Victory Capital Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Victory Capital Second 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 will now turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations.

Operator

Please go ahead, Mr. Dennis.

Speaker 1

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.

Speaker 1

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 is now my pleasure to turn the call over to David Brown, Chairman and CEO.

Speaker 1

David? Thanks,

Speaker 2

Matt. Good morning, and welcome to Victory Capital's 2nd 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 2nd quarter. After that, I will turn the call over to Mike to review the financial results in detail.

Speaker 2

Following our prepared remarks, Mike, Matt and I The quarterly business overview begins on Slide 5. We generated another quarter of strong revenue, earnings and margins to close out the first half of the year. Long term net flows improved for the 2nd consecutive quarter with outflows of $1,000,000,000 compared with the $1,200,000,000 of outflows recorded in the This excludes the 3 basis points passive mandate redemption in April, which is previously disclosed in our April AUM release. Average AUM was essentially flat quarter over quarter and our average fee realization rose to 52.1 basis points, which contributed to higher revenue compared with the Q1 of the year. Our margins remained exceptional coming in at 50.9% this quarter, which highlights the differentiated nature of our operating platform and its highly variable expense structure.

Speaker 2

This is a 4th quarter in a row that we achieved margins above our long term guidance of 49%, and this is the 8th quarter over that period where our margins surpassed 50%. Our long term margin guidance remains unchanged at 49%. And keep in mind, this does factor in ongoing strategic investments that will help us grow our business in the future. Adjusted net income with tax benefit rose to $1.11 per diluted share in the quarter, up from $1.08 in the previous quarter. Substantial capital returns to shareholders continued through the first half of twenty twenty three.

Speaker 2

We repurchased a record 1,500,000 of our shares this quarter versus 1,400,000 in the 1st quarter. We allocated $47,000,000 to share repurchases and paid out $21,000,000 in cash dividends For a total capital return of $68,000,000 for the quarter. On a year to date basis, we've repurchased 2,900,000 shares for $92,000,000 and paid cash dividends of $43,000,000 for a total return of capital in the first half of $135,000,000 We continue to invest in our business in a number of different areas. We launched our new brokerage platform in April and rebranded the direct channel at the same time. Additionally, We continue to allocate resources to data and technology and are embarking on a few new marketing and distribution initiatives as well.

Speaker 2

Turning to Slide 7, investment performance remains excellent and consistent. At quarter end, 42 of our mutual funds and ETFs had 4 or 5 star overall ratings from Morningstar. These 4 and 5 star products account for nearly 2 thirds of our AUM in mutual funds and ETFs. Additionally, Approximately 3 quarters of our total AUM outperformed benchmarks for the 3, 5 10 year measurement periods ended June 30. A number of our products rose into the top quartile according to Morningstar's trailing 3 year rankings.

Speaker 2

These included the Victory Income Investors Tax Intermediat Term Bond Fund, Victory RS Global Fund, Victory RS Partners Fund And the Victory RS Investors Fund as well as the Victory Munder Mid Cap Fund and our emerging markets value momentum ETF. In total, approximately 43% of our mutual funds and ETF AUM is ranked in the top quartile as of June 30. Focusing specifically on the 16 fixed income products managed by our Victory Income Investors franchise that are rated by Morningstar. 14 of those 16 products representing 95% of that AUM ended the quarter with 4 or 5 star overall ratings. Given this investment performance, the 1,000,000,000,000 of dollars presently invested in money market funds and the distribution we have built out for this franchise over the last few years, We believe we are nicely positioned to capture inflows into these products as the Fed's tightening cycle subsides, Investors begin to migrate their holdings into longer duration fixed income strategies.

Speaker 2

Turning to Slide 8. We continued to generate robust excess free cash flow in the Q2. Once again, we remain opportunistic with our share repurchase activity this quarter given where our shares were trading during the period. While we intend to remain flexible with our capital allocation, It is important to state that we are not deviating from our proven approach of making our company better through acquisitions. Over the long run, We believe that the best use of our excess free cash flow is to invest in both organic growth initiatives and strategic acquisitions to create shareholder value.

Speaker 2

On the organic side, in addition to what I mentioned a few slides back, we are also investing in new product development. One recent example is our Victory shares free cash flow ETF, ticker VFLO that we launched in June. On the inorganic side, we are spending quite a bit of time conducting diligence on multiple inorganic opportunities. Although timing and getting to a transaction close cannot be guaranteed, we are generally optimistic with what we are seeing and how things are going. That being said, we remain patient, disciplined and selective as we evaluate opportunities aimed at enhancing shareholder value over the long term.

