Q1 2025 Virtus Investment Partners Inc Earnings Call
Thanks, Judy 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 2025.
Speakers today are George Aylward, President and CEO, and Mike Anderson, 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 Reform Act of 1995.
Such are subject to known and unknown risks 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 are 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.
George George: Now I'd like to turn the call over to George George Thank you, Sean and good morning, everyone.
Speaker Change: I'll start today with an overview of the results. We reported this morning, and then give it over to Mike for more detail.
Speaker Change: Market performance volatility were challenging in the first quarter, leading to lower assets under management and while we had net outflows we continued to deliver solid financial and operating results key highlights included.
Speaker Change: Earnings per share over the prior year period.
Speaker Change: Increased sales in fixed income strategies across products.
Speaker Change: Net flows in Etfs.
Speaker Change: Very strong relative investment performance, especially through the recent volatility are.
Speaker Change: A higher level of share repurchases.
Speaker Change: Solid balance sheet at quarter end, providing ongoing flexibility to invest in the business and return capital.
Speaker Change: The markets, we had been experiencing which continue in the second quarter with a heightened level of uncertainty and volatility is a type of environment in which active managers can demonstrate their value.
In our equity offering several of our managers employ high conviction or high quality orientations that seeks to deliver strong investment performance and provide a level of downside protection in difficult markets.
Speaker Change: On the fixed income side, we offer multiple strategies across the spectrum of credit quality and duration with products that are attractive in a variety of rate environments.
Speaker Change: We are pleased with the investment performance of our managers have generated the first quarter over 70% of our equity strategies beat their benchmarks, reflecting the benefit of quality active management in challenging markets.
Speaker Change: Our strategies are also consistently outperformed over market cycles, with 74% of equity assets, beating benchmarks over 10 year period.
Speaker Change: We were pleased that our long term performance was recognized again by Barron's, which identified us as the number two type one family that 10 year period. He also ranked us as the third top one family in a taxable bond category for 2024.
Speaker Change: In terms of product development, we remain very active in expanding offerings and our key focus areas, including Etfs global funds and retail separate accounts.
Speaker Change: For Etfs and global funds, we have several strategies under development and products and filings that we expect to launch over the next few quarters, including our first interval fund.
Speaker Change: Retail separate accounts, we completed structural steps to facilitate an increase in our fixed income offerings of retail separate accounts.
Speaker Change: We've also continued to expand the asset raising efforts of our $8 5 billion out of the wealth management business and our expanding resources to support that effort.
Speaker Change: Turning now to a review of the results.
Speaker Change: Lastly, its under management were $167 5 billion at March 31st down sequentially due to market performance and net outflows.
Speaker Change: Total sales of $6 2 billion compared with $6 4 billion in the fourth quarter and were generally stable across products. Despite the mark the market disruption in March.
Speaker Change: Total net outflows of 3 billion improved from $4 8 billion as the prior quarter included a large partial redemption.
Speaker Change: Reviewing by product.
Speaker Change: Institutional net outflows of $1 2 billion were primarily due to domestic and global large cap equity strategies, partially offset by positive net flows in small and mid cap equities as well as emerging market debt.
Speaker Change: We continue to see interest in our institutional offerings from investors seeking differentiated active managers with strong investment performance and there continues to be broad representation of sales across our managers geographies and investment strategies.
Speaker Change: Retail separate accounts were in net outflows in the quarter largely reflecting the soft closing of our Smith cap or equity model offering late last year assistant that strategy has grown significantly and it was soft close to limit ongoing asset growth in order to protect future returns.
Speaker Change: Thank you to all for other Smith cap strategies as well as mid cap and once we have significant capacity.
Open end fund net outflows of $1 1 billion were essentially unchanged sequentially.
Speaker Change: Distant with market trends U S. Retail fund net outflows were driven by equity strategies, partially offset by positive net flows in fixed income.
Speaker Change: ETF assets reached $3 4 billion. All continued strong positive net flows of point 3 billion.
Speaker Change: Over the past year, Etfs generated organic growth rate of 73%.
Speaker Change: In terms of what we're seeing in April investors continue to take stock of ongoing market volatility and uncertainty remain cautious with their investment decisions trends in retail remained relatively consistent with the latter part of the first quarter for institutional known redemptions do slightly exceed known wins than institutional flows.
Speaker Change: To predict.
Speaker Change: Wins were broad base, representing six managers eight strategies and include both U S and non U S clients.
Speaker Change: Oh.
