Victory Capital Holdings, Inc.

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 portions of our website at ir.vcm.com. It is 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 fourth quarter 2020 earnings call. I'm joined today by Michael Pellicarpo, our President, Chief Financial and Administrative Officer, as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'll start by providing the business overview for the quarter, as well as an overview of the full year 2020 and an update of our pending THB acquisition. Then I will turn it over to Mike, who will review our financial results in greater detail. Following our prepared remarks, Mike, Matt, and I will be available to take questions. The business overview begins on slide five. Victory Capital ended 2020 with record-breaking financial performance across a number of metrics. Our business performed well in a very challenging operating environment. We entered the new year with strong momentum. Adjusted EBITDA margin increased to a record 52% during the fourth quarter, resulting in record adjusted quarterly earnings of $1.07 per share. That's up 7% from the third quarter of 2020. Investment performance also remained strong, with 67% of AUM outperforming respective benchmarks over the one, three, and five-year periods ended December 31. Firm-wide assets under management rose to $147.2 billion at December 31, 2020, an increase of 11% relative to September 30. We ended the year with long-term AUM of $143.7 billion. Long-term growth flows increased 12% quarter over quarter to $5.7 billion. We also saw substantial improvement in our net flow picture in the fourth quarter relative to the first three quarters of the year. While we continue to see some of the same headwinds in our net flow profile in Q4 that we saw in previous quarters, it did slow, and activity on the intermediary and institutional sides of our business was strong and included the funding of some previously awarded institutional mandates and a number of intermediary platform wins and placements. For example, on the retirement side of our business, we executed a selling agreement with ADP for the USAA mutual funds. Additionally, our recently launched NASDAQ Next 50 ETF, ticker QQQN, has been approved for sale on the LPL, Raymond James, and more recently, the Morgan Stanley Wealth Management Platforms. And Sterling Trust Capital added SOPHUS Emerging Markets Strategy to its discretionary models. We've also increased our focus on registered investment advisors with the addition of a team of distribution professionals with deep experience specializing in this channel and expect to see increased activity as we progress through the year. Lastly, we established a new institutional level relationship with Citi Private Bank earlier in the year. Moving to capital management, we generated strong cash flow for the quarter. Consistent with prior guidance, most of the excess cash we generated in 2020 was allocated to reducing debt. This reduced our leverage ratio to 1.8 times at year end. We also have made additional debt payments post-year end, which Mike will cover. Finally, we increased our quarterly cash dividend from $0.07 to $0.09, a 29% increase. We remain committed to enhancing our financial flexibility and balance sheet capacity through reduction of debt so that we can pursue strategic acquisitions while also balancing returning capital to shareholders through dividends and share buybacks. We will continue to evaluate the balancing of the two especially as we continue to create capacity on our balance sheet through debt and interest expense reduction. Turning to slide seven, we'll step back and review the full picture for 2020. In addition to ending the year with record long-term AUM and record gross flows, we saw marked improvement in long-term net flows as the year progressed. Adjusted net income with tax benefit per diluted share was a record $3.87, up 47% from $2.63 in 2019. We had record-adjusted EBITDA margin of 49% in 2020, reflecting the strength, efficiency, and flexibility of our business model, even as we navigated a very uncertain business and market environment. We reduced our debt by $164 million over the course of the year, while at the same time returning $42.6 million to shareholders. And with the latest dividend declared yesterday, we've increased the quarterly cash dividend by 80%. We continue to invest in our business in 2020 through meaningful investments in product development, digital transformation, data, and technology. This included the launch in November of a new digital platform to support clients across all our business channels. The pursuit of attractive inorganic growth opportunities also remained a focus last year and will continue into this year. In September, we announced that we had acquired a 15% interest in Alderwood Partners, which provides us with an attractive return opportunity and broadens our international scope for future acquisitions. We are on track to close the previously announced THB asset management acquisition later this quarter. We look forward to welcoming THB as our 10th investment franchise and integrating