Speaker 2

Before I turn the call over to Mike, I want to take a moment to highlight a significant company milestone. On Monday, we celebrate our 10th anniversary of being an independent company. In 2013, when we executed on our management buyout, Employees contributed about a third of the required equity and the balance of the equity was funded by Crestview Partners. Our other private equity investor, Reference Capital Partners began their investment in the Q4 of 2014. Crestview and Reverence have been long term investors and neither firm sold any shares leading up to or during our initial public offering in February of 2018.

Speaker 2

For calendar year 2018, we ended the year with $53,000,000,000 of AUM, generated revenue of $413,000,000 And adjusted EBITDA of $160,000,000 with an adjusted EBITDA margin of 38.7 percent And adjusted net income with tax benefit per diluted share of $1.64 Since then, We have more than tripled our AUM and increased our run rate revenue and earnings by more than twofold. But of most importance is we made our company better And more durable by significantly diversifying our business across investment products, asset classes, broadening distribution and adding size and scale, With substantially increased efficiency and has allowed us to expand our margins by well over 1,000 basis points during our time of being a public company. It wasn't until November of 2021 that our private equity holders executed on their first sale of VCTR shares in a secondary offering. Since then, they've either sold or distributed more than 23,000,000 shares, taking their combined ownership stake down from approximately 67% at the time of the IPO to approximately 32% today. The relationship with our private equity holders has been a textbook case of a genuine win win over the past decade.

Speaker 2

We are very proud of our track record on executing on our differentiated strategy and the ability to produce an attractive return for these shareholders, who understood our strategy and believed in our vision from the very beginning. While they remain shareholders today, given the nature of their business model, we anticipate monetization of their investments will continue moving forward. Although we anticipate it, the decision to monetize and the exact timing of that monetization are at the sole discretion of their respective organizations. With that, I will turn the call over to Mike to go through the quarter's financial results in greater detail. Mike?

Speaker 3

Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 11. Assets under management increased nearly 2% $158,600,000,000 at the end of March to $161,600,000,000 by the end of June. While the point to point variance was higher, our average AUM was slightly lower than in the Q1 due to intra quarter market volatility. The higher ending point of AUM in June gives us a nice jump off point to start the Q3 from a revenue perspective.

Speaker 3

Revenue of $204,200,000 was up in the 2nd quarter compared with the $201,300,000 of revenue in the 1st quarter. The higher revenue on the lower average AUM was a result of a higher quarter over quarter fee rate realization in one additional day in the period. GAAP operating income was $87,500,000 in the quarter and our adjusted EBITDA was $104,000,000 both up from the previous quarter. 2nd quarter net income was $56,700,000 or $0.83 per diluted share on a GAAP basis, resulting in GAAP EPS increasing by 17% from the prior quarter. And adjusted net income with tax benefit rose quarter over quarter to $75,900,000 or $1.11 per diluted share.

Speaker 3

The quarterly cash dividend of $0.32 per share will be payable on September 25 to shareholders of record on September 11. On Slide 12, you can see a steady increase in total AUM Over the trailing 12 month period, reaching $161,600,000,000 at the end of the second quarter. Our AUM remains well diversified from a distribution channel and client perspective. We are also well diversified from a vehicle perspective With ETFs and separately managed accounts, including model delivery, representing more than a third of our total AUM. Turning to Slide 13.

Speaker 3

Long term gross flows were $5,600,000,000 in the quarter. Industry wide softness in gross sales has persisted with investors remaining hesitant to enter the market given heightened volatility and uncertainty And holding cash has become an attractive risk adjusted option for many investors. 5 franchises including Integrity, New Energy Capital, RS Global, Sycamore and Westend each had positive net flows for the 2nd quarter. In fact, Westend has been net flow positive since the acquisition closed at the end of 2021 for the full calendar year 2022 and to date in 2023. This is a result of not only their excellent investment performance, but also enhance distribution reach and winning new platform placements since the acquisition.

Speaker 3

Moreover, Strong industry tailwinds such as an increasing adoption of model portfolios by financial advisors and the shift to fee based revenue models in the industry Have reinforced our original thesis regarding the attractive growth profile of Westend. We also achieved positive net flows in our active ETF products during the quarter, which we believe is a very attractive vehicle wrapper with excellent growth prospects going forward. Slide 14 illustrates our revenue by quarter. Our fee rate increased 4 tenths of a basis point in the 2nd quarter, which is the highest fee rate realization we have recorded in the past 4 quarters. In general, fees have remained steady and asset class, client and vehicle mix are the primary drivers of quarterly fee rate variations.

