Good day, ladies and gentlemen and welcome to Victory Capital First Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, today’s conference call is being recorded. I’d now like to turn the conference over to Matt Dennis, Director of Investor Relations. Please go ahead.

Thank you, Candice. Good morning. Before I'd turn the call over to David Brown, I would like to note that today's discussion contains forward-looking, and as such includes, risk and uncertainties. Please refer to our press release and our SEC filings for more information on specific risk factors that could cause actual results to differ materially from those projected in our forward-looking statements. While recording of this call will be made available by us on our website, any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these forward-looking statements to reflect new information or future events that occur or circumstances that exist after the date on which they were made. In addition to U.S. GAAP reporting, we also report certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable related GAAP measures are included in tables that can be found in our earnings press release and the slide presentation accompanying this call. Both can be accessed on the Investor Relations portion of our website at ir.vcm.com. Now, I'll turn the call back over to David Brown, Chairman and CEO.

Thank you, Matt. Good morning, and welcome to Victory Capital's first quarter 2019 earnings call. I'm joined today by Michael Policarpo, our President, Chief Financial Officer and Chief Administrative Officer, as well as Matt Dennis, our Director of Investor Relations. I'm going to spend a few minutes discussing our business results. I'll also provide an update on our planned acquisition of USAA Asset Management Company. Then I'll turn it over to Mike, who will review our financial results for the quarter in more detail. Following our prepared remarks, Mike, Matt, and I will be available to take questions. We'll start on slide 5. Victory Capital achieved strong financial results during the first quarter of 2019. Total AUM increased during the quarter and year-to-date through April 30, 2019. The first quarter was also marked by healthy margins, earnings and cash flows. Total AUM grew to $61 billion as of April 30, 2019. Year-to-date, net flows were slightly negative at $300 million through the end of April, but have turned positive in early May following the funding of our few larger mandates in the RS Mid Cap Growth strategy and our solutions platform. We believe our business performance year-to-date illustrates the sound positioning of our integrated multi-boutique business model in a rapidly evolving industry and the effectiveness of our distribution platform. While we have seen some realization of our won but not yet funded book, it remains strong as does our sales pipeline. We have favorable expectations that the momentum we are currently seeing from a gross and net flow perspective will continue through the remainder of 2019. The planned acquisition of USAA Asset Management Company remains on track and is targeted to close effective July 1, 2019. The more we learn about the USAA business and the member platform, the more…

Thanks, Dave. Before I begin, I'd like to say, how pleased I am to be back in the CFO role for Victory. It's been a very smooth transition and we've had the opportunity to enhance our staffing by filling new roles in investor relations, analytical support and corporate strategy. I'll start my remarks this morning by reviewing the annualized pro forma guidance that we expect from USAA transaction, which is shown on page 15. The acquisition USAA Asset Management Company will transform our financial profile and deliver the size, scale, and diversification that we believe is critical to succeed in today's investment management environment. Based on combined AUM for both firms as of March 31, 2019, including the USAA manage money component, we expect to have pro forma AUM of $138 billion across more than 120 investment strategies when the transaction closes. We expect to generate more than $850 million in annual revenue, and nearly $400 million in adjusted EBITDA, with adjusted EBITDA margins of approximately 46%. Please keep in mind these figures are based on March 31, 2019 AUM levels. As we discussed earlier, we are ahead of our cost synergy estimates and have accelerated our expected time line for achieving them. This is a result of our continued work to integrate the USAA Asset Management business onto our platform. Our guidance of onetime cost of $50 million, associated with the realization of the synergies remains unchanged. Additionally, we expect EPS accretion to be more than 100% in 2020, which would represent our first full year of ownership. This is an increase from our original guidance. Assuming at July 1, 2019 close date, the impact on 2019 EPS accretion is expected to be greater than 40%. We have fully committed debt financing for the acquisition. Our pro forma net…

Thank you. [Operator Instructions] And our first question comes from Sumeet Mody from Sandler O'Neill. Your line is now open.

Thanks. Good morning, guys. I saw the commentary on the reversal of flows thus far in the second quarter $755 million of inflows in April, it sounds like over $350 million in May, just wanted to get a better feel for where those flows are coming from, maybe by distribution channel, asset class, any color there would be helpful?

Sure. The flows are coming from a number of different distribution channels, the sub-adviser channel, the institutional channel and then pockets of the retail channel. It's really multi-franchise. A few of the franchises that we're seeing flows in our RS growth, we are seeing flows in solutions and in our ETF business.

Okay, great. That’s it from me. Thanks.

Thank you. And our next question comes from Randy Binner from B. Riley FBR. Your line is now open.

Hey. Good morning, everyone. This is actually Ryan Aceto on for Randy. Turning to USAA, the $60 million cost synergies that you guys are now expecting to see, could you help us size up where you're expecting that to come through, is that going to be personnel or G&A based?

Good morning. Yes, the $60 million in really the entire $110 million, will be across a few broad buckets. Back office, middle office as we employ an outsourcing model, we'll have some across sub-advisers that we are taking in-house and changing. And then there is also just the power of the integrated model that will get some scale across corporate administrative functions.

Perfect. And then as far as the strictly G&A line, what’s a good run rate you think we should be looking at going forward after the USAA acquisition rolls in?

Yes. So I think we put on page – slide 15, we've kind of put where we expect the overall margins to be post kind of the synergy realization in the 45% or 46%. I think, that's how we're looking at it. From a margin perspective, we think it's - the power of our model allows us to operate the business with that capacity. And if you think about it, two thirds of the expenses that we have in the business today are variable, including compensation, sales commissions, as well as kind of our back office, middle office and distribution. So I think, that's how we’re looking at it from a standpoint of where those buckets fall.