their ESG-focused investment strategies onto our platform. Both our investment in Alderwood and our acquisition of THB will broaden our distribution opportunities outside the U.S., particularly in the U.K., Europe, and Australia. We are continuing to actively evaluate M&A opportunities with a focus only on those that will make our company better by providing access to specialized asset classes, new distribution channels, and or the potential to expand our client base beyond those what we serve today. Simply put, we are in search of acquisitions that are strategic to our business. Looking back even further, slide eight lists several of the objectives we laid out at the time of our IPO in February of 2018. As you can see from the table, we've generated substantial profitable growth through 2020. Through year-end, we've achieved an 88% increase in revenues, expanded margins by 1,000 basis points, more than tripled our gap earnings per diluted share, and more than doubled adjusted net income with tax benefit. This illustrates the tangible results we've achieved since becoming a public company, and we believe serves as a report card for our business. It's important to note that we've achieved these results while continuing to reinvest significantly in our business, retain and improve our talent base, and deliver strong investment performance results for our clients. Looking ahead, we'll continue to focus on strong execution while maintaining a long-term view and creating lasting value for our shareholders. Turning to slide nine, I'd like to provide a brief update on our direct investor business. We continue to enhance the service and products that we offer to direct investors and expanded our executive leadership team to include Nikhil Sudan, who has been appointed to the newly created position of President, Direct Investor Business. Nikhil brings a wealth of experience to this role, most recently serving as a leader in McKinsey's wealth and asset management practice. We are very pleased to welcome him to Victory. Looking at the direct business, we continue to benefit from our referral agreement with USAA and our ability to deliver a diversified set of competitive products to USAA members and other direct investors. Since we launched the business in July 2019, we have approximately 115,000 new funded account registrations. A good highlight is the USAA 529 College Savings Plan, which remained net positive in terms of both account growth and flows during 2020, and since we acquired the business in July 2019. In November, we completed the final transition from USAA's technology platform and introduced a new proprietary digital experience to serve direct investors as well as clients in other business channels. The new digital marketplace advances our sales and marketing efforts and enable us to more effectively promote our products to direct investors who are not USAA members. An example of a new feature is a software-based investment planning solution that enables investors to create a personalized portfolio for retirement and non-retirement accounts based on their specific goals and risk tolerance. Earlier in 2020, we launched a new IVR contact center technology, which is fully integrated with our CRM data and better supports our marketing initiatives to gain wallet share with existing direct investors and attract new investors to our platform. In addition to our marketing and digital efforts, we are focused on continuing to expand investment options. In conjunction with the launch of our digital platform, we added a new no-load member share class to 11 of our existing victory funds specifically for the direct business. This means that direct investors are now able to invest in mutual funds not previously available through the legacy platform. We also introduced taxable and tax-exempt fixed income separately managed accounts, SMAs, managed by our USAA investments franchise on the direct platform in the fourth quarter. As a side note, we will be offering this to the intermediary channel in the coming weeks as well. During the year, we've broadened our firm-wide commitment to responsible investments by becoming a signatory to the United Nations supported principles for responsible investment. In conjunction with this commitment, we revised the strategy for the USAA World Growth Fund to focus on sustainable and responsible investing and ESG considerations and changed the fund's name to USAA Sustainable World Fund. We've been steadily securing more product placements in shelf space for fixed income strategies managed by our USAA investment franchise. The exceptional performance being generated by this group, which I'll cover in a moment, is greatly enhancing our efforts to build these pipes for future asset flows. This has picked up recently, and we anticipate this continuing throughout the year. As I mentioned, in the fourth quarter, we established a selling agreement with ADP for USAA mutual funds, and Voya added the USAA Intermediate Term Bond Fund to one of its fiduciary products. Charles Schwab also made allocations through its UMP product to the USAA High Income Fund and the USAA