Good morning and welcome to the Victory Capital Third Quarter 2023 Earnings Conference Call. All callers are in a listen-only mode. Following the company's prepared remarks, there will be a question-and-answer session. I'll now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please go ahead.

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. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release that was issued after the market closed yesterday disclosed 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 earnings press release and in the slide presentation accompanying this call, both of which are available on the investor relations portion of our website at ir.vcm.com. 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 Third Quarter 2023 Earnings Conference Call. I'm joined today by Michael Policarpo, 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 third quarter. After that, I will turn the call over to Mike to review the financial results in detail. Following our prepared remarks, Mike, Matt, and I will be available to take your questions. The quarterly business overview begins on slide five. We reported strong financial results for the third quarter. Revenue, including adjusted EBITDA earnings and margin, net income, and earnings per diluted share all rose sequentially from the second quarter and we achieved the highest levels for each of those metrics thus far in calendar year 2023. Our margins remain robust with adjusted EBITDA margin coming in at 51.1% this quarter, which underscores the strength of our operating platform in all market environments. This was the 13th quarter in a row that we achieved margins above our long-term guidance of 49%, and it was the ninth quarter over that period that we reported margins of 50% or higher. Adjusted net income with tax benefit rose to $1.18 per diluted share in the quarter, a 6% increase over the $1.11 per diluted share that we reported last quarter. Long-term net flows improved from the second quarter, with outflows declining to $1.7 billion in the third quarter. I would also note that our gross redemptions are the lowest that they have been in the past eight quarters. Although we are in an environment where many investors have chosen to either invest in cash and cash equivalents or to pause allocations, we are seeing some significant green shoots with several of our investment franchises. One franchise I would like to call out is WestEnd Advisors, which continues to see positive net flows and significant distribution expansion from a platform and advisor perspective. We made the decision to build up cash during the quarter to enhance our financial flexibility and ensure we have the means to execute on our capital allocation strategy, specifically the inorganic aspect of it. As announced in our latest AUM press release in September, we consolidated the former fixed income franchise, INCORE, under the Victory Income Investors brand, which is also a fixed income franchise. In conjunction with this consolidation, we sold a number of unique accounts totaling approximately $1.3 billion that were not scalable on our platform. We did retain a majority of the investment strategies and all the investment professionals associated with the management of the strategies that transferred under the Victory Income Investors franchise. Lastly, as we stated in our earnings release, there will not be any material financial impact from these actions. Consistent with our ongoing growth initiatives, we continue to strategically invest in our platform in several areas. These include product development, enhancing capabilities for our direct investor channel, technology, automation, artificial intelligence, digital marketing, as well as our use of data to make our platform even more competitive and efficient. Turning to slide seven, you can see that our investment performance remains very strong. At quarter end, 40 of our mutual funds and ETFs had four or five star overall ratings from Morningstar. These products account for more than two-thirds of our AUM in mutual funds and ETFs. Additionally, more than 80% of our total AUM outperformed benchmarks for the five-year measurement period ended September 30th. One standout in the quarter was our WestEnd Advisors Investment Franchise. Through quarter end, 98% of WestEnd's AUM was outperforming respective benchmarks over the five-year period. This bodes well for accelerating the already positive net flow momentum at WestEnd that I mentioned earlier. With the trillions of dollars that is currently invested in cash and cash equivalents, we are exceptionally well positioned in anticipation of investors eventually re-risking portfolios when there is more visibility around the direction of interest rates, as well as economic and geopolitical conditions, given the investment performance in our fixed income products and our distribution positioning. Moreover, our suite of equity offerings continues to perform very well, and our distribution positioning within our different channels is as strong as ever. Turning to slide eight, we continue to generate robust to excess free cash flow in the third quarter. Subsequent to quarter end, we also monetized our floating to fixed swap that generated $43 million in cash and produced the gain that is now locked in. Converting the swap into cash only adds to our financial flexibility, and we see real benefit to flexibility at this point in the cycle. We are continuing to have numerous discussions around inorganic opportunities. As I have said many times, exact timing is difficult to predict, but I do believe that the opportunities that are presenting themselves in this environment are quite attractive, becoming more plentiful and executable. With that in mind, we remain patient, disciplined, and selective as we evaluate opportunities with the end goal of enhancing long-term shareholder value. With that, I will turn the call over to Mike to go through the quarter's financial results in greater detail.

