Earnings Call Transcript - VCTR Q2 2025

Operator, Operator

Good morning, and welcome to the Victory Capital Second Quarter 2025 Earnings Conference Call. I will now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please proceed, Mr. Dennis.

Matthew J. Dennis, Chief of Staff and Director of Investor Relations

Thank you. Before I turn the call over to Dave Brown, I would like to remind you that during today's conference call, we may make a number of forward-looking statements. 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, which was issued after the market closed yesterday, discloses 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 slides accompanying this call, both of which are available on the Investor Relations section of our website at ir.vcm.com. It is now my pleasure to turn the call over to David Brown, Chairman and CEO. David?

David Craig Brown, Chairman and CEO

Thanks, Matt. Good morning, and welcome to Victory Capital's Second Quarter 2025 Earnings Call. I'm joined today by Mike Policarpo, our President, Chief Financial, and Administrative Officer, and Matt Dennis, our Chief of Staff and Director of Investor Relations. I will begin with an overview of our second quarter business performance, after which Mike will provide a detailed review of our financial results. The quarterly business overview starts on Slide 5. Total client assets increased by 76% compared to the previous quarter, exceeding $300 billion, marking a record high for a quarter end. Our sales momentum persisted, with quarterly gross long-term flows rising to $15.4 billion and net outflows at $660 million. This marks the third consecutive quarter of improved long-term flows on both gross and net levels. We are optimistic about our current trajectory, bolstered by sustained momentum in various products and capabilities, including fixed income, global equity, and ETF strategies. Adjusted EBITDA for the quarter was $179 million, resulting in an adjusted EBITDA margin of 50.8%. This was marginally better than expected due to a favorable asset mix and the realization of certain annually produced fees within this quarter. This led to a slight uptick in our revenue and fee rate. The adjusted net income for the second quarter, after tax benefit, was $133 million, or $1.57 per diluted share. We successfully completed our strategic transaction with Amundi on April 1, which included the acquisition of the Amundi U.S. business and the reintroduction of the Pioneer Investments brand as our latest investment franchise. This significantly increased our size and scale while enhancing the diversification of our business. We are currently managing assets for clients in 60 countries and have new investment capabilities in fixed income and various equity asset classes. The integration process is progressing smoothly, and we achieved $70 million of net expense synergies on a run rate basis by the end of the second quarter. This is nearly two-thirds of the anticipated total $110 million in net expense synergies expected within the first two years of ownership. The remaining $40 million in net expense synergies will be realized sooner, with about $30 million expected in the next three quarters and the remaining $10 million over the subsequent 12 months. Beyond integration efforts, we expanded our product offerings by launching the first ETF managed by Pioneer on our VictoryShares ETF platform in June. The VictoryShares Pioneer Asset-Based Income ETF is aimed at targeting premium yields within specific securitized credit markets, providing investors with private credit-like characteristics in a listed and liquid ETF structure. Along with this ETF, we expanded our free cash flow series with the launch of the VictoryShares International Free Cash Flow ETF and the VictoryShares International Free Cash Flow Growth ETF, which are designed to enhance our existing free cash flow ETFs and provide better diversification. Our ETF platform showed strong performance in the second quarter, in line with previous years. For the first half of this year, our ETF platform recorded positive net flows exceeding $4 billion, bringing our total ETF assets under management to $15 billion at the end of June, a nearly 90% increase from the same period last year. These products are competitively priced and meet our margin standards. The creation of various vintage Victory strategies in UCITS vehicles for delivery to international investors through Amundi's distribution team is ongoing. We have identified our initial go-to-market products and expect to complete registrations in the coming quarters. In the institutional channel, our products are now live, and we are diligently working to educate the Amundi sales force, respond to requests for proposals, and assist in marketing our strategies throughout their vast distribution network. We are very optimistic about the potential for business expansion globally. In conjunction with our product development and growth efforts, we are committed to ensuring our investment capabilities align with client demand, preferences, and market opportunities. During the quarter, we carefully assessed our existing products and decided to liquidate several underperforming mutual funds and ETFs. We also decided to close our NewBridge, Sophus, and THB investment franchises, which collectively managed less than $1 billion of assets under management. This action is slightly accretive and allows us to allocate more resources towards areas that will facilitate future growth. On Slide 7, we present our firm's investment performance. 57 mutual funds and ETFs, representing 64% of our assets under management with star ratings, earned overall 4 or 5 stars from Morningstar. The majority of our assets and strategies are also exceeding benchmarks across all shown time frames. Additionally, more than 50% of our mutual fund and ETF assets under management rank in the top quartile of their respective Morningstar categories for the critical 3- and 5-year periods. With the Amundi transaction now finalized and providing the expected financial benefits through increased earnings and cash flow, I am pleased to announce that our Board has approved an increase to our share repurchase plan from $200 million to $500 million, marking the largest repurchase plan in our history. We anticipate positive growth prospects for our business and believe that the intrinsic value of these opportunities is not currently reflected in our share price. Finally, we are actively exploring acquisition opportunities, as the current market conditions are favorable for executing transactions. I maintain my belief that industry consolidation will accelerate in the coming years. Our proven track record, business model, and the unique value our platform offers to potential acquisition targets are compelling. Together with our strengthened financial position, this gives me confidence in our ability to pursue strategic, value-creating acquisitions in the short, medium, and long term. With that, I will turn the call over to Mike for a more detailed look at the quarterly results. Mike?