Speaker Change: Our first quarter financial results reflected the impact of seasonally higher employment expenses, excluding those items. The operating margin was 32, 7%.
Speaker Change: Earnings per share as adjusted of $5.73 declined from the fourth quarter due in part to a $1 <unk> per share of seasonal employment expenses.
Speaker Change: On a more comparable year over year basis earnings per share as adjusted increased 6%.
Speaker Change: Turning now to capital we continue to take a balanced approach for our capital management by investing in our growth returning capital to shareholders and maintaining appropriate levels of leverage during the quarter, we used 26 million to repurchase or net settled approximately 146000 shares over the past year our repurchases have.
Speaker Change: Reduced shares outstanding by 3% on a net basis.
Speaker Change: In addition, we made a 23 million of revenue participation payments, which reduced our contingent liability to $40 million.
Speaker Change: The bulk of the remaining revenue participation obligation will be paid in the first quarter of next year.
Speaker Change: Similarly, our final stage equity purchase of our majority owned affiliate will be made in the third quarter of this year.
Speaker Change: We ended the quarter and a modest net debt position as the first quarter represents our highest quarter of cash utilization given the timing of annual incentives and our revenue participation payments.
Speaker Change: A low level.
Speaker Change: Beverage and significant cash flow generation provide ongoing opportunities to invest in the growth of the business.
Mike Anderson: And on capital to shareholders, so with that I'll turn the call over to Mike Mike.
Mike Anderson: Thank you George good to be with you all this morning.
Mike Anderson: Starting with our results on slide seven assets under management.
Mike Anderson: Our total assets under management at March 31.
Mike Anderson: Or $167 5 billion and represented a broad range of products and asset classes.
Mike Anderson: Byproduct institutional is our largest category at 34% of the U N.
Mike Anderson: Retail separate accounts, including wealth management at 28%.
Mike Anderson: And U S retail mutual funds at 27%.
Mike Anderson: The remaining 11% comprises closed end funds global funds and Etfs.
Mike Anderson: We are also diversified within asset classes.
Mike Anderson: In equities between international and domestic and within domestic well represented among mid small and large cap strategies.
Mike Anderson: And fixed income is well diversified across duration credit quality and geography.
Mike Anderson: We continue to have compelling relative investment performance across products and strategies.
Mike Anderson: As of March 31.
Mike Anderson: 71% of rated retail fund assets and 33 funds at four or five stars.
Mike Anderson: 86% were in three four or five star funds.
Mike Anderson: In addition, 61% of fund AUM outperformed the median of their peer groups over the five year period.
Mike Anderson: Etfs have also had strong performance with 91% of ETF assets exceeding median peer performance for the three year period.
Mike Anderson: And 12 of our 14 rated Etfs were rated three four or five stars.
Mike Anderson: And as George discussed recent performance, particularly by our quality equity managers has been compelling.
Mike Anderson: First quarter market volatility with 73% of equity AUM, beating benchmarks in the quarter.
Mike Anderson: Okay.
Mike Anderson: Turning to slide eight asset flows.
Mike Anderson: Yes.
Mike Anderson: Sales of $6 2 billion compared with $6 4 billion in the fourth quarter as higher sales of fixed income strategies were offset by lower sales across other asset classes.
Mike Anderson: Reviewing byproduct.
Mike Anderson: Institutional sales of $1 5 billion relatively unchanged from one 6 billion last quarter.
Mike Anderson: As higher fixed income sales, particularly emerging markets debt.
Mike Anderson: Were offset by lower alternatives and equity strategies.
Mike Anderson: Retail separate account sales of $1 7 billion were also essentially unchanged from $1 8 billion in the prior quarter.
Mike Anderson: With lower smid cap sales, mostly offset by higher small cap large cap at fixed income.
Mike Anderson: Open end fund sales of 3 billion were unchanged with higher sales of alternative.
Mike Anderson: Fixed income.
Mike Anderson: And multi asset strategies offset by equities.
Mike Anderson: Within open end funds ETF sales were again strong at <unk> 4 billion.
Mike Anderson: We continue to prioritize new ETF capabilities and further availability through intermediaries.
Mike Anderson: Total net outflows of 3 billion compared with $4 8 billion last quarter reviewing byproduct institutional net outflows of $1 2 billion improved from $3 8 billion in the prior quarter.
Mike Anderson: By strategy within institutional we had positive net flows in emerging markets debt.
Mike Anderson: And small and mid cap equity strategies.
Mike Anderson: As always institutional flows will fluctuate depending on the timing of client actions.
Mike Anderson: Yes.
