Earnings Call Transcript - VCTR Q4 2022

Operator, Operator

Good morning, and welcome to the Victory Capital Fourth Quarter and Full Year 2022 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 would now like to turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please go ahead, Mr. Dennis.

Matthew Dennis, Chief of Staff and Director of Investor Relations

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 could 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.

David Brown, Chairman and CEO

Thanks, Matt. Good morning, and welcome to Victory Capital's third quarter 2022 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 quarter and the full year period. Then I will cover our investment performance, which continues to be very strong. Following our prepared remarks, Mike, Matt, and I will be available to take your questions. 2022 was a historic year for the asset management industry. The disruptions in both the equity and fixed income markets drove asset levels significantly lower across most asset classes with industry-wide declines in year-over-year revenue and operating margins. While we are not immune to the market backdrop, I am very pleased with the results we reported last night. At the end of each year, I like to step back and take a long-range view of our company and review our progress against our long-term strategy and goals. As part of that, we continue to make strategic investments in hiring, technology, data, and marketing and distribution during the year and are seeing that these investments are beginning to pay us back. A good example of this is gross long-term flows in 2022 were $33.3 billion, which is 20% higher than the gross long-term flows of $27.9 billion generated in 2021 and 44% higher than gross long-term flows in 2020. The $6.5 billion in gross long-term flows achieved in the fourth quarter of 2022 is a record high for any fourth-quarter period in our history. These results reinforce our strategy of investing in areas where we can make a meaningful impact on our business. Our long-term net flows were negative $2.5 billion during the year, which equates to only 1.4% of the beginning of the year assets under management and pales in comparison to the more than $26 billion of negative market action we experienced since the beginning of the year. Specific to the fourth quarter, net long-term outflows were elevated. We experienced clients selling assets at an accelerated pace for a number of reasons including tax loss harvesting, capital gain distribution avoidance, and pivoting to risk-off positions. To-date in 2023, our net long-term flows have improved materially across our business from the fourth quarter. Operating income rose 7% from $374 million in 2021 to $399 million in 2022. Full year adjusted EBITDA margin was 49.6% in 2022 which exceeded our long-term guidance of 49% and is a good representation of our margin defensibility during a very volatile year. Adjusted net income or tax benefit was $1.05 per dilute share in the quarter and $4.58 per diluted share for all of 2022. We continued to return capital to our shareholders in 2022. In total, we returned more than $200 million of capital to shareholders, which was more than three times the $62 million in capital returned in 2021. We are continuing to invest and hire at the same steady pace we have maintained over the last few years, and we will do the same thing in 2023 while also maintaining our long-term adjusted EBITDA margin guidance of 49%. Turning to Slide 7, you can see the strong investment performance we deliver on behalf of our clients has continued throughout the year and its final quarter. We had 44 mutual funds and ETFs with four or five-star overall ratings from Morningstar. Additionally, approximately 80% of our total AUM outperformed benchmarks for the three, five, and 10-year measurement periods as of year-end. We are also very well positioned from an investment performance and distribution standpoint to benefit from a rotation back into fixed income. Keep in mind, from a product offering perspective, we have mutual funds, separate accounts, and ETFs available for this franchise. With that, I will turn it over to Mike for more details on the quarter's financials.

Michael Policarpo, President, Chief Financial and Administrative Officer

Thanks Dave and good morning everyone. The financial results review begins on Slide 10. Total AUM increased $5.7 billion or 4% in the quarter to $153 billion at the end of December. This was driven by more than $10 billion of positive market actions as the markets rebounded during the quarter. Revenue of $201 million in the fourth quarter was up 3% in the third quarter, which was consistent with the 3% decline in average AUM in the year's final quarter despite the higher point-to-point AUM. Full year 2022 revenue was $855 million. On a GAAP basis our operating income was $79.6 million in the fourth quarter and $399 million for the full year period. Adjusted EBITDA was $100 million in the fourth quarter and $424 million for the year. Adjusted net income with tax benefit was $74.5 million or $1.05 per diluted share in the fourth quarter and $331.2 million or $4.58 per diluted share for the full year. We increased our quarterly cash dividend by 28% to $0.32 per share, which will be payable on March 27th to shareholders of record on March 10th. Our strategy included deploying capital to support earnings growth, capital appreciation, and balance sheet flexibility, while at the same time rewarding shareholders with capital returns. We intend to maintain flexibility and strategically allocate excess capital to maximize long-term shareholder value creation.