Michael Dennis Policarpo, President, Chief Financial and Administrative Officer

Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 9. This quarter's results reflect the closing of the Amundi transaction on April 1, and it is the first quarter that includes the results from the Pioneer Investments business. I will provide additional color in several areas to highlight what are permanent changes and those that are onetime in nature. Revenue increased to $351.2 million, which was up 60% from the first quarter. Average assets for the second quarter rose to $285 billion which was 64% higher quarter-over-quarter. The realized fee rate of 49.4 basis points in the quarter was down from the first quarter, which was expected, but not down as much as anticipated. This quarter's fee rate was positively impacted by a better-than-anticipated asset mix and the realization of certain annual fees this quarter. For the third quarter and beyond, we would expect the fee rate to be in the range of 46 to 47 basis points. Our second quarter GAAP results included $53 million of acquisition-related restructuring and integration costs, which was up from less than $10 million in the first quarter. This resulted in a GAAP operating margin of 26.8%. Our adjusted EBITDA was $178.5 million, which is 53% higher than the first quarter. Adjusted EBITDA margin came in at 50.8%. We are still maintaining our long-term adjusted EBITDA margin guidance at 49%. Adjusted net income with tax benefit rose to $132.8 million or $1.57 per diluted share. As disclosed in yesterday's press release, the Board authorized an increase in our existing share repurchase plan to $500 million. This allows us to maintain flexibility in our capital strategy with more capacity for opportunistic open market purchases of our stock. We repurchased 439,000 shares during the second quarter. Combined with dividends, we returned a total of $71 million of capital to shareholders in the quarter. The Board also declared the regular quarterly cash dividend of $0.49 that will be payable on September 25 to shareholders of record on September 10. We held $108 million of cash at the end of the quarter, and our net leverage ratio improved to 1.2x, which is our lowest level of leverage since our initial IPO. On Slide 10, you can see the added diversification in our total client assets afforded by the transaction. In addition to diversification in the U.S. across channels, client types, and asset classes, our mix of business has been improved by a meaningful diversification into non-U.S. geographies. As of the end of the quarter, we have just over 16% of our total client assets with investors in 60 countries outside of the United States and anticipate the sales efforts here will be an important part of our future growth. Our long-term asset flows improved on all metrics, as you can see on Slide 11. We have substantially increased the size and scale of our U.S. intermediary and institutional sales teams through the acquisition and are now acquiring and leveraging more data and have even deeper platform relationships that are helping fuel increased sales. Gross sales of $15.4 billion represent more than 20% of AUM on an annualized basis, which should position us well in the future from an organic growth perspective. Net sales have improved for the third consecutive quarter, which continues to have us encouraged for the future. During the quarter, positive net sales were generated by Integrity, Pioneer, and RS Global as well as our VictoryShares ETF platform. Turning to Slide 12. Total revenue jumped 60% from the prior quarter with the addition of the Pioneer Investments business. Additionally, our average AUM increased to $285 billion. On Slide 13, you can see our expense details for the quarter. GAAP expenses increased by $125 million, reflecting the normalized higher operating expenses with the Pioneer Investments business as well as a number of onetime items that will not be recurring in future periods. Our integration efforts are progressing as planned, and we are well underway in executing our operating model. As a result, we've achieved nearly 2/3, or $70 million on a run rate basis of the total expected net expense synergies of $110 million after just our first 90 days of ownership. Over the next 3 quarters, we anticipate another $30 million of net expense synergies to be realized and then the remaining $10 million to be realized over the next 12-month period, which will take us to the second anniversary of the closing of the transaction. Included in acquisition, restructuring and integration expenses are certain onetime items related to the transaction, including legal, advisory, and proxy-related costs of completing the transaction as well as certain costs to achieve the net expense synergies, which are front-end loaded. We expect to see these onetime costs decline over the period we recognize the net expense synergies. As expected, our cash compensation remained relatively consistent as a percentage of revenue. The acquisition and transaction-related compensation is noncash and reflects post-transaction expense associated with fully-funded deferred compensation plans inherited as part of the transaction that will run off over the next several years. During the quarter, we recorded approximately $27 million in nondeductible expenses on a tax basis related to the Amundi transaction. This resulted in an effective tax rate of 32.5% in the quarter. On a go-forward basis, our normal effective tax rate will be approximately 25%, which is unchanged from previous guidance. Turning to Slide 14. We cover our non-GAAP metrics. This presentation removes much of the accounting noise and provides a clear picture of our results and business performance. While our adjusted net income rose 57%, reflecting the economics of the Pioneer Investments business and the benefits of our operating model due to the transaction structure, we did not receive a step-up of acquired intangible assets. As such, our cash tax benefit of $10.2 million was unchanged relative to prior quarters. Adjusted EBITDA increased 53% to $178.5 million. Adjusted net income per diluted share increased 15% to $1.57 from $1.36. Wrapping up on Slide 15. The balance sheet is stronger than ever. Our debt-to-equity ratio improved to 0.39, and our net leverage ratio went from 1.7x at the end of the first quarter to 1.2x, providing us with the financial flexibility to execute on our inorganic growth strategy. Our interest expense was unchanged from the first quarter, and our interest coverage ratio was nearly 14x in the period. Recognizing our continuing strong financial position, last month, Moody's upgraded the outlook on our credit rating from stable to positive. We expect to continue to return capital via buybacks and dividends while simultaneously pursuing growth initiatives and reinvesting in the business going forward. Our cash generation is such that we can effectively balance strategic internal investments, pursue inorganic opportunities, and deliver shareholder returns. With that, we will open the call for questions. Operator?