Income Fund. We are confident that we will continue to achieve more wins in 2021 as we further expand the commercial distribution of these strategies. Turning to slide 10, I'll review the acquisition of THB Asset Management, which, as I said earlier, is on track to close later this quarter. THB has a 38-year history with an impressive investment performance track record. As of January 31, the firm managed approximately $555 million in the micro-cap, small-cap, and mid-cap asset classes, including U.S., global, and international strategies. That number is up about 28% since the time of announcement. These are capacity-constrained asset classes that we know well and that are in demand. These are also asset classes in which active management is an important part of a well-diversified portfolio. From a business perspective, THB has significant room for AUM growth across its product set, which we think will significantly accelerate with our distribution support. All of THB's strategies have ESG considerations fully integrated into their investment processes. In fact, THB was an earlier adopter and has been managing socially responsible investment portfolios for decades. The table on this page highlights THB's stellar investment performance track record. All four of THB's primary institutional strategies have outperformed their respective benchmarks for the one, three, and five-year periods ended December 31. Additionally, all the strategies are ranked in the top quintile or top decile for the one-year period and top quartile for the five-year period, according to eVestment. This is a testament to the strength and consistency of THB's processes and long-tenure managing strategies in these specialized asset classes. THB is a great fit for us on many levels and highlights our ability to strike financially attractive, creative deal structures with talented investment organizations. THB's entrepreneurial client-first culture aligns well with ours, and we are very pleased to welcome them to our team. On slide 12, I'll review our investment results for the quarter. As of December 31, 64% of company-wide AUM in mutual funds in ETFs was ranked four or five stars overall by Morningstar. Sixteen mutual funds were ranked in the top quartile by Morningstar for the trailing one-year period, including 11 funds in the top quintile. Looking at the investment performance of our Victory Shares ETFs, four were ranked in the top quintile by Morningstar, including two ranked in the top decile for the trailing one-year period. Performance of the fixed income mutual fund and ETFs managed by our USAA investment franchise remained very strong in the fourth quarter. The percentage of AUM in those products outperforming respective benchmarks over the trailing one-year period was 90% as of December 31. Additionally, 14 out of 16 mutual funds in ETFs will rank four or five stars overall by Morningstar. This includes the two active fixed income ETFs managed by USAA Investments, which achieved their three-year track records in October, and are ranked four stars overall by Morningstar as of December 31. Reflecting on 2020 as a whole, there's no doubt that it will be characterized as a year of unprecedented challenges both personally and professionally. As we emerge from the global pandemic crisis, there will be undoubtedly substantial change ahead. We believe our business model, which combines boutique investment qualities with the benefits of a fully integrated, centralized operating and distribution platform, is uniquely situated to navigate and thrive as we look forward. In fact, history shows that this type of market environment presents real opportunities for talented active managers, like our franchises and solutions platform. to outperform and deliver meaningful results to our clients. Now I'll turn it over to Mike to review our financial results in more detail.

Thanks, Dave, and good morning, everyone. The financial results review begins on slide 14. Revenue for the fourth quarter increased 6% from the third quarter, reaching $200 million in the period. For the full year, revenues were a record $775 million, up 27% from the $612 million reported for 2019. Gap operating margin was 39% in the fourth quarter and 41% for the full year. Our fourth quarter margin was down on a gap basis from the third quarter, primarily due to a non-cash adjustment to the book value of the earn-out liability related to the acquisition of USAA's asset management business. In the fourth quarter, this adjustment increased operating expense by $7.5 million compared to the third quarter. This adjustment was net of the first maximum earn-out payment of $37.5 million that we made to USA during the quarter. As you may recall, these earn-out payments are based on revenue retention, which was in excess of the maximum hurdle rate in our first year of ownership. Gap net income was $54.9 million in the fourth quarter, compared with $55.7 million in the third quarter. Versus the fourth quarter of 2019, gap net income rose by 46%. Gap earnings per diluted share for $0.75 in the fourth quarter. That was down a penny from the third quarter