Victory Capital Holdings, Inc.

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 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? Thanks, Matt.

Good morning and welcome to Victory Capital's second quarter 2024 earnings conference call. I'm joined today by Michael Pelicarpo, 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 and first half of the year. After that, I will turn 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 six. The second quarter of 2024 was highlighted by the announcement on April 16th of our intention to enter into a multi-dimensional agreement to become strategic partners with Amundi. We worked through the rest of the quarter to complete diligence and negotiate the definitive agreement, which was signed in early July. We do not have much additional news to report since our conference call on July 9th discussing the formal signing. We are currently developing integration plans that will allow us to provide guidance in areas such as the pace of achieving the projected $100 million of expense synergies post-closing, which is expected to occur late in the fourth quarter of this year or in the first quarter of 2025. We're also targeting to incorporate the potential revenue synergies from the reciprocal exclusive global distribution agreements in our guidance prior to closing. Turning to quarterly results, we had another exceptional quarter. We ended the quarter with total client assets of $174 billion and achieved a number of quarterly records, including earnings per share, EBITDA, and adjusted EBITDA margin, which expanded to 53% in the quarter. The momentum of our fixed income products managed by our Victory Income Investors franchise continued in the second quarter, marking the second consecutive quarter of positive net flows for that investment franchise. Additionally, our ETF platform had another positive quarter of net flows and is also net flow positive year to date. The average fee rate on our AUM was 52.6 basis points in the quarter, and has been consistently within a basis point of that level over the past year. 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. These product launches can be very effective and efficient for us, and we have launched several new active ETFs recently and have more in our pipeline. Moreover, we're continuing to invest in our ETF platform by hiring dedicated resources and making investments in numerous distribution partnerships. In addition, we're continuing to make investments in people and technology, particularly when it comes to data and analytics across our platform. On slide seven, we provided more detail here than in past quarters. As a growth company, it should come as no surprise that a majority of our capital is allocated to strategic inorganic growth initiatives designed to increase shareholder value. Since our IPO in 2018, we have deployed $1.6 billion for strategic acquisitions, resulting in significant growth in our earnings and free cash flow. Annual net cash generated from operations has increased from $134 million in our first calendar year as a public company to $330 million last year. GAAP earnings per diluted share have more than tripled from under $1 to more than $3 per share last year for a compound annual growth rate of 28%. At the same time, we've accelerated the return of shareholder capital. As a reminder, the proceeds we received from our initial public offering totaled $156.5 million, and to date, we've returned a total of $700 million to shareholders through cash dividends and share repurchases since our listing. Starting from a position of strength today, our balance sheet will solidify even more from the plan to Monday transaction. We will have even greater capacity to execute on strategic inorganic initiatives and increase capital return to shareholders. Turning to slide eight, over the same period, our shareholders have been rewarded with a more than 300% increase in stock price from our initial public offering price of $13 per share, which excludes the $3.85 per share returned in quarterly cash dividends. Our dividends have grown more than 700% since we began paying dividends, which was exactly five years ago this quarter. Total shareholder return, including the impact of dividends, is 357% through the end of July. Our history of value creation is attributable to our unwavering principles and a unique and differentiated business model coupled with industry-leading execution capabilities. The platform we have is highly scalable and provides best-in-class technology and operational systems for our investment franchises and solutions platform. This provides our investment professionals with a platform to focus on managing portfolios and providing the best possible service to clients. On slide 10, our investment performance remains strong with 68% of our AUM in mutual funds and ETFs earning overall four or five star ratings. This is broadly diversified, encompassing 44 different products. Over the key three and five year periods, 60% and 77% of our total AUM outperform their respective benchmarks. 15 of the 16 fixed income funds managed by the Victory Income Investors franchise, representing 93% or about $22 billion in AUM, are rated either four or five stars overall by Morningstar. Stepping back for a moment and looking at the macro environment, we are encouraged by the recent market action that is potentially signaling the start of a rotation out of just a few stocks into the broader market. The Russell 2000 index outperformed the large cap weighted indices to start the third quarter, which may reflect the anticipated easing of interest rates by the Fed, which would bode well for many of the asset classes we manage. Should small cap and mid cap sectors narrow the valuation gap with large cap issuers, it could create a nice tailwind for many of our strategies. With that, I will turn the call over to Mike to go through the quarter's financial results in greater detail. Mike? Thanks, Dave, and good morning, everyone.