Thanks, Dave, and good morning, everyone. The financial results review begins on slide 10. Assets under management at quarter-end were $153.5 billion. Average assets under management rose 2.4% in the third quarter compared with the second quarter. Our fee rate was steady at 51.6 basis points. Revenue of $209.7 million in the third quarter was up 2.7% compared to the second quarter. The higher revenue benefited from the higher average AUM as well as one extra day in the quarter. GAAP operating income was $80 million, and our adjusted EBITDA rose to $107.2 million, with adjusted EBITDA margin expanding 20 basis points to 51.1% in the third quarter. Quarterly net income was $52 million or $0.77 per diluted share on a GAAP basis. Adjusted net income with tax benefit rose quarter-over-quarter to $79.8 million or $1.18 per diluted share, up 6% from the second quarter. Dave already covered accumulating cash to enhance our flexibility and strengthen the balance sheet during the quarter. This accumulation resulted in cash increasing to $108 million at quarter end. Further to this point, in October, we monetized our floating to fixed interest rate swap locking in the gains from that arrangement, which generated $43 million in cash. From an accounting standpoint, the gain will be realized on a straight-line basis as a decrease in interest expense through the end of the swap's term in July of 2026. Our net debt to adjusted EBITDA ratio improved to 2.1 times at the end of September, reflecting the growth in adjusted EBITDA and our lower net debt. We returned $21 million to shareholders in the quarter in the form of cash dividends and another $7 million with share repurchases. Our Board of Directors declared another quarterly cash dividend of $0.32 per share. This next dividend will be payable on December 22nd to shareholders of record on December 11. On slide 11, you can see the steady increase in the total AUM in the first half reversed in the third quarter. This was driven primarily by negative market action, which reduced AUM by $4.9 billion in the period. Our AUM remains well diversified from a distribution channel and from a client perspective within each channel. We're also becoming more diversified from a vehicle perspective with ETFs and separately managed accounts, including model delivery, now representing more than one-third of our total AUM. Turning to slide 12. Long-term gross flows were $5.3 billion in the quarter and net long-term flows were negative $1.7 billion. Gross redemptions improved to their lowest level in two years. We are not immune to the current industry landscape with muted gross sales, reflecting investors being content to hold cash in this environment, as they delay allocations to longer term and higher-risk asset classes. Several franchises had positive net flows in the third quarter, including New Energy Capital, RS Global, Trivalent, and WestEnd. WestEnd's investment and business performance has been very strong, and we are beginning to realize the vision of growth for the platform we had when we made the acquisition. Another franchise worth noting is RS Global, which has been net flow positive for 10 consecutive quarters. The overall Five Star rated RS Global Fund, ticker RSGGX, ranked in the top decile according to Morningstar for the choice one, five and ten-year periods as of September 30th and has outperformed benchmarks as well over those same periods. Slide 13 illustrates revenue by quarter. You can see the close correlation between revenues and average assets under management, which resulted in the highest level of quarterly revenue achieved in the past year. Our fee rate decreased slightly in the third quarter. As you may recall, the fee rate realization recorded in the second quarter was the highest in the year. In general, our investment management fees have remained steady and asset class client and vehicle mix are the primary drivers of quarterly fee rate variations. On slide 14, we break out our expenses for the quarter. GAAP operating expenses rose in the quarter, primarily due to a significant increase in quarter-over-quarter noncash charge related to the net present value of contingent consideration for prior acquisitions. This rose to $10.3 million, up from $1.5 million in the second quarter. Additionally, some of the increase is related to our variable cost structure and was due to the higher average AUM and revenue reflected in higher asset-based expenses, such as broker-dealer and platform fees, fund administration, and middle office expenses. Cash compensation as a percentage of revenue held constant at 23.7% for the third quarter. Finally, G&A expenses rose slightly due to the timing of our ongoing investments to support growth. Moving on to our non-GAAP results on slide 15. Adjusted net income rose to $70.3 million in the quarter, which was the highest level in the past four quarters. The cash tax benefit in the quarter was unchanged at $9.5 million, resulting in ANI with tax benefit growing to $79.8 million or $1.18 per diluted share. Our adjusted EBITDA margin expanded 20 basis points to 51.1% in the third quarter. We achieved steady growth in adjusted earnings per share over the past year, which including our cash tax benefit rose 12% from the level achieved in the final quarter of 2022. Looking forward, we are maintaining our long-term margin guidance of 49%, which is inclusive of the continued investments in numerous areas to support our future growth. Finally, turning to slide 16. We did not pay down any debt in the first three quarters of this year. However, our net leverage ratio improved to 2.1 times at the end of September, reflecting the higher cash balance on our balance sheet and higher earnings. The average interest rate paid on our debt increased 18 basis points to 5.6% in the quarter. This was the smallest quarter-over-quarter interest rate increase in the past 1.5 years. Our $100 million revolver remains undrawn and GAAP operating cash flow was $91.6 million in the third quarter. That concludes our prepared remarks. I will now turn it back over to the operator for questions.