Operator, Operator

Thank you. Our first question comes from Randy Binner with B. Riley.

Randy Binner, Analyst

I have a couple of questions. First, it was clearly a solid quarter. On Slide 13, I noticed that we added back those nonrecurring expenses for this quarter. I understand this is included in the overall synergy guidance, but could you provide some insight on how quickly those one-time costs will decrease in the fully reported numbers? Will it be a significant change in the third and fourth quarters, or is it more of a gradual decline for those expenses for the remainder of the year?

Michael Dennis Policarpo, President, Chief Financial and Administrative Officer

Randy, thanks for the question. In Q2, we had, I think, the number of $53 million of acquisition, restructuring, and transaction-related costs, $26 million of that is truly deal-related and onetime with respect to closing the deal. So think of adviser, legal, proxy, insurance-related costs that are all onetime in nature and will not recur. And then in addition to that, we did have about $14 million of expense really associated with the extraction of the synergies to date. And I think we put a total out there of about $30 million in total. We expect to realize the synergies. So we're about halfway there. And then the other item, I think, which we mentioned in the prepared remarks, there's compensation-related expense that we back about $13 million to get to the $53 million. And that really is related to a fully-funded deferred comp plan that we inherited as part of the transaction. And that will run off over the next couple of years, but that really is truly non-cash and retentive in nature. It was part of the economics of the transaction that we acquired in the balance sheet. So that one will continue for the next couple of years and will be different levels based on mark-to-market of those deferred comp plans and some amortization. So the bottom line is it will start to decline. There's definitely onetime in Q2, and then we'll start to see them decline over the next several quarters as well and not be anywhere near the...

Randy Binner, Analyst

Yes. I mean we'll exclude it, but we still need to model it. So that's super helpful. And then actually, just a higher-level question, and maybe this is for Dave. I know we knew that fixed income was going to be a really big part of the asset mix pro forma this deal, but just looking at the model, it just gets big. And I heard the prepared remarks about some newer products that are kind of more private return oriented. But just kind of like standard fixed income, just kind of curious if you have a view of kind of how that product sets fitting in, given kind of market volatility, interest rate uncertainty, stagflation, that kind of thing. If you just have a view on like does that make those flows more? Do you think the growth there is better or worse? Or just be kind of curious because that's going to be a really important piece of the pie.