Mike Anderson: Retail separate accounts had net outflows of <unk> 7 billion largely related to the soft close of certain smid cap equity model offerings late last year.
Mike Anderson: For open end funds net outflows of $1 1 billion were at essentially the same level as the prior quarter.
Mike Anderson: With positive net flows.
Mike Anderson: And fixed income strategies.
Mike Anderson: We then open end funds Etfs continued to generate a double digit organic growth rate with <unk> 3 billion.
Mike Anderson: Our positive net flows.
Mike Anderson: Okay.
Mike Anderson: Turning to slide nine investment management fees as adjusted of $178 5 million decreased 7%, reflecting lower average assets under management and higher performance fees in the prior quarter.
Mike Anderson: The average fee rate was 41 seven basis points.
Mike Anderson: And compared with 42 basis points in the fourth quarter.
Mike Anderson: Excluding performance fees from both periods the average fee rate was unchanged sequentially.
Mike Anderson: At 41 seven basis points.
Mike Anderson: Looking ahead, we continue to believe an average fee rate in the range of 41 to 42 basis points is reasonable for modeling purposes.
Mike Anderson: With performance fees of $3 million to $5 million per year incremental to that range.
Mike Anderson: As always the fee rate will be impacted.
Mike Anderson: By the markets and the mix of assets.
Mike Anderson: But.
Mike Anderson: Okay.
Mike Anderson: Slide 10 shows the five quarter trend in employment expenses.
Mike Anderson: Total employment expenses as adjusted of $109 4 million increased 5% sequentially, reflecting $10 million of seasonal employment expenses related to the timing of annual incentives.
Speaker Change: Merrily incremental payroll taxes and benefits.
Speaker Change: Excluding the seasonal items employment expenses decreased by 5% sequentially.
Speaker Change: Merrily due to lower profit based variable incentive compensation.
Employment expenses were 55, 4% of revenues as adjusted.
With the sequential increase is due to the seasonal expenses, excluding those items employment expenses were 53% of revenues.
Speaker Change: If markets remain at current levels. It is reasonable to anticipate employment expenses as a percentage of revenues would be at the higher end of our outlook range of 49%.
Speaker Change: 51%.
Speaker Change: As always it will be variable based on market performance in particular.
Speaker Change: As well as profits and sales.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Turning to slide 11.
Speaker Change: Other operating expenses as adjusted continued to be in a relatively stable range as we have offset increasing costs with active expense management.
For the quarter other operating expenses were $31 3 million essentially unchanged from the prior quarter.
Speaker Change: As a percentage of first quarter revenues other operating expenses were 15, 8%.
Speaker Change: Up from 14, 6% in the fourth quarter due to lower revenues.
Speaker Change: Looking ahead, we continue to be focused on managing these expenses within a narrow range.
Speaker Change: For example, we have reduced our office space in several locations and expect to generate savings of approximately 1 million per quarter from those activities starting in the third quarter of this year.
Speaker Change: Actions like these will help us continue to maintain a quarterly range of $30 million to $32 million, which remains reasonable for modeling purposes, all else being equal.
Speaker Change: In addition, keep in mind that our annual board of directors equity grants occur in the second quarter.
Speaker Change: Slide 12 illustrates the trend in earnings.
Speaker Change: Operating income as adjusted of $54 $6 million declined from $74 5 million sequentially.
Speaker Change: In large part due to the seasonal employment expenses.
Speaker Change: Excluding those items operating income decreased 13%, primarily due to lower average assets under management.
Speaker Change: Looking at the more comparable year over year period operating income declined 3%.
Speaker Change: The operating margin as adjusted of 27, 6% compared with 35, 1% in the fourth quarter.
Speaker Change: Excluding the seasonal employment expenses, the operating margin was 32, 7%.
Speaker Change: With respect to non operating items interest expense declined by <unk> 5 million, reflecting a lower effective interest rate on our term loan.
Speaker Change: And lower average gross debt.
Speaker Change: Noncontrolling interests.
Speaker Change: Reflect minority interest in one of our managers were lower sequentially by $2 million.
Speaker Change: Net income as adjusted of $5 73 per diluted share, which included $1 one set of seasonal expenses.
Speaker Change: Compared with $7 50 in the fourth quarter.
Speaker Change: <unk> increased 6% over the prior year period.
Speaker Change: In terms of GAAP results net income per share of $4 five.
Speaker Change: Decreased from $4 66 per share in the fourth quarter and included 94 cents of realized and unrealized losses on investments.