Thank you. Your first question comes from the line of Craig Siegenthaler of Bank of America. Your line is open.

Good morning, Dave, Mike. I hope everyone is doing well. My first one is on M&A. So with $140 million of cash on hand today after the floating to fixed swap monetization, can you update us on the M&A pipeline? And are you holding more meetings with prospects today than six months ago? And any commentary on valuation multiples would be helpful, though? Thank you.

Good morning, Craig. First, let me start off on the pipeline. The pipeline for the last year or so has been pretty full. And we've been having lots of meetings. I wouldn't say that the meetings have increased. What I would say is, and I said this in our prepared remarks, that I feel like the ability to execute has gotten a lot better and really us monetizing our hedge and us building cash is a reflection of where we think we are in the cycle and how close we are to potentially doing a transaction. That being said, nothing is imminent, and we also look at our capital strategy very opportunistically. And so we had historically, at least this year, bought a lot of shares back and continue to pay a dividend. I wouldn't say that we wouldn't be buying shares back going forward, but we want to make sure that we have a balance sheet that's flexible to execute in a really timely manner.

Thanks, Dave. Just as my follow-up on the SMA and other flows of $440 million in the quarter. Within the $440 million, I was wondering if you have the mix or could provide some color between trust, wraps, UMA, UCITS, any other vehicles that I may be missing because that's been a nice growth engine for you guys. And then within those sort of sub-buckets, which one do you expect to be the biggest flow contributor in 2024?

It's primarily about WestEnd, the WestEnd Advisors franchise. When we acquired that business, our belief was that it represented a strong model within the larger industry platforms that would see growth, and that has proven to be the case. Looking ahead, we anticipate that our focus will largely be on the model side.

Your next question comes from the line of Etienne Ricard of BMO Capital Markets. Your line is open.

Thank you and good morning. So lots of discussion on the potential to return to positive net flows in fixed income across the industry. So in this environment, how do you think about promoting your fixed income strategies, both across the direct and retail channels?

So over the last few years, we have really spent the time to build out our distribution channels for the Victory Income Investors franchise. And where we've spent the time from a marketing, from gaining access to different platforms and really shoring up the platform. And as we said in our prepared remarks, we did consolidate the INCORE franchise into at least from a brand perspective into the Victory Income Investors franchise. And we think having one brand, the scalability of that brand and really consolidating all of our efforts under that brand will really help us when some of these investors come off the sidelines and get out of cash or decide to allocate back to traditional fixed income. I'd also add, one of the best ways to prepare for it is to have really, really good investment performance. And if you were to look at the Victory Income Investors franchise and look at our performance, it's excellent across the board. And I think that's really the best preparation for it.

Okay. And just to circle back on M&A, can you give us a sense of the potential size of transactions you're looking at? And would you be willing to maybe close multiple transactions in a relatively short period of time? Or would you prefer to stick to your historical one transaction per year track record?

We have historically engaged in large, medium, and small transactions. Our strong platform allows us to consider a range of transaction sizes. Larger and smaller transactions have significantly affected us. For instance, our ETF business began with a small acquisition that has grown well over the past eight years. We closed several deals at the end of 2021 and into 2022, totaling about 3.25. There have also been gaps between some transactions. I can't specify the speed, size, or frequency of future deals, as we approach this on an opportunistic basis.

Your next question comes from the line of Adam Beatty of UBS. Your line is open.

Thank you and good morning. Just a follow-up on M&A, not to harp on it too much, but Dave used the word executable a couple of times. And potential interpretation of that is maybe tighter sort of bid-ask spread, sellers kind of getting more realistic on valuation. But those are my words. So I'm just curious, probably no one out there executes M&A in the asset management space as well as Victory. So just curious what you meant by more executable at this stage in the cycle? Thanks.

I think you summed it up nicely. I do think that the bid and the ask spread has tightened. And I think buyers and sellers are much more realistic of what valuation is and potentially being open to structuring. And so my word of executable is really in reference to that.

Your next question comes from the line of Kenneth Lee of RBC Capital Markets. Your line is open.

Thank you for taking my question. I'd like to discuss M&A further. Do you see the cost of financing as a potential challenge for M&A in the current environment? Thank you.

I'd start off by saying that when we think of financing, we really think of all the tools that we have, where you have our cash generation, we have the ability to structure. Of course, we can go to the debt markets. And we have, I think, over the past really done a nice job on being creative on how we structure the transactions. The financing costs are up, obviously, over the last 1.5 years. But for us and the way we execute the transactions and the way we look at the transaction, it isn't a hurdle for us, the cost of financing. As we said, we did accumulate cash this quarter, which is the benefit of having a platform that generates a lot of free excess cash flow. And then we also monetized our hedge. And then as we look forward, we'll balance out if we do a transaction, how to go about that. But I don't feel, at least for us, the financing costs are going to be a hurdle to executing the transaction.

