins, but in victories case.
Up to what point and scale do you believe you.
You can maintain the culture and.
Operating efficiency.
I think we guided towards.
Keeping the 49% guidance, we have today and what we reiterate that in the pro forma business.
We've obviously exceeded the 49% guidance.
Over the last few years, but we've also highlighted that it'll ebb and flow based on the investments we're making.
So we're very confident in the 49% in the pro forma organization.
Our track record and history of integration.
And when we talk about integration, we talk about smartly integrating.
I think is top of the industry.
And we have a lot of confidence that.
The principles of victory capital.
Are the right principles on how to run it in investment management organization for the future and we think that those principles will be able to to partner with among the U S and.
Those people that work for them under U S will adopt the principles, we have to maintain our culture.
I don't think that.
Anything that we have seen.
All the diligence we have done and we have been working on this for a while gives us any reason to believe that we wouldn't be able to maintain our culture and the margins and our operating discipline.
Going forward and even as we think about additional acquisitions posted Monday U S. It would be the.
<unk> same story.
Okay, great and staying on the topic of expenses, how do you think about the pace of realization.
On the $100 million.
As expense synergies for 'twenty fives.
Good morning, Yes, So I think as we had said in our prepared remarks.
And Dave just highlighted the level of the work that we've done we're very confident in the $100 million expense synergy.
We have put out there and kind of had commented on.
We also said that we expected to realize them over two years.
Really with the majority of those coming in the first year.
And.
As Dave mentioned, our track record in our history.
Integration and expense realization I think kind of speaks for itself and we have a pretty time tested and well.
Thought out plan with respect to integration and we believe will execute on that with respect to the <unk> acquisition as well.
Okay.
Great. Thank you very much.
Okay.
Our next question comes from the line of Michael Thanks, Chris.
Morgan Stanley.
Please go ahead.
Great. Thank you just wanted to circle back to the distribution agreement that you have.
Within Lindsay with respect to selling their products into the U S. Just hoping you might be able to elaborate on how that might work maybe you could talk about the economics, what that can mean for victory and what strategies do you think can make the most sense to sell into the U S. Over time, how many products to envision selling and how do you navigate prioritizing selling their products in the.
Speaker Change: U S versus ear products.
Yes, I'd start off by saying is they have a good manufacturer investment manufacturing capability outside of the U S. There are a few products that debt today.
We think there is an opportunity to sell one maybe example would be an emerging market that product or maybe.
Speaker Change: A product that.
That is like that may be through an institutional channel.
So there will be there'll be a number of products that they have based on the market conditions that will move through different channels.
As far as priorities.
Our sales force is used to selling and it has come up with a system of selling multiple.
Speaker Change: Products.
Speaker Change: Different asset classes. So it isn't really about what the prioritization is it's really about accepting what the client demand is so we're well. This is really part of what we do today. So we're we're well.
Schooled on how to do that the economics of it will be.
Very similar to what from our perspective very similar to two.
To what we have today is selling our own products. So the margin requirements, we have with products.
Speaker Change: Our own will be that will be the same.
It really will be the same margins with.
With products that we sell into the U S.
And it really just gives us another avenue to get closer to different clients by being able to offer them a wider range of investment solutions and capabilities.
Great and just a follow up question on the margin profile I hear you on reiterating the synergies coming through you are sticking to the 49% margin profile, but just curious as you think about this large transaction. It seems like it can enhance our scale and revenues coming on at high incremental margins. So.
Just hoping maybe you can elaborate on some of the moving pieces there and offsets that leads you to maintain the margin outlook, maybe you could talk about how much you're looking to spend it seems like maybe there is an underlying net net spend how much you're looking to invest back in the business and what are the top areas.
Yes, so we've guided towards $100 million of synergies and then the 49%.
The $100 million of synergies is a net number.
We'll invest a significant amount of money into the platform.
A lot of that will be into the U S intermediary.
Portion of our business distribution portion of our business.
So we will continue to invest on our platform.
I think one of the major advantages we have is the way our platform is set up is we have the ability to invest.
And invest in a way, where it's very efficient and I think you can see that by the margins.
So a lot of what we're going to be doing is investing even though you see a $100 million of cost synergies it'll be a net number and we will be investing heavily back into the platform as we are today.
Great. Thank you.
As a reminder, if you'd like to ask a question. Please press star followed by the one on the telephone keypad.
And next question comes from the line of Adam <unk> with UBS.
Please go ahead.
Alright, Thank you and good morning.
First I wanted to focus in on solutions, a little bit, obviously, west and doing well.
Monday U S business had positive flows in their solutions business, so hoping to get maybe a fuller picture of the solutions business that <unk> will bring in.
The complementary nature of it versus what victory already has and whether or not those those businesses will be integrated into one sort of solutions provider or remains somewhat separate thank you.
Good morning, Adam.
Solutions business for the amount of U S business, it's really a multi asset offering so very similar to the offering some of the offerings that victory has.
Within victory our solutions include multi asset. It also includes some risk based as well as target date products as well as our rules based ETF business.
We don't envision consolidating the amount of U S solutions business into our platform they are distinct enough.
And we will remain under the <unk>.
Current on Monday U S investment team platform.
We're excited about the opportunity to take on additional solutions offerings, and we think there is an opportunity.
Dave had mentioned earlier to take some of the product set that a Monday U S offers and package those into ETF offerings that.
That we think will have a tremendous opportunity to see organic growth going forward as they currently don't have an ETF offering.
Great. That's helpful that fills it out tanks and then just as a follow up.
Kind of the reverse of Mikes question around distribution in terms of.
Victory at a Monday U S products being distributed.
<unk> outside the U S.
Just wondering you mentioned that a lot of those products right now obviously come from when the U S. But there are also other providers. So just wanted to get a sense of kind of the asset mix within those other providers where victory might be kind of taking some share there. Thank you.
Yes.
I think theres a couple of elements to it first is.
There's probably an under allocation.
The Monday.
Clients in the U S products. So part of this is actually open space that we will be taking.
And you think about the evolving platform that they have where they are in China. They are in India and what's happening in some of those countries around allocation to U S markets over a longer period of time. So some of this is prospective on what we anticipate happening.
So that's the first piece I think the second pieces there are.
Other solutions that are on their platform outside the U S.
I would say that will probably take some of that market share I would presume.
And they'll have an economic incentive to want to do that because.
They will have a 26, 1% economic stake in our business.
And I would also just reiterate that.
Monday U S business, if you average it over the last five years, it's $12 billion a year in gross flows that part of their business has been net flow positive over the last five years.
And then I think with our added product set and then as I mentioned before our desire and ability to reinvest in the platform I would imagine that would only accelerate as we think about going forward.
And then you put just underneath all of that is we have excellent investment performance from a firm wide perspective, so the products we would be.
Able to offer the Monday clients.
Would have really good investment performance and then we also have the ability to create new product and go out and acquire new product.
Great. So it sounds like you have more of a bigger pie situation than straight substitute. Thanks, a lot appreciate it.
Correct.
I will now turn the call back over to David Brown for closing remarks. Please go ahead.
Thank you and again, thank you for your interest in victory capital. We look forward to keeping you updated on the Monday transaction as we move forward and to the definitive agreement that we anticipate by the end of the second quarter.
Have a wonderful day.
This concludes today's call. Thank you all for joining US and you may now disconnect your lines.
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