Yahoo Finance Virtus Investment Partners, Inc. (NASDAQ:VRTS) Q1 2024 Earnings Call Transcript
Virtus Investment Partners, Inc. (NASDAQ:VRTS) Q1 2024 Earnings Call Transcript April 26, 2024
Virtus Investment Partners, Inc. reports earnings inline with expectations. Reported EPS is $5.41 EPS, expectations were $5.41. VRTS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Dede, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners Quarterly Conference Call. The slide presentation for this call is available in the Investor Relations section of the Virtus website, www.virtus.com. This call is being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer period and instructions will follow at that time. I will now turn the conference to your host, Sean Rourke.
Sean Rourke: Thank you, Dede, and good morning, everyone. On behalf of Virtus Investment Partners, I'd like to welcome you to the discussion of our operating and financial results for the first quarter of 2024. Our speakers today are George Aylward, President and CEO; and Mike Angerthal, Chief Financial Officer. Following the prepared remarks, we'll have a Q&A period. Before we begin, please note the disclosures on Page 2 of the slide presentation. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's news release and discussed in our SEC filings.
These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for the GAAP financial results and should be read in conjunction with them. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement, which are available on our website. Now I'd like to turn the call over to George. George?
George Aylward: Thank you, Sean, and good morning, everyone. I will start with an overview of the results we reported this morning, and then I'll turn it over to Mike to provide a little more detail. Market strength continued into the first quarter despite ongoing investor uncertainty over the path of inflation and interest rates, leading to growth in our assets under management to $179 billion. We saw meaningful increases in retail and institutional sales and improved net flows across asset classes and strategies, given the diversity of our product offerings, compelling investment performance and effective distribution. We were also pleased with the recognition and barons of our investment performance earlier this year, which identified us as a top five fund family for all periods under review, including for the year of 2023, as well as the longer term 5 and 10 year periods.
For the quarter, our highlights included a 22% increase in sales with strong growth in all product categories, positive net flows in retail separate accounts, ETFs, and global funds, growth in operating earnings and the margin excluding seasonal expenses, attractive investment performance across strategies, and continued return of capital through share repurchases, net settlements, and our dividend, and we ended the quarter with reasonable levels of leverage. Turning now over to the results, total assets under management increased 4% to $179 billion, primarily due to favorable market performance in addition to positive net flows in retail separate accounts, partially offset by net outflows in institutional and open-end funds. Sales increased 22% to $7.6 billion with double digit growth in all product categories, including a 47% increase in sales of institutional, 18% in open-end funds, and 12% in retail separate accounts as investors slowly began to put some cash back to work as equity markets reached new highs.
Open-end fund sales reached their highest level in two years with growth across most strategies and our retail separate account sales were the highest in three years. Net outflows were $1.2 billion, an improvement from the net outflows of $3.8 billion in the prior quarter. By product, institutional net outflows of $1.3 billion, a sequential improvement from $2.2 billion. The redemptions included rebalancing by several accounts given the strong equity market appreciation over the past two quarters. Institutional is inherently variable on a quarterly basis, though we continue to see board-based interest in our strategies. Retail separate accounts generated positive net flows of $0.7 billion, the highest level in two years. Demand for SMID and mid-cap has been strong and we continue to introduce additional strategies to complement those offerings to drive growth over time.
Open-end fund net outflows of $0.6 billion were at their best level since the second quarter of 2021 and improved from $2.0 billion in the fourth quarter with better flows in most strategies and positive net flows in SMID-cap, global equity, and fixed income. In terms of what we're seeing so far in April, many of the first quarter trends have continued, including solid momentum in retail separate accounts and ETFs, as well as generally similar retail fund flow trends with pockets of strength in certain strategies. In Institutional, we have high levels of activity across both geographies and strategies, though based on known fundings and redemptions, the second quarter is tracking similarly to the first. Our first quarter financial results reflected the impact of seasonally higher employment expenses, absent which we achieved sequential improvements in both operating income and margin as we generated higher revenues and closely managed expenses.