and up $0.24 or 47% with the fourth quarter of 2019. For full year 2020, GAAP net income jumped 130% to $213 million, while GAAP EPS rose 129% to $2.88 per diluted share, compared with $1.26 per diluted share last year. Adjusted EBITDA margin widened to a record 52% in the fourth quarter. Compounding the higher quarter-over-quarter revenue, the margin expansion drove adjusted net income with tax benefit to a record high $78.6 million, which was up 7% from the previous record set in the third quarter. Adjusted earnings per diluted share reached $1.07, which was up from $1 per diluted share in the third quarter and up from $0.99 in the same quarter last year. For the full year period, adjusted EBITDA margin expanded 480 basis points to 49%, up from 44% in 2019 due to better operating leverage and resulted in full-year ANI with tax benefit reaching a record $286 million. This was up 48% from ANI with tax benefit of $193 million in 2019. On a per share basis, ANI with tax benefit improved to $3.87 per diluted share, a 47% increase from 2019. As Dave highlighted, we increased our quarterly cash dividend for the third time in the past year. We also continued our share repurchase program while directing most of our free cash flow to reducing debt. We paid down $49 million during the quarter, which increased full-year debt prepayments to $164 million. This reduced our leverage ratio to 1.8 times at the end of the year. Since the beginning of 2021, we have repaid an additional $32.5 million of debt. Turning to slide 15, total AUM rose 11% during the quarter. The $147.2 billion of AUM at year end reflects positive market action that was partially offset by net outflows, which improved in the fourth quarter. Since the first quarter low point at the end of March, our total AUM rose steadily during the final three quarters of the year, increasing 19%. The diversity of AUM in our distribution channels remained strong throughout the year. Long-term asset flows are covered on slide 16. Consistent with guidance on our third quarter call in November, the improving flow trend that began in the second quarter continued in the fourth quarter. From the chart, you can clearly see the steady decline in redemptions throughout the year. Also, gross flows turned higher in the fourth quarter, increasing by 12% from the third quarter level. A couple of our one but not yet funded mandates came in during the fourth quarter, and we have a significant number of remaining mandates that have yet to fund. We expect most of these to fund in the first half of this year. Turning to slide 17, quarter-over-quarter revenues increased by 6%, which is slightly ahead of the 5% increase in average AUM. The average fee rate in the quarter rose 7 tenths of a basis point to 57.1 from 56.4 basis points in the prior quarter. The higher average fee rate in the fourth quarter was the result of improving asset and channel mix shift, better fulcrum fees on certain USA mutual funds, as well as additional performance fees recorded in the fourth quarter. This was partially offset by higher yield support on money market funds during the period and a slight decline in administration and servicing fees. For the full year, our average fee rate was 56.8 basis points. Looking ahead, we continue to be encouraged by the improving investment performance in the largest USAA mutual funds with welcome fees. As Dave highlighted, investment performance has continued to outpace respective benchmarks on many of the fixed income products managed by our USAA investments franchise. Moving to slide 18, the higher fourth quarter expenses compared with the third quarter were attributable primarily to the increase in the contingent liability valuation for the remaining USAA earn-out I mentioned previously. Fourth quarter adjustment of $9.5 million reflects a lower discount rate used to calculate the liability's present value plus a shorter time period for the three remaining payments and is net of the cash payment made during the quarter. This expense is included in acquisition-related restructuring and integration and represents nearly the entire increase in this category from Q3 when this adjustment was $2 million. The maximum liability of the three remaining payments is $112.5 million. At year end, the estimated present value was $92 million. Collectively, personnel and operating expenses were 6% higher than in the third quarter, which was in line with revenue growth in the period. Personnel expenses grew 12%, which included a sizable non-cash mark-to-market for a deferred compensation plan in Q4 as a result of market appreciation. This expense is 100% offset as a reduction in non-operating expenses and has no financial impact on the company's earnings. Adjusting for this expense, personal expense growth was 6% and in line with our revenue earnings growth for the quarter. Variable operating expenses flexed higher due to the increased AUM and revenue in the quarter, and other operating expenses rose 1%. Non-operating expenses declined by 35% from the third quarter. This was driven by 6% lower interest expense quarter over quarter as outstanding debt