Speaker Change: Partially offset by 35.
Speaker Change: Fair value adjustments to minority interests.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Slide 13 shows the trend of our capital liquidity and select balance sheet items.
Speaker Change: As a reminder, in the first quarter typically represents our highest quarter of cash utilization during the year due.
Speaker Change: Due to the timing of annual incentives and the revenue participation payments.
Speaker Change: In addition to return of capital to shareholders through the dividends share repurchases and net settlements.
Cash and equivalents at March 31, or $135 4 million.
Speaker Change: In addition, we had $143 million of seed capital investments to support growth initiatives and.
Speaker Change: $132 8 million of other investments.
Speaker Change: Early in our managed CLO.
Speaker Change: Working capital was $137 2 million up 2% from $134 5 million as cash generated more than offset return of capital and the revenue participation payment.
During the first quarter, we repurchased 111200 shares of common stock for $20 million and net settled 35178 shares for $6 1 million.
Speaker Change: At Assai employee tax obligations.
We also made a $23 $1 million revenue participation payment.
Speaker Change: Reducing the contingent consideration liability by 36% to $44 million.
Speaker Change: The majority of that liability will be paid next year in the first quarter.
Speaker Change: At March 30, <unk> gross debt to EBITDA was <unk> seven times.
Speaker Change: Unchanged from December 31.
Speaker Change: And we ended the quarter with $100 million of net debt.
Speaker Change: Or three times EBITDA.
Speaker Change: EBITDA in the first quarter, while down sequentially due to seasonal employment items.
Speaker Change: Was up modestly from the prior year level.
Speaker Change: Our adequate levels of working capital and modest leverage provides financial flexibility to continue to invest in the business and return capital.
Speaker Change: And finally as I have previously noted our intangible assets continue to provide a cash tax benefit.
Speaker Change: Which is not included in our earnings per share as adjusted.
Speaker Change: The net present value of the tax asset is approximately $112 million.
Or $16 on a per share basis.
George George: And with that let me turn the call back over to George George.
Speaker Change: Thanks, Mike So we will now take all of your questions D. D would you open up the lines. Please.
Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Speaker Change: And our first question comes from Ben Boujis Yap Barclays. Your line is open.
Speaker Change: Hi, good morning, and thank you for taking the question.
Speaker Change: Maybe just to start I think you indicated the fee rate going forward, there's probably going to be in between the range can.
Speaker Change: Can you provide any more color on where things are kind of shaking out as we get into April and then I was wondering if you could also touch on just some of the fee rate changes we saw in the quarter U S retail funds, a little bit lower ETF seem to be trending higher I'm sure. There is mix within the mix, but any additional color there would be helpful. Thank you.
Speaker Change: Yeah, Hey, Ben as you know the fee rate will be impacted by many factors, including the markets.
Speaker Change: Fee rate differential on sales versus redemptions.
Speaker Change: But the markets impacted the fee rate really.
Speaker Change: The change as you noted on the open end funds was due to the mix of assets really the change from some of the higher fee rate on the equity side too.
Speaker Change: To take just a slightly lower fee on on the fixed income side, notably.
Speaker Change: Fee rate isn't in and of itself does not have an impact or directly reflect profitability still.
Speaker Change: Targeting incremental margins in that $50 to 55% range. So.
Speaker Change: So just currently as we look ahead.
Speaker Change: Do think that the range that we talked about is appropriate for modeling and if there are any updates to that will go.
Speaker Change: Will reflect that and communicated accordingly.
Speaker Change: Understood maybe a follow up just on the capital allocation side, you bought more shares in the quarter that you had in the past several quarters.
Speaker Change: I know youre always cognizant of liquidity in your stock, but curious what your appetite is.
Speaker Change: Kind of given the recent share performance and market backdrop.
Speaker Change: Yes, so I mean as you as you commented we always evaluate our alternative uses of capital every quarter in one of the factors. We do evaluate is our relative perspective on how our stock is trading and as you correctly note. We did increase the amount of repurchases.
Speaker Change: We did compare to prior quarters.
Speaker Change: So that will continue to be a factor as we sort of decide what the next repurchase levels will be but currently as Mike indicated in his comments. We're just we're still at low levels of leverage.
Speaker Change: Only generating a lot of cash flow again, and while we do invest in the business. We do think return of capital is critical.
Speaker Change: And again, we're very cognizant of our perspective on how that stock is trading so that absolutely will figure into how the our decisions on what to do in the next few quarters.
Speaker Change: Okay understood. Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: And as a reminder, if you have a question. Please press star one one.