Excluding the seasonal employment expenses, the operating margin was 33.6%, up 60 basis points from the fourth quarter due to higher revenues and lower other operating expenses. Earnings per share as adjusted at $5.41 declined from the fourth quarter due to $1.11 of seasonal expenses. Excluding those expenses, EPS as adjusted increased 7% sequentially. On a more comparable year-over-year basis, earnings per share as adjusted increased 29%. Turning out to capital, during the quarter we repurchased or net settled approximately 64,000 shares for $15 million. We continue to take a balanced approach to capital management by investing in our growth, returning capital to shareholders, and maintaining appropriate levels of leverage. Over the past year, we have repurchased or net settled 296,000 of our shares for $61 million and reduced outstanding shares by 2%, raised our quarterly dividend by 15%, closed on a strategic acquisition that increased our product capabilities, and maintained net leverage below 0.5x.
We ended the quarter in modest net debt position as the first quarter represents our highest quarter of cash utilization, giving the timing of annual incentives and a revenue participation payment. We continue to generate significant cash flow, providing ongoing opportunities to invest in the growth of the business and return capital to shareholders. With that, I'm going to turn the call over to Mike. Mike?
Mike Angerthal: Thank you, George. Good to be with you all this morning. Starting with our results on slide 7 on assets under management. At March 31st, assets under management were $179.3 billion, up 4% from $172.3 billion at December 31st due to $8.7 billion of favorable market performance partially offset by net outflows of $1.2 billion. Average assets under management in the quarter increased to 7% to $173.4 billion with ending assets 3% above the quarter's average. Our assets under management continue to represent a broad range of asset classes and products. Institutional was 36% of AUM. Retail separate accounts, which has delivered consistent organic growth, was at 26% of assets. Global funds and ETFs, while a relatively small portion of our AUM had a combined 4% have had consistent organic growth and their combined AUM is up 36% over the prior year period.
We also continue to have compelling long-term relative investment performance across products and strategies. As of March 31, approximately 53% of institutional assets, 85% of retail separate account assets, and 56% of rated mutual fund assets were outperforming their benchmarks over five years. For mutual funds, 62% outperformed the median of their peer groups over the five year period. In addition, 63% of rated fund assets had four or five stars, and 91% were in three, four, or five-star funds. We had 35 funds that were rated four or five stars, including 11, with AUM of $1 billion or more. And we had six ETFs that were rated four or five stars as well. Turning to slide 8, asset flows, total sales of $7.6 billion increased 22% from $6.2 billion due to growth in all product categories.
Institutional sales of $1.7 billion increased from $1.2 billion in the prior quarter. Retail separate account sales of $2.4 billion increased 12% from $2.1 billion. Open-end fund sales of $3.5 billion increased 18% from $2.9 billion due to growth across most investment strategies with strong growth in small cap where we recently reopened two strategies that had been soft closed. Total net outflows were $1.2 billion with marked improvement from $3.8 billion of net outflows in the prior quarter. Reviewing by product, institutional net outflows of $1.3 billion improved from $2.2 billion in the fourth quarter. As always, institutional flows will fluctuate depending on the timing of client actions. In retail separate accounts, positive net flows of $0.7 billion increased from $0.4 billion in the prior quarter and represented our highest net flows in two years.
Both intermediary sold and private client continued to generate positive net flows. For open-end funds, net outflows were $0.6 billion compared with $2 billion in the fourth quarter due to higher sales and lower redemptions and included positive net flows in small cap, global equity, and fixed income. ETFs were again positive and have generated a 34% organic growth rate over the past year. Global fund net flows were also positive with organic growth of 12% for the past year. Turning to slide 9, investment management fees as adjusted of $180.5 million increased $6.1 million or 3% reflecting the 7% increase in average assets under management that was partially offset by lower performance fees which were elevated in the prior quarter. The average fee rate of 41.9 basis points compared with 42.6 basis points in the prior quarter which included 0.8 basis points of performance fees.