David Brown, Chairman and CEO

Turning to Slide 12, long-term gross flows were $6.5 billion in the fourth quarter, which was the highest we've ever reported for a fourth quarter period. Full year gross long-term flows of $33.3 billion also marked a new record. WestEnd Advisors, Sycamore, Sophus, and RS Global, each had positive net flows for 2022 and fourth quarter represented the ninth consecutive quarter of positive net flows for our VictoryShares ETF business. We also earned a number of product recommendations and model allocations during 2022 that will support future sales activity. In addition, our market neutral income fund was added to the recommended lists at Morgan Stanley, Merrill Lynch, Saterra, Fifth Third Bank and LPL. If you look at WestEnd Advisors, we own that business for all of 2022, and that was net flow positive. They had a really great existing distribution platform and we’re expanding that. The point is each one really has its own unique situation. The concept is to take really excellent investment franchises and really plug that into our distribution network and expand their opportunity set to gain more clients.

Craig Siegenthaler, Analyst, Bank of America

Good morning, Dave. Michael, hope you're both well.

David Brown, Chairman and CEO

Good morning, Craig. So I would think of it this way. We're opportunistic in our share buyback and really it depends on the market conditions. We talked about in our script the last six months we leaned into buying shares because of the market. When we look at the market going forward we're going to take it week by week. That's part of an overall capital allocation strategy. The primary purpose of our capital allocation strategy is to really have a flexible balance sheet so we can go ahead and pursue acquisitions and the buyback and the dividend is ancillary to that. I'd reiterate what I said in our script that we think that the levels we're at today, there's really good value in our stock.

Kenneth Lee, Analyst, RBC Capital Markets

Hi, good morning, and thanks for taking my question. Wondering if you could just further expand upon your prepared remarks about being well positioned to potentially capture fixed income net flows.

David Brown, Chairman and CEO

Yes, good morning. A great question and very timely. Just to expand on what we said in the prepared remarks, we have 16 products under the USAA franchise. 15 of them are four or five-star, which is remarkable. We really do cover a lot of ground from the fixed income perspective, and we think we're really well positioned with the investment performance.

Michael Brown, Analyst, KBW

Great. Good morning guys. How are you?

David Brown, Chairman and CEO

Good.

Michael Policarpo, President, Chief Financial and Administrative Officer

Good.

Michael Brown, Analyst, KBW

I guess I wanted to just start on the fee rate here. It's remained relatively stable, and you've had a lot of kind of mix shift in your AUM here with the recent acquisitions.

David Brown, Chairman and CEO

As you mentioned, our fee rate has remained very stable. For 2023, we would expect that the fee rate will continue to be driven by beta impact, as well as asset mix, channel mix, product mix. As we think about opportunities for expansion of fee rates, we've discussed the fulcrum fees we have on some of our products that gives some upside. Those fulcrum fees were positive in the fourth quarter, about 0.1 basis points, and there is opportunity for upside on that.

Brennan Hawken, Analyst, UBS

Good morning. Thanks for taking my questions. I’d like to start on the capital return side of things, buybacks robust again and you guys spoke to that a bit in a prior question.

David Brown, Chairman and CEO

Yes, great question. I think first our private equity owners have liquidated and actually reduced their position quite significantly over the last few years. The ownership has come down through a couple of programs and we’re happy with that. We also on the other hand, have done really well with the ownership of private equity. The board evaluates every time, every quarter, all different kinds of programs around what we do with our buyback, how we interact with our private equity shareholders, and so we continue to evaluate. We’re focused on growing the business, doing smart acquisitions, and focusing on our clients.

Michael Cyprys, Analyst, Morgan Stanley

Hey, good morning. Thanks for taking the question. Maybe just on M&A, you guys have been quite active over the years. Markets have been quite volatile, though financing costs have gotten a bit higher and the spreads have widened out.

David Brown, Chairman and CEO

Hi, Mike. So as I said in the script, we are very patient and selective as we’ve always been. We’ve done very sizable deals in comparison to our size. We’ve done four acquisitions in five years. As I look at the environment with pricing and cost of financing, we feel really good about the opportunities. If we find something we’ll do it.

Operator, Operator

That concludes today’s presentation. You may now disconnect.