Your next question comes from the line of Mike Brown of KBW. Your line is open.

Great. Thank you for taking my question. So I wanted to ask about WestEnd here. The growth continues to be really strong there. Can you just give us an update on how many platforms that franchise is on today? And just maybe expand on some of the recent growth trends there and the potential going forward. Do you still see some more room to ramp on the current platforms? And is there potential to get added on more platforms for WestEnd?

Since we acquired the platforms, we have deepened our engagement with them. Currently, we are working with a significantly larger number of advisers compared to when they were independent. We have not only strengthened our existing relationships but also expanded the number of platforms we operate on. Additionally, we’ve broadened our product offerings by launching an ETF with the ticker symbol MODL, which allows our sales team to provide both models and an ETF managed by WestEnd. This presents significant growth opportunities for the franchise. As we approach the two-year mark of owning this business, it’s impressive to see it consistently generating net positive flows since inception. This clearly highlights the potential of the platform. The main goal of the acquisition was to enhance a strong franchise with an excellent culture, solid investment performance, and good distribution, making it even better and scalable. We believe we are well-positioned to capitalize on opportunities as assets transition out of cash, and we are also looking to further expand our product offerings, which will contribute to potential growth.

Great. Thanks. And then Michael, maybe just a quick modeling one for me. Following the monetization of the hedge, what is the right jumping-off point for that interest expense now with the impact of the gain that will come through?

Yes. I think the simple way to look at it is we really locked in at the kind of Q3 rate. So I think we mentioned about 5.6% is the kind of combined interest rate going forward, based on current rates.

Our next question comes from Ken Worthington of JPMorgan. Your line is open.

Hello, good morning. This is Michael Cho in for Ken. Thanks for taking my question. My first question is regarding cash. You mentioned mergers and acquisitions and investments. In case those don't materialize in the near term, how long are you willing to maintain a higher level of cash?

We are going to examine our cash levels in a very opportunistic manner, based on the facts and circumstances at the time. We have quickly adapted our strategies in the past, such as aggressively paying down debt before shifting to share buybacks. Looking ahead, we will remain flexible and take advantage of opportunities as they arise. We still have over $50 million available from our Board's buyback authorization that we can use. We will proceed as we always have, considering the current situation.

Okay. Perfect. Thank you. And then just switching gears, just on G&A, I think you called out just kind of slightly elevated in the quarter for particular organic investment opportunity. I'm just curious what was that organic opportunity that drove the quarter? And then I think you listed a number of organic investment areas as you do every quarter, but I'm not sure I heard AI before. So just curious what you're also doing with AI as well? Thank you.

Yes. Thank you, Mike. There wasn't any major investment made during the quarter. We've mentioned before that the timing of our investments tends to vary. The increase in G&A you noticed was primarily a timing issue. Our investments are mainly focused on data and analytics, product development, and digital marketing. We're also continuing to invest in our direct investor channel. Any changes you observe from quarter to quarter are mainly due to timing. Regarding AI, we've previously discussed some investments in data and analytics for our retail and intermediary distribution team. We've invested in proprietary databases that enhance their effectiveness in the field by leveraging the data we collect from the market and certain dealers. Our approach to AI supports our distribution efforts as well as our investment franchises by providing them with more information and data.

Yes. And it's Dave. I'd like to add one thing is our platform is so unique, which I think you can see from the margins and how we've performed in a really tough industry environment and having guidance at 49%. But one of the things that we think is pretty unique is our investments and the dollars that we invest, I think are as efficient as anybody in the industry given the way we're structured in our platform and how we're scaled at the size we're at. And these investments we're making are very applicable to multiple distribution channels to multiple parts of our business. Our platform isn't complex. And our margins this quarter are 51.1%, and I went through the statistics of 13 straight quarters above 49, nine of them 50% or more. I just think that we have a really unique platform with a great group of employees executing it with a great culture. So when we think about investing, we love to invest. There's lots of places to invest. We're just getting a lot of bang for our buck, if you will.

There are no further questions at this time. I will now turn the call over to David Brown for closing remarks.

Thank you and thanks for your interest in Victory Capital. Next month, we'll be attending the Goldman Sachs Financial Services Conference in New York City, which is on December 6th, and I look forward to seeing some of you there. Have a great day, and thank you.

This concludes today's conference call. You may now disconnect.