The first quarter average fee rate was unfavorably impacted by discrete reimbursement costs of 0.2 basis points. Normalizing for that, as well as 0.1 basis points of performance fees, the average fee rate in the quarter was 42 basis points, modestly higher than the 41.8 basis point normalized fourth quarter average fee rate. Looking ahead, we believe the normalized first quarter average fee rate is reasonable for modeling purposes. As always, the fee rate will be impacted by markets and the mix of assets. Slide 10 shows the five quarter trend in employment expenses. Total employment expenses as adjusted of $111.6 million increased 15% sequentially reflecting $10.9 million of seasonal employment expenses related to the timing of annual incentives, primarily incremental payroll taxes and benefits.
Excluding the seasonal items, employment expenses increased by 4% sequentially due to higher profit and sales-based variable incentive compensation. Employment expenses were 55.7% of revenue as adjusted, and excluding the seasonal items, they were 50.3%, slightly above the prior quarter level of 50% due to higher variable incentives. Looking ahead, we believe employment expenses as a percentage of revenues in a range of 49% to 51% is reasonable, though, as always, it will be variable based on market performance in particular, as well as profits and sales. Turning to slide 11, other operating expenses as adjusted were $30.2 million, down $1 million or 3% from the fourth quarter. We have maintained other operating expenses within a narrow range over the past two years, despite inflationary pressure and the addition of a new affiliate last year, reflecting management of some of our longer-term contractual expenses and by limiting discretionary spending.
Looking ahead, the quarterly range of $30 million to $32 million for other operating expenses as adjusted remains reasonable. For modeling purposes, keep in mind that our annual Board of Directors equity grants occur in the second quarter. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $56.4 million declined $7.4 million or 12% sequentially due to the seasonal employment expenses. Excluding those items, operating income increased 5%. Looking at the more comparable year-over-year period, operating income increased 19%. The operating margin as adjusted of 28.2% compared with 33% in the fourth quarter. Excluding the seasonal employment expenses, the operating margin was 33.6%, an improvement of 60 basis points with an incremental margin of approximately 50%.
On a year-over-year basis, the operating margin improved by 140 basis points. With respect to nonoperating items, interest expense decreased by 5% sequentially reflecting lower gross debt due to the repayment of our revolving credit line in the fourth quarter. Noncontrolling interest increased by $1 million, reflecting growth in affiliate earnings. Net income as adjusted of $5.41 per diluted share, which included $1.11 of seasonal expenses compared with $6.11 in the fourth quarter, and increased 29% over the prior year period. In terms of GAAP results, net income per share of $4.10 compared with $4.21 per share in the fourth quarter, and included $0.69 of unfavorable fair value adjustments to affiliate minority interests, and $0.11 of acquisition and integration costs.
Slide 13 shows the trend of our capital liquidity and select balance sheet items. Working capital was $123.4 million at March 31, up sequentially from $109.1 million, as cash generated by the business more than offset return of capital to shareholders. Cash and equivalence declined sequentially to $123.9 million, from $239.6 million at December 31st. Cash utilization in the quarter included the annual incentives and the revenue participation payment, as well as return of capital to shareholders through the dividend, share repurchases, and net settlements. As a reminder, the first quarter typically represents the low point of our cash during the year. The contingent consideration liability was reduced by a $24.2 million revenue participation payment to $66.7 million.
The majority of that liability will be paid annually over the next two years in the first quarter. At March 31, gross debt to EBITDA was 0.9x, the same level as December 31. Net debt at March 31st was $134.1 million or 0.4x EBITDA. We generated $69 million of EBITDA in the first quarter, down sequentially due to seasonal employment items, but up 17% from the prior year level. During the quarter, we repurchased 21,108 shares of common stock for $5 million and net settled an additional 42,588 shares for $9.9 million to satisfy employee tax obligations. Over the past year, we have reduced total shares by 2.2%. With that, let me turn the call back over to George. George?
George Aylward: Thanks, Mike. So we will now take your questions. Dede, would you open up the lines, please?
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