Speaker 3

On Slide 15, we break out our expenses for the quarter. Total expenses declined by $9,900,000 were 7% to $129,600,000 from the 1st quarter, driven by lower operating expenses. GAAP operating expenses were down $10,100,000 or 8% in the quarter. This reflected lower compensation expense And lower non cash expenses, including depreciation and amortization, as well as expenses associated with the change in value of consideration payable Cash compensation expense was in line with expectations. And as you can see from the graphic on this slide, As a percentage of revenue, cash compensation remains in a very narrow range.

Speaker 3

Moving on to our non GAAP results on Slide 16. Adjusted net income rose to $66,400,000 in the 2nd quarter. The tax benefit in the quarter held steady at $9,500,000 resulting in ANI with tax benefit increasing to $75,900,000 for $1.11 per diluted share. Our adjusted EBITDA margin expanded to 50.9% in the quarter. We are maintaining our long term margin guidance of 49%, which is inclusive of continued investments in numerous areas to support our future growth.

Speaker 3

Finally, turning to Slide 17. While we did not pay down any debt in the first half of this year, Our net leverage ratio improved to 2.3 times at the end of June due to our growth in earnings during the quarter and slightly higher cash position. The average interest rate paid on our debt increased just 19 basis points to 5.43 percent in the quarter. This was the smallest quarter over quarter interest rate increase in the past 5 quarters and takes into account the $450,000,000 hedge portion of our debt, which is fixed at 3.15 percent. Our $100,000,000 revolver remains undrawn And GAAP operating cash flow from operations was $77,400,000 in the 2nd quarter.

Speaker 3

That concludes our prepared remarks. I will now turn it back over to the operator for questions.

Operator

And your first question comes from the line of Etienne Ricard from BMO Capital Markets. Your line is open.

Speaker 4

Thank you and good morning. To circle back on the launch of brokerage capabilities in your direct channel, How do you think about the opportunity to cross sell your strategies? And what improvement are you expecting as it relates

Speaker 2

Good morning. The launch of our brokerage platform, I'd start off by saying we're in the early stages. We launched it at the end of April of this year and we're making really, really good progress on it. There will be a great opportunity to be able to cross sell to take your term to cross sell our Investment strategies to our current clients to new clients. But I think the real opportunity is to get Closer to our clients there.

Speaker 2

So to offer them more product choice, to be able to work with them with their financial Future and to really be able to see what we can do to be a bigger part of their financial life Through more product choice. So part of that is going to be more of our own products, but another part of that is going to be Other firms' products sitting on our brokerage platform, and that's the real goal is to really help our clients And to get closer to our clients and then ultimately to get new clients.

Speaker 4

Okay, understood. Switching gears a little bit on New Energy Capital. Could you please remind us of the potential for scale And that business as well as how investor interest is holding up in this macro backdrop and lastly the Timeline for future fundraising.

Speaker 2

So, New Energy was our first entrance into really private markets. And the business is smaller relative to our overall business. Think of it as a $1,000,000,000 or sub-one $1,000,000,000 platform. The opportunity there is to go out and to Launch new funds, we were net flow positive for this quarter with them. And it's really just the beginning of new energy and that's also the beginning for us in the private market part of the industry.

Speaker 4

Thank you very much.

Operator

And your next question comes from the line of Craig Siegenthaler from Bank of America. Your line is open.

Speaker 5

Hey, good morning, Dave, Michael. Hope you're both doing well.

Speaker 6

Good morning. Good morning.

Speaker 5

So fixed income continues to be a net flow headwind for Victory Despite pretty good investment performance, but I wanted your perspective over into the second half into 2024. Are you expecting a large pickup in industry fixed income flows kind of really after the Fed pauses? And how do you think your bond business is Position for this migration?

Speaker 2

So we are as we said in the script, we think the second half of this year And then going into next year, we do think that investors are going to pivot really from money market Our very, very short term fixed income investments to more longer duration. And from our perspective, And we articulated this in the script. We have a number of products that have really good performance, Long track records, high ratings from a Morningstar perspective, and we've expanded out the distribution over the years. So we think we're really well positioned. Some of the softness, if you go back to the first half of the year for us, Has really been in some of the non core fixed income products that we have, some floating rate, high yield And other non core fixed income products that really we've seen those investors go into a money market type investment.