continued to rapidly decline in the quarter, and the offset for the deferred compensation plan mark to market mentioned previously. Before we move to our non-GAAP results, we thought it might be helpful to illustrate long-term trends in our annual incentive compensation on slide 19. Another benefit of increasing scale is that incentive compensation increased in absolute dollars since our management buyout with the addition of new investment franchises, distribution, and support staff. but the percentage of pre-incentive compensation EBITDA represented by that incentive compensation has been reduced by more than half, from 40% to less than 19%. This is another demonstration of the substantial operating leverage we can achieve with our business model. Slide 20 provides a snapshot of our non-GAAP metrics for the quarter. Adjusted net income with tax benefit per diluted share was up 7% from the third quarter and up 8% from $0.99 per diluted share reported in last year's fourth quarter. While we are not surprised by our strong financial performance and record results in 2020, it is still gratifying to realize the profitable growth we envisioned. Our highly variable expense structure was deliberately designed to ensure consistently strong financial results regardless of market conditions. Our strategy was put to the test during the year. Coupled with resilient execution, we emerged as a stronger company. This certainly included strong execution by our investment franchises and solutions platform. Our investment professionals successfully navigated the unprecedented disruptions during the pandemic while continuing to deliver robust investment performance. Our investment teams were provided with uninterrupted best-in-class resources from our centralized operating platform, allowing them to remain focused on managing client assets. Our just-in-net income of $71.8 million generated in the fourth quarter was another record. There also was a small increase in the quarter's cash tax benefit due to making the first full contingency payment to USAA, which increased goodwill and acquired intangibles modestly during the quarter. The end result was an A&I with tax benefit growing by 7% in the quarter to $78.6 million. As we look ahead, the significant expansion in our adjusted earnings margin from Q1 to Q4 in 2020 of 700 basis points is a testament to our financial execution and our operating platform. Margins will vary quarter to quarter based on the timing of investments we are making to drive future growth and some seasonality of certain expenses. We look at our full year 2020 margin level of 49% as sustainable going forward, which will include our investments in the digital transformation of distribution and marketing, product development, data, technology, and analytics. Finally, moving to slide 21, I'll cover our capital management activities. We paid down an additional $49 million in debt during the quarter and another $32.5 million subsequent to year end. Since the origination of the term loan in July of 2019, we have repaid approximately $345 million of the outstanding debt. As a result of our proactive measures to manage our interest costs, our cost of debt has decreased over 240 basis points since July of 2019. you can see the impact of this steady decline and our paydowns in the chart on the top right of this slide. Also, our $100 million committed revolver remains undrawn, and we continue to generate substantial free cash flow. Gap net cash flow from operating activities in the fourth quarter was $68 million. For the full year period, cash flow from operations totaled $251 million, which does not include the $27 million we realized in cash tax savings during the year. With our strong financial position and free cash flow, we have added flexibility to return capital to shareholders. As we look ahead, we intend to maintain our capital allocation priorities with the majority of our excess cash flow being allocated to reducing debt. However, as our cash flows grow and leverage declines, we intend to strike a balance that allows us to continue to pursue strategic and value-creating acquisitions while increasing capital returns to shareholders. In the final quarter of 2020, we returned $10.3 million to shareholders in the form of share repurchases and dividends. We repurchased 272,000 shares at an average cost of $19.72 per share and announced our third consecutive dividend increase. For the full year, we returned a total of $42.6 million in capital to shareholders, nearly matching the savings in our run rate cost of financing. With our debt to equity ratio close to 1 to 1 and a very attractive interest rate below 3.5%, locked in on $450 million of the outstanding debt, we are evaluating if this fixed rate portion of our debt might represent a natural floor. Of course, it will ultimately depend on a number of factors that will be driven by the actual facts and circumstances. And given what we have all endured over the past year, we know a lot can change in a very short period of time. With that, I will conclude our prepared remarks and turn it back over to the operator for questions.