David Craig Brown, Chairman and CEO

First, let me say, we love the fixed income asset class in general. I think over the years, we have acquired a lot of assets and a lot of capabilities in the fixed income asset class. We have two franchises today. You have the Victory Income Investors and then you have Pioneer Investments, which a portion of that manages fixed income. We are covering a lot of the different sleeves within fixed income. And so I really think the environment as it changes, as it evolves, we have a really good product set for any environment. I think, as you know, we have active ETFs, better fixed income. We have UCITS that are fixed income, and then we have institutional separate accounts and we're also in the retirement channel as well from a fixed income perspective. So we're well covered from a product perspective, from a distribution perspective, and the performance across the board with our two franchises is excellent. So it's an area that we were very purposeful in growing. And I see that as an important piece of our growth going forward. And I think going forward, just really from an active versus passive perspective, fixed income over the years, historically, and I think as you look forward, investors have done very well being active. So we view that as an area where we have great active teams in an area where we think we can grow.

Operator, Operator

Your next question comes from the line of Michael Cho with JPMorgan.

Michael Cho, Analyst

I just wanted to start with Amundi partnership. I mean, Dave, you kind of talked through a number of different places where you're starting to either launch or in the process of launching some different products and initiatives. I was hoping you could flesh out a little bit more around your expectations here for the uplift to Victory as it relates to non-U.S. distribution, either for current products and again, as well as some of the key focus areas that you highlighted as well.

David Craig Brown, Chairman and CEO

Thank you for the question. Let me provide an overview. Our strategic partnership with Amundi has enabled us to market our products beyond the U.S., specifically throughout Europe and Asia. The Pioneer Investments franchise already has many of its products integrated into Amundi's distribution network in these regions. We plan to continue supporting and investing in this partnership, along with launching new products from the Pioneer Investments franchise, which has seen growth over the years and is expected to continue on this upward trajectory. As of April 1, all of Victory's vintage products have been made available to institutional clients across Europe and Asia through Amundi's distribution network. We are actively collaborating with them on marketing efforts, RFPs, and client engagement, viewing this as an immediate opportunity for education and significant growth. We are also working on launching registered products outside of the U.S., focusing on new Pioneer Investments strategies as well as vintage Victory strategies. As previously mentioned, we aim to complete the initial registrations for these products by the end of this year, with expectations for more progress by 2026. Many of these products will be registered in UCITS formats, and we are excited about Amundi's extensive distribution network in Europe and Asia. Currently, 16% of our client assets are in this area, and we manage money for clients in 60 countries, a number we anticipate will grow. As we execute our strategy, this will play a significant role in expanding and globalization of our business, though we are still in the early stages. Our results are starting to reflect this, and we are optimistic about future developments.

Michael Cho, Analyst

Perfect, Dave. If I could follow up with a quick question about numbers, I'm curious about the margin impact during the quarter from the higher fee event that contributed to the increase in the 2Q fee rate. Looking ahead in the near term, with more cost synergies and various initiatives on the horizon, I'm aware you mentioned the 49% long-term margin, but I'm interested in your perspective on near-term margins, especially considering the upcoming benefits.

David Craig Brown, Chairman and CEO

I believe you noted our margins exceeding 50% for the first quarter following the acquisition, which we are pleased with. We are maintaining our guidance at 49%. Margins will fluctuate in the future as we continue to invest in the business. We have executed effectively and surpassed that guidance, but we will keep our guidance at 49%. This doesn't exclude the possibility of some quarters performing better. Regarding synergies, the $70 million net expense synergy we mentioned is based on a run rate, meaning not all those costs are reflected in the quarter. From the remaining $40 million of net expense synergies, we expect to realize $30 million of that within the next nine months, and after the one-year anniversary, we'll obtain the final $10 million in the following twelve months. We cannot predict which quarter that will occur or what the margins will be. However, as we've discussed frequently, we operate our business with a focus on margins. We have structured our operating model so that approximately two-thirds of our expenses are variable, enabling us to concentrate on margins. The 49% guidance we've maintained provides us the flexibility to keep investing in our business.

Operator, Operator

Your next question comes from the line of Alex Blostein with Goldman Sachs.

Alexander Blostein, Analyst

Just zooming out maybe a little bit, it seems like there's lots of progress, lots of exciting things happening on the product development side as Pioneer kind of comes into the fold here. If you look at the firm's flows over the last few quarters and over the last couple of years, they've been generally slightly negative, you guys are closer to breakeven now. If all goes well, what is sort of the aspirational organic growth do you see in the business as these assets all come together?