Speaker Change: And our next question comes from Bill Katz of TD Cowen Your line is open.
Bill Katz: Great. Thanks, very much so just starting with the SMA is that has been a nice driver for you over the last number of quarters. It flipped negative and I think you mentioned in this quarter that you mentioned that you are soft closed a vehicle keeps suicides how big that vehicle is what percentage of the 'twenty 'twenty four flows that represents and then as you look across.
Speaker Change: Your broader SMA platform are there any other vehicles that might be facing some kind of capacity constraints.
Speaker Change: Yes. So for SMA is that has been an area, where we've consistently had.
Speaker Change: Growth over a period of time and as we indicated in one of the strategies have been very successful.
Speaker Change: Was it an appropriate sort of closing of that.
Speaker Change: And that was coincident then obviously then with the challenges in the market in the first quarter right. So.
Speaker Change: As whenever we have a strategy that we put through a soft close.
Speaker Change: Our goal is really just to then encourage investors to consider other alternative or similar strategies and in that case, we actually have very similar strategies that was kept core we have other very attractive strategies as well in the smid and the mid cap, but again, we were trying to do that in the quarter of <unk>.
Speaker Change: A little bit of volatility and uncertainty in terms of how investors should behave but our offerings are generally.
Speaker Change: Broad based as indicated in the last quarter.
Speaker Change: We've incubated and launched several new strategies some of my comments in the beginning of today's call I indicated that we've done.
Speaker Change: Some addition, additional structural changes in terms of.
Speaker Change: In enhancing our ability to expand the number of fixed income SMA. So we continue to be focused on taking advantage of the fact that we have been successful with SMA and their growth and then continuing to just make more offerings available through them for the specifics on the strategy.
Speaker Change: Capacity, Mike Yeah, I think.
Speaker Change: We feel good about capacity and.
Speaker Change: Don't have any specific capacity constraints on other areas in the.
Speaker Change: In the retail channel I think what we've been pleased with is moving up in the capitalization, we've seen mid cap law.
Speaker Change: Looking year over year in the sales and mid cap, they're up meaningfully and we've been able to at other times increase.
Speaker Change: Larger capitalizations as we soft closed other products, whether it's small cap or now smid cap. So we've seen it that had success in moving up the capitalization and feel very good about mid cap both on the core.
Speaker Change: Specifically on the core side and there is significant available capacity in that area. We do expect that to be a contributor to growth going forward.
Speaker Change: Okay, and then just maybe a big picture question I know, we've chatted about this over the last couple of quarters.
Speaker Change: And I think usually when you make any kind of strategic change it tends to be in the first quarter of the new year and just what's your latest thinking in terms of trying to better monetize the deferred tax asset.
Speaker Change: By transitioning that to a potentially lower.
Speaker Change: <unk> tax rate as it affects adjusted earnings from here.
Speaker Change: Yeah, I think you're referring to the tax attributes and the presentation of those tax attributes.
Speaker Change: I don't necessarily know if it's monetizing the tax attribute to just more of a reporting.
Speaker Change: A factor because we are.
Speaker Change: Achieving the economic benefit from those tax attributes we did.
Speaker Change: Provide just the latest context around that on a NPV basis, I think it comes out to around $16 a share.
Speaker Change: And we've talked about there being a divergence in practice where some.
Speaker Change: Industry participants will.
Speaker Change: Modify and adjust their tax rate and estimate that and lower their tax rate. So we do continue to evaluate it. It is important to us to provide transparency because there is real value that we do achieve from those tax benefits.
Speaker Change: So we'll continue to evaluate and ensure.
Speaker Change: We think we're providing the appropriate transparency too.
Speaker Change: Ensure investors.
Speaker Change: Prescribes the value that we know is there and alright.
Speaker Change: Adjusting it from it.
Speaker Change: And EPS basis, it does come out like $2 50 per year. So if you want to just do the math that excess.
Speaker Change: Extends on a per share basis, rather than thinking of it as a.
Speaker Change: An asset its about $2 50 per share, but will continue to provide that transparency and ensure investors are aware that that is an area that does provide value and the cash flow generation of the business.
Speaker Change: Great. Thank you very much.
Speaker Change: Thank you. This concludes our question and answer session I would now like to turn the conference back over to Mr. Aylward.
Speaker Change: Great well. Thank you so much and again as always I want to thank everyone today for joining us and encourage you to reach out if you have any other further questions. Thank you.
Speaker Change: That concludes today's call. Thank you for participating and you may now disconnect.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.