Victory Capital Holdings, Inc.

Good morning and welcome to the Victory Capital First Quarter 2024 Earnings Conference Call. All callers are in the 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. Please go ahead, Mr. Dennis.

Thank you. Before I turn the call over to David Brown, I would like to remind you that during today's conference call, we may make a number of forward-looking statements. Please note that Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release that was issued after the market closed yesterday disclosed both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call, both of which are available on the investor relations portion of our website at ir.vcm.com. It 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 first quarter 2024 earnings conference 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 will start today by providing an overview of the quarter. After that, I will provide a quick summary of the Memorandum of Understanding with a Monday that we announced last month before I turned the call over to Mike to review the financial results in greater detail. Following our prepared remarks, Mike, Matt, and I will be available to take your questions. The quarterly business overview begins on slide five. During our last earnings call, we commented on our improving business dynamics in the beginning of a constructive environment we were seeing in sales activity as 2023 came to a close. This momentum continued through the first quarter, with both gross and net sales reaching their best levels in more than a year during the first quarter of 2024. Our net long-term flows were positive in March, and total client assets rose more than 5% in the first quarter. aided by positive market action. We ended the quarter with a little more than $175 billion in client assets, providing us a good jump-off point as we entered the second quarter. The fee rate on our AUM was 53 basis points and has been consistently within a basis point of the same level for the past year. Adjusted EBITDA margin was 52.1% for the quarter, which is industry leading and a testament to our focused execution combined with the efficiency and effectiveness of our operating platform. Overall, we have an optimistic outlook for our business and are beginning to realize benefits from the investments we've been making across our platform. For example, the work and investment made securing attractive shelf space on numerous intermediary platforms for the products managed by our fixed income group, Victory Income Investors, is paying off as the franchise turned net flow positive in the first quarter. Victory income investors specifically generated strong momentum in the retail and retirement channels, which has carried over to the second quarter as well. We continue to strategically invest in areas that will have a positive impact on growth, such as new products and new vehicle wrappers for existing strategies. We are spending a lot of time on our ETF lineup, associated staffing, and the positioning of our products as we continue to build on our momentum. In addition, we are making investments in people and technology, particularly when it comes to data and analytics across our platform. Turning to slide seven, our investment performance remained strong, with 69% of our AUM and mutual funds, or ETFs, earning overall four or five star ratings. This is broadly diversified, encompassing 45 different products up from 42 products at the beginning of the year. Over the critical three- and five-year periods, 61% and 85% of our total AUM outperformed their respective benchmarks. And on a relative ranking basis for the trailing three years, 34 funds representing nearly half of our AUM in mutual funds and ETFs were ranked in the top quartile of the respective categories by Morningstar as of the end of the first quarter. On slide eight, you can see our capital allocation strategy flywheels. After returning a record amount of capital to shareholders in 2023, we were restricted from conducting share repurchases due to our negotiations with the Monday throughout the first quarter. We anticipate that to change as we move through the year and progress through the different stages of the transaction. As a growth company, reinvesting in our business for organic growth acquisitions are the best way for us to deploy capital and increase shareholder value. During the quarter, we made our first earn-out payment to West End Advisors. West End has continued to generate positive net flows and grow revenues since the acquisition. With the addition of West End's models onto new distribution platforms and with expanding the number of financial advisors that are using their products, we expect this success to be sustained and accelerate moving forward. We are projecting a much lower leverage ratio upon the close of the pending transaction with the Monday, given the transaction doesn't include any debt. This will give us more flexibility as we look out at future acquisition opportunities. Moreover, this will provide us with a great foundation return shareholder capital in multiple forms and even higher rate moving forward. One of the major objectives for the transaction is to provide a Monday's global distribution network, with more U.S.-managed investment products and strategies. This perfectly aligns with our inorganic growth strategy of bringing new products onto our platform through acquisitions, and these new products will be distributed through their global distribution network. Turning to slide nine, I will quickly recap our MOU with a Monday. This is a strategic and multidimensional transaction that will materially and positively transform our company in many ways. The exclusive 15 year global and reciprocal distribution agreements will greatly enhance the globalization of our firm by both expanding our distribution reach outside of the U.S. market and by obtaining access to a wider range of high quality investment products managed outside of the U.S. to distribute in the U.S. The ability to feature Victory Capital's products in and sell through arguably one of the top global distribution networks in the world is extremely exciting and powerful. Through these agreements, a Monday will become the exclusive distributor of all Victory Capital products outside of the U.S., and Victory Capital will be the exclusive distributor of Monday products in the U.S. Victory Capital will also be the exclusive provider of U.S.-managed active asset management products for Monday's distribution network outside of the U.S., thereby opening a large and robust international distribution channel for our products to reach clients around the world. As a reminder, Amundi has a local presence in 35 countries and relationships with 1,000 third-party distributors reaching more than 100 million retail clients and more than 1,500 institutional clients. Another important aspect of the transaction is the contribution of Amundi's U.S. business into Victory Capital in exchange for a 26.1% economic interest in Victory Capital that carries voting rights of 4.9%. This ownership stake in our firm is intended to align incentives and sets the foundation for success with the reciprocal distribution agreements. The combination of the amount of U.S. business into our business adds significant size, scale, along with complementary investment capabilities in fixed income, equity, and solution strategies. It also immediately diversifies our client base with an increased international presence as more than a third of Amundi US's AUM is currently from non-US clients. While the transaction is dynamically strategic, it is also very attractive financially. The combination of the Amundi US business onto our platform aligns very well with our proven acquisition and integration playbook. We anticipate the low double-digit EPS accretion by the end of the first full year of ownership and to achieve $100 million of expense synergies within the first two years of ownership with the majority of that realized within the first year. Just to be clear, that doesn't include any revenue synergies. Since we are not using cash or debt as consideration, the incremental earnings will significantly reduce our leverage ratio and provide additional strategic and capital flexibility. This will allow us to continue reinvesting in our business to drive organic growth, as well as continue pursuing our inorganic growth initiatives while returning capital to shareholders in multiple forms, all of which is consistent with our long-term strategy. On slide 10, we highlight publicly available data from Morningstar on the AMUNDA U.S. mutual funds, illustrating recent net flows and fund ratings. This information represents approximately $45 billion. Keep in mind that the total AUM for the AMUNDA U.S. business is approximately $104 billion, and the total U.S. portion is $70 billion. So the $45 billion is just a piece of the overall total, but it does give some valuable insight into flows and investment performance. Moreover, note that we disclosed in our analyst call announcing the MOU that the non-U.S. portion of their business has had an average of $12 billion of annual gross flows a year over the last five years, and that each year has been net flow positive for this segment of their business over that same timeframe. Net flows are shown by asset class. As you can see, their total U.S. fund complex has been net flow positive for year-to-date 2024, with net inflows in fixed income and solutions products being partially offset by net outflows in equity funds. Given a Monday U.S.' 's strong investment performance and the fact that 77% of their mutual funds are rated four or five stars overall by Morningstar, We are projecting that the net flow profile of the business will continue to improve and benefit further from our added distribution resources and relationships post the close of the transaction. We are continuing to work through the final pieces to get to a definitive agreement and expect to announce the completion by the end of June with the closing expected by year end. With that, I will turn the call over to Mike to go through the quarter's financial results in greater detail. Mike?