The financial results review begins on slide 12. Our average AUM in the quarter rose 2% from the first quarter to $167.5 billion, which resulted in revenue also growing by 2% sequentially. For the first half of the year, revenues of $436 million were 7% higher than the first half of last year. For the second quarter, we generated $110.6 million in GAAP operating income with a margin of 50.4%, both of which are quarterly record highs and were supported by lower non-cash operating expenses. Removing that impact, adjusted net income with tax benefit rose 5% in the quarter to $86.6 million and $1.31 per diluted share, which is another company record. Adjusted EBITDA margin expanded by 90 basis points to 53%. Cash grew on the balance sheet to $119 million during the quarter. This, along with our record high quarterly EBITDA, help reduce our net leverage ratio to just below 1.9 times. We did not make any open market share repurchases for the second consecutive quarter. We returned $32 million to shareholders via our quarterly cash dividend and net settlement of shares for taxes holding for our employees. The dividend was increased by 10% in the prior quarter, and the Board announced an 11% increase this quarter. This latest dividend of 41 cents per share will be paid on September 25th to shareholders of record at the close of business on September 10th. Turning to slide 13, while average AUM rose quarter over quarter, you can see that point-to-point AUM was lower at the end of June at $173.8 billion compared with the end of March. This is why we recently increased transparency by reporting monthly averages for AUM and total client assets when we report our month-end AUM. On slide 14, we cover long-term asset flows. Several of our investment franchises and our ETF platform generated positive net long-term flows in the second quarter. Victory Income Investors posted its second consecutive quarter of positive net flows in RS Global, Integrity and NEC also had positive net long-term flows in the quarter. A significant portion of redemptions in the first half of this year were out of equity strategies as investors rebalanced portfolio weightings. Despite this rebalancing activity, many of these equity strategies have even higher levels of AUM as a result of market action. Slide 15 shows a modest 2% uptick in sequential revenue compared with the first quarter, consistent with the higher average AUM. Our average fee rate remains steady at 52.6 basis points. Slide 16 highlights expenses recorded during the quarter. Total expenses declined by 14% to $123.8 million, compared with $144 million in the first quarter. The primary driver of this was a $22 million reduction in operating expenses that was largely due to a change in value of consideration payable for potential earn out payments for prior acquisitions. It also reflects the return to normalized payroll tax and benefit expenses following the seasonal uptick in the first quarter of the year when minimums are reset. We've also started to incur expenses related to the Monday transaction in the first half of the year, which partially offsets some of the overall decline. On slide 17, we remove some of the accounting noise from these non-cash items as well as acquisition related expenses and highlight our non-GAAP metrics. We reported $1.31 adjusted net income with tax benefit per diluted share, which is the highest level in our history and is up 5% from $1.25 per diluted share reported from the first quarter. Adjusted EBITDA and adjusted EBITDA margin were also company records at $116.5 million and 53% respectively. Finally, turning to slide 18, we generated approximately $80 million in cash from operations during the quarter and ended June with $119 million in cash. This reduced our net debt to EBITDA leverage ratio for the second consecutive quarter. As Dave covered in detail, we carefully manage our balance sheet to maintain flexibility and have a capital allocation strategy that directly supports our growth strategy. During the quarter, we extended our $100 million revolver by two years. With the extension, we amended the agreement to reduce the draw pricing by 50 basis points. The facility remains undrawn. That concludes our prepared remarks. I will now turn it back over to the operator for questions.