Speaker 2

So when those investors feel comfortable, I think as we talked about with the industry, feel comfortable getting out of A money market type investment, we think we're really well positioned and we're really excited about that. And we think that that's going to be A big driver going forward of our organic growth opportunities.

Speaker 6

Great.

Speaker 5

For my follow-up, I want to circle back on M and A, just given the rebounding markets here. I wanted to see what that's changed. Has there been any change in valuation multiples over the last 6 months? The financing side looked a little more challenged last year. Is that starting to ease a little bit too?

Speaker 2

I think sellers have come down in their expectations. So I would say That there's probably a lot more conversations happening that potentially can get to a conclusion. We have seen Some activity from Victory's perspective, we're really encouraged. We're working hard. And part of our growth over the last decade has been through acquisitions.

Speaker 2

And I would anticipate that going forward. And I'd also anticipate, and I've said this before that coming out of some of these challenging periods, You see a lot of M and A activity in this industry and I don't think it's going to be any different this time. And if you assume we're coming out of a challenging period Through this year and into next year, I think the M and A activity is going to happen and I think there's going to be a lot of it and we're going to participate in it.

Speaker 6

Okay. Thank you.

Operator

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

Speaker 7

open. Great. Hey, good morning, guys.

Speaker 2

Good morning. Hi, Mike.

Speaker 7

Hey, so I guess a really nice margin result this Quarter and as you called out this is the 12th consecutive quarter above your 49% guidance. Looks like lower comp was certainly helpful this quarter. Any thoughts on perhaps changing that guidance So, any quick comments on how to think about maybe the coming quarters here?

Speaker 2

So, I'll start and Mike will follow-up. We've always talked about margin guidance from a long term perspective. Quarter to quarter with the ebb and flow of investments that we're making in the business, the way the market is and then How we realize revenue, really it's tough to think about it quarter by quarter and we've had a great track record of exceeding the guidance. And but our guidance, we're comfortable at 49%. Over the long run, We have a really differentiated operating platform.

Speaker 2

I think this is the 2nd highest Margin, operating margin, we have achieved as a public company. And I think the first was Q4 of 2020. So to think that we would have our 2nd highest margin in this environment just says a lot about our platform.

Speaker 3

Yes. I would add, I think the ability for us to continue to make the investments and we highlighted a few areas where we are reinvesting For long term data, product, distribution, continuing to invest in those areas really pointed for the future. And as Dave mentioned, those investments will ebb and flow. So while this quarter we had a 50.9% margin, We think that the beauty of the model is it's highly consistent. And if you go back and look, we've been operating at 49 Margins for the last 12 quarters, and that includes those investments.

Speaker 7

Okay, great. And then could you just comment on the broader investor sentiment? Just looking at your flow trends and A lot of your peers, it looks like the gross sales have been just remain quite soft and that's really an important part of the net flow trends that we've been seeing. What causes investors to really engage in a more meaningful way in your view? Any green shoots that you've been seeing on this front?

Speaker 2

Yes. I would agree with you that gross flows from an industry perspective have been soft. I think a lot of investors Our sitting in money market investments. I think the last number I heard was $7,000,000,000,000 Which is around a quarter of the industry, is invested in money markets. I think that there is A lack of certainty of what the future holds from a Fed perspective, from a rate perspective.

Speaker 2

So I think To earn 5% in a money market essentially risk free is a good risk Adjusted return for many investors, I think as we get clarity on the Fed and the economy, I think a lot of that money will move, and I think that's what we're excited about. We do see Some movement now. We're seeing the pickup on our won but not yet funded on the institutional channel. We also and We called this out the Westend platform that we have. We've seen a nice pickup.

Speaker 2

And I do think When we get some clarity, you're going to see a lot of money move. It will go into various types of investments. I think until then, I think people many people, many advisors, many investors are going to be very comfortable just Sitting in a money market and earning a 5% yield. When you go back 2 years ago, you think about what money markets were yielding, it is a good risk Adjusted return when you look at it historically.

Speaker 7

Okay, great. Thanks, David. Congrats on the anniversary. That's a big milestone.

Speaker 2

Thank you.