David Craig Brown, Chairman and CEO

Alex, it's Dave. We've seen notable improvement over the past few quarters. This quarter, we experienced a net outflow of $660 million, which translates to 23 basis points or 92 basis points on an annualized basis, showing progress although we’re not where we want to be yet. We recorded $15.4 billion in gross flows, which is quite significant and marks our highest amount ever in a quarter. Looking ahead, as we globalize and expand our product offerings, our goal is to achieve organic business growth. I believe we are in the strongest position in our organization's history to reach that goal. While the industry faces some challenges, there are many opportunities ahead, and we have products aligned with those opportunities. Our aim is to grow consistently on a quarter-over-quarter basis. We’ve made substantial progress towards that goal. As mentioned in our prepared remarks, we've enhanced the size and scale of our U.S. intermediary sales operations, which involves increased marketing, hiring more staff, purchasing data, and forming partnerships with key providers. We've also expanded our institutional team. We're investing in distribution, and I think you’re beginning to see that reflected in our numbers. As we continue to ramp up our efforts outside the U.S., I believe we are well-positioned for organic business growth.

Alexander Blostein, Analyst

Great. All right. Fair enough. Mike, one quick cleanup question for you. Can you just specify the amount of benefit in revenues you guys got from a onetime or the seasonal performance fee benefit that you mentioned? I know you said the fee rate improved because of the mix shift as well as the seasonal realization event. Can you just classify the dollar amount of that event?

Michael Dennis Policarpo, President, Chief Financial and Administrative Officer

Yes, Alex, it's difficult to specify because there are several different factors involved. It’s not just one thing; there’s the asset mix, client mix, and channel mix that we’re considering as we look at Q2, and all these factors are actually favorable and could support the guidance of 46 to 47 basis points. We did experience some revenue realization that was somewhat one-time in nature. If you consider all these elements, we can expect some fluctuations moving forward. While it's challenging to quantify, the impact is ultimately minor compared to what we observed at 49.4 basis points. We continue to guide towards 46 to 47, but I believe there is potential for some upside due to the asset mix. The equity markets performed well, and we witnessed more retail flow and retail assets than we had previously anticipated, which could lead to an increase in basis points. However, we can’t easily break that down for you.

Operator, Operator

Your next question comes from the line of Ben Budish with Barclays.

Benjamin Elliot Budish, Analyst

I wanted to delve a bit deeper into your previous point about a specific one-time realization related fee. Could you explain the nature of that fee, even if you're unable to provide a specific number? In your prepared remarks, you mentioned that this is something that typically occurs annually but happened to materialize this quarter. Any insight into the margin benefit this quarter would be appreciated.

Michael Dennis Policarpo, President, Chief Financial and Administrative Officer

Sure. Yes. So I think, as we said, it's really about how we are able to recognize certain revenue and revenue realization associated with certain products that we have. So that's the nature, if you will, Ben, of kind of what we highlighted. Again, there's an element of asset mix, I would point to as well that leans positively for the quarter. So it really has to do with accounting from a revenue realization perspective. We've highlighted in the past we have some fulcrum fees. We've highlighted that there are some annual fees that we receive that are not necessarily tied to performance. That's how I would categorize these. And then your second question with respect to impact to margins, I think I would highlight our operating model. We talked that we are very margin-focused. And so from a low-fee product to a high-fee product to annualized revenue, asset mix, all of that calibrates with our variable cost structure that we have. So there really wasn't a significant impact to our overall margins as a result because of how the expenses are offset to any change in revenue.

Benjamin Elliot Budish, Analyst

Okay. That's helpful. Maybe just a separate follow-up. You talked a lot about confidence in the flows. Can you maybe talk about what flows look like maybe sequentially through the quarter? How is July shaping up? What the kind of most recent momentum looks like just coming into Q3 here?

David Craig Brown, Chairman and CEO

Thanks for the question, Ben. We are still integrating our sales teams, so on the intermediary side, that's going to be a buildup. The same applies to the institutional side and, as I mentioned earlier, also to the international side. With each passing week and month, we are becoming more integrated and better educating our sales force. I expect this ramp-up to continue. To put it differently, we aren't operating at full capacity yet, but our results are still strong. I would say we are performing better than I initially anticipated, but there is still much work ahead. This quarter was quite volatile, especially from April to the end. We navigated through that volatility quite well. Regarding the third quarter, it's too early to assess. We don’t provide monthly updates on flow trends, as we see various developments weekly. Looking at the bigger picture as we approach the end of the year, I believe we will intensify our sales efforts. Overall, I think we are ahead of our expectations, and I am very excited about our short, medium, and long-term outlook for flow and organic growth.

Operator, Operator

Seeing as we have no further questions for today. This concludes the Q&A session and today's conference call. We would like to thank everyone for their participation. You may now disconnect your lines. Have a pleasant day.