Operator

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

Speaker 8

Hi, good morning, Dave and Mike. This is actually Michael Killen for Ken Worthington. I just wanted to follow-up on the margin Discussion and organic growth organic investment discussion there. I mean, you listed a few several different organic initiatives. And so I guess, We're thinking about kind of the 49% long term margin target.

Speaker 8

I mean, what's kind of the level of annual organic investment that That's kind of assumed in there long term.

Speaker 2

So We set the 49% margin guidance over the long term factoring in that we would make investments in our business We're making a lot of investments today. Mike went through a few of them, data, Technology, we launched the brokerage platform. We rebranded, really the direct business. We also have launched products, and there's a lot of other things happening behind the scenes where we're investing in Our business and we'll continue to invest. We think the balance of investing for organic growth And then maintaining the 49% as our long term guidance is the right balance.

Speaker 2

I do think that our model is different. And I think when you compare us to other firms in the industry, we just have a different operating model where A good portion of our expenses are variable. And then we have the ability To really scale up and to scale down during tough markets and maintain our margins. And so the balance of the investments and the 49 We really think that's a really that's threading the needle in getting both of those things right.

Speaker 3

Okay, great. Thank you so much.

Operator

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

Speaker 6

Hey guys, Luke here on for Alex. Thanks for taking the question. Can you just provide a quick update on capital allocation strategy? Obviously, buybacks continue to be very healthy and are encouraging, but how are you balancing that with debt pay down and inorganic activity? And on the inorganic side, are there any specific areas of focus you guys are thinking about as you do your due diligence?

Speaker 6

Thanks.

Speaker 3

Sure. Good morning. I think our capital management strategy has really remained consistent and is unchanged. We want to maintain balance sheet flexibility really to execute our differentiated strategy, which really includes, as you highlight, kind of the inorganic The strong financial performance that we've delivered, the business diversification that's really been driven by those organic Investments that we've made in inorganic investments have kind of provided us that ability to remain flexible. And really as we think about The level of buybacks that we've done in the first half of the year and balancing that versus the other capital management elements and pillars, We've been opportunistic and really those decisions are based on facts and circumstances.

Speaker 3

We've leaned in the past several quarters on shareholder return. We think that's been the right pivot from an allocation perspective. We've got a very advantageous Debt Stack, as we've talked about, we've got a hedge on about $450,000,000 of the debt that It really allows us to kind of have a lower interest cost, and it really is something that we think about kind of going forward. And we've also leaned in on the share buyback because we think there's a statement with respect to the value of the stock as well there. But I think as we think about going forward, the priority and the best use of our excess cash will continue to be Inorganic growth and we want to make sure that we've got the right capacity from and tools to be able to deliver on that.

Speaker 3

Yes.

Speaker 2

And then I'll Take the what kind of intergrown growth opportunities we're looking at. I mean, first, anything we do, we start off That has to make the company better. A lot of what we have done in the past has made Very, very great strides financially, but everything the constant has been that we've made the company better. So, we start off, we have to make the company better. The different types of transactions that we're interested in, I'd put them into A transformational transaction where it's going to be large in size and scale, going to have multiple levers of value that you can create, Products opening up distribution channels, and we have done some of those in the past.

Speaker 2

Then another area we're interested in is really acquiring products that are part of the future portfolio of our investors. So, a Westend type acquisition, a new energy, THB, These are acquisitions that have fantastic products that are part of the future of portfolios and We're hearing from our clients the type of products that they want and desire. So we're looking at those kinds of opportunities. And from a sizing perspective, the range really is something very small to something very large. And as Mike has said, we have a lot of different levers to do acquisitions.

Speaker 2

Part of that has been debt in the past. We generate cash. We have structuring. And we've done a number of different things. And We feel today that we have the balance sheet and then we have the other tools that we can use to really execute on

Speaker 6

That's super helpful. I appreciate the color there. And maybe a nice segue to a follow-up. So Westend has obviously been like a very successful acquisition for you guys. Can you help frame for us how significant of a driver it has been and you expect it to be maybe For the quantum of flows and is there anything specific that you can speak to that's driven the recent pickup in activity here?

Speaker 6

Thank you.

Speaker 2

So, I'll take the back half of that question. I think the recent pickup is really just a general market environment. Westend has had excellent investment performance, but even deeper is they really do provide a solution To advisors and to clients. And so none of that has changed. It's really just been a general market sentiment.

Speaker 2

And I think the group that's out servicing and selling the product does an excellent job. Westend, since we've done since we closed the acquisition really the beginning of 2022, We've had organic growth. And if you think about the beginning of 2022 to today to have a product that has grown organically, really in every time period that we measure. So all of 'twenty two year to date and 'twenty three both periods they've grown and then cumulatively they've grown. It's been excellent.

Speaker 2

We have big expectations for them going forward. We think they're going to be a big part of our organic growth And as the general investor sentiment gets better, we think that their organic growth will increase. If you remember, when we did the acquisition, this was a double digit organic annual organic grower, percentagewise. So they have experienced great growth in the past and I don't see in a normal market environment why we can't reproduce that.

Operator

And your next Question comes from the line of Matthew Howlett from B. Riley Securities. Your line is open.

Speaker 9

Hey, good morning and thanks for taking my question. Most of my questions have been answered. But David, I wanted to ask you on the 12 platforms, how often do you feel the need to get involved from a management Remind us again sort of how often in the past you step in on the day to day and so forth.

Speaker 2

So, our model really is all about an independent autonomous investment franchise is how we describe it. So you have investment professionals really every day researching And managing a portfolio as they see fit. They do it on a platform which we think is best of class. And but really the investment professionals that are driving, building the portfolios and deciding how the portfolios are positioned, That's how we have built our business and we think that that's the best way to get Great investment performance. You can see from our investment performance how excellent it's been, how consistent it's been.

Speaker 2

And it's really because We've got, as you said, 12 investment franchises where you have groups developing their own portfolios And then, and the ability to articulate those portfolios without any interruption from Non investment professionals and I think that's been consistent over the last decade as being an independent company.

Speaker 9

So there's no need to step in and sort of guide someone that may not be up to what the others are doing. You just sort of Let them

Speaker 7

run it's worked for you in

Speaker 9

the past and that's the way it stands and let them run their company.

Speaker 2

Yes. It's All about providing them all of the necessary tools that they need to build portfolios, and to manage client assets. And so our focus is on providing them all the tools to do that. They take those tools. They build the portfolios.

Speaker 2

And then our job as well is to go out and make sure that we secure them clients and that we service those clients and we let them focus As much as their time as possible on the portfolio and making the decisions around the portfolio.

Speaker 9

Makes a lot of sense. And that leads into my next question. You run the gamut in terms of what you're looking at in terms of M and A. How do you narrow it down? Does it come down to sort of the best value out there, the needs of the company or geography We'd like to be in.

Speaker 9

I mean, you're going to presumably see a lot of potential deals out there. I mean, what can you tell us in terms of how you prioritize All that's out there.

Speaker 2

Yes. I think we have a really good track record With our M and A over the last decade, how we prioritize isn't really around Asset class or size or scale or even financial accretion, it's really around the best fit for the company. This industry is going to go through, in my opinion, going to go through continued consolidation for the foreseeable future. There's going to be a lot of opportunity. And I do think sorting out the best fit for your organization Is one of the challenges for leadership teams.

Speaker 2

And so part of that is science, and you can go through all of the Investment performance, analytics and other things. And then the other part is art, and I think we draw upon our experience of doing acquisitions.

Speaker 9

Yes, absolutely. Thank you so much.

Operator

And there are no further questions at this time. Mr. Dave Brown, I turn the call back over to you for some final closing remarks.

Speaker 2

Thank you. And we appreciate everybody's interest in Victory Capital. We look forward to keeping you posted on our progress

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Victory Capital reported Q2 revenue of $204.2M, average fee realization of 52.1bps and adjusted EPS of $1.11, driving a 50.9% adjusted EBITDA margin above its 49% long-term target for the 4th consecutive quarter.
  • Long-term net outflows improved to $1.0B in Q2 (vs. $1.2B in Q1), with five franchises including Westend and active ETFs posting positive net flows despite industry cash retention trends.
  • Investment performance remained strong, with 42 mutual funds and ETFs holding 4- or 5-star Morningstar ratings (nearly two-thirds of fund AUM) and ~75% of AUM outperforming benchmarks over 3/5/10 years.
  • Capital returned to shareholders totaled $68M in Q2 ($47M buybacks, $21M dividends) and $135M YTD, while net leverage improved to 2.3x, preserving flexibility for disciplined M&A.
  • Strategic initiatives include launching a new brokerage platform and free cash flow ETF, rebranding direct channels, investing in data/technology, and pursuing selective acquisitions as it marks its 10th anniversary and over triples AUM since IPO.
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Earnings Conference Call
Victory Capital Q2 2023
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