Appreciate that. I’ll hop back in the queue. Thank you.

Thank you. And our next question comes from Chris Shutler from William Blair. Your line is now open.

Hey, guys. Good morning. With USAA, you talked about there's an opportunity related to deepening wallet share among members, who are already using investment product. There's also an opportunity to go out to the 12 million members that do not use a product. You provided a little detail there, but can you dig in a little more to each of those areas and how you plan to go-to-market going forward?

Sure. Hi, Chris. Let me start with deepening wallet share. As I stated, kind of in the prepared remarks, I think, there is a tremendous opportunity to better serve the members through education, through product expansion, through updating some of their retirement plans, some of their savings plans, and really working directly with those already existing members who have investment products. We'll employ a number of different strategies there via online and then also through our call center. On the 12 million members that don't today have an investment product, we'll approach them in a way, introducing the ability to help them with, again, the retirement plan, the college savings plan, we'll do that again, through online and also through our call center. And we really do that with the help of USAA to really expand that - grow that 1.5 million number, we think that the real opportunity on that bucket is really just an awareness in education. USAA has done a great job to get to 1.5 million members, but there's still a lot of opportunity with the remaining 12 million members.

Okay. Thanks. There's two other ones, quick ones. Maybe on the $10 million of incremental cost synergies, what areas of those coming in? And then maybe talk about the deal pipeline?

Hey, Chris. Yes, so the incremental $10 million is really coming across all of the different buckets that we mentioned previously. So as we've done our work from announced today, we found incremental opportunities. And again, I think when we went out back in November, we probably had a little bit of conservatism in the numbers that we had out there. But again, as we've dug in and done the work, it's really coming across all the different areas as we dug in with our integration team and USAA.

In regards to the deal pipeline, first, I would say that we still feel like the industry is just starting to begin to consolidate. And we think that's going to accelerate our platform, again, as we have discussions and conversations with lots of different potential partners. We think it's extremely differentiated, we think it's in demand. So our pipeline, and I kind of repeated this really, every quarter, it just continues to be super strong. I think that the pace and the cadence that we have done deals in the past will continue, if not accelerate. And we couldn't be more excited about the opportunity, just given our track record and what we see coming with the industry. And last thing I would say is, we feel that we are as well positioned, if not better positioned than any firm in the industry to take advantage of the consolidating industry.

Okay. Thank you.

Thank you. And our next question comes from Robert Lee with KBW. Your line is now open.

Great, thanks. Good morning, everyone. I have a couple of questions, just kind of maybe a bigger picture a little bit with the USAA, well, two questions here. Number one, in some other kind of large acquisitions, mergers, also it was often seen an opportunity to adjust pricing on different products, maybe to make them more sellable or attractive and maybe could you talk about that, I don't believe it's part of your plan, but is that something that you're doing, or we should be thinking about? And secondly, as you look to accelerate the USAA product sales in your own distribution in the intermediary channels, could you highlight, which products you think you can get the best traction with quicker, is it - I'm going to assume it maybe fixed income products, but other specific strategies you think to really kind of hit the ground running?

Let me start off with the pricing question. We evaluate our own pricing every quarter. And we've done that for years. When we diligenced USAA, we looked at their pricing, we think it's competitive. We’ll continue to evaluate their pricing, just as we do our legacy business. Today, there are just a few areas that we’ll consider lowering pricing, but nothing that’s material or significant. Where you will see potentially down the road, where the mutual funds shareholders of USAA will see some pricing relief is really, some of the scale and size that will accrue to the current shareholders. And then on really growing within the intermediary channel, really our existing channel, the USAA products, we think there is a tremendous opportunity to take the fixed income product set tax exempt out to really our distribution partners. That have not had, or have been introduced to the USAA fixed income products, we've got tremendous opportunity. We've also take on some of the ETFs and the solutions that we think we can make traction there. And I'll remind you on the fixed income side for USAA, all of the products are either 4 or 5-star rated on MorningStar and the performance is excellent. So we think that when we introduce those products that will have a lot of traction and success therewith that.

Great. Then maybe, two quick follow-ups, if I could. Sticking with the USAA, well, both of them are USAA related. They have a bunch of their equity products, I think, in particular that are sub-advised by either parties. I mean, is there - how do think of an opportunity for migrating some of those strategies to your internal managers, assuming it's appropriate? And then second follow-up question or fourth follow-up question is your EPS accretion, I'm assuming that adjusted EPS and is that, including tax benefits, so just want to reconfirm that?

So let me start off with the sub-adviser migration and then Mike will answer the EPS question. First, we work with their mutual fund board to evaluate the sub-advisers and where it makes sense for our investment franchises to participate in managing those mutual funds. We've been working with them quite a bit and we think there's a significant opportunity, we will announce that at close. But we think there is a real opportunity for our franchises to participate in a way that's the best thing for the end mutual fund shareholder. And we also think that over the long run, that some of the performance will get better and improve with the participation of our franchises. But I would look at close to see how we'll allocate assets to our franchises.

And with respect to the accretion numbers that we provided, they are reflective of the tax benefit, so really they're updated for kind of current financial profile, as well as current leverage profile, and they are adjusted for tax benefits related to the USAA transaction.

Great. Thanks for taking all my questions.

Thank you. And our next question comes from Kenneth Lee from RBC Capital Markets. Your line is now open.

Hi. Thanks for taking my question. Just a follow-up on the M&A opportunities. How do you think about what particular new investment capabilities or strategies would you be looking for in the potential opportunity, or are there other potential, such as a geographic reach or distribution that you can be thinking about?

How we look at M&A might be a little bit different than others. We don't necessarily focus on a specific asset class or a product. Where we start is with a concept of any acquisition we would do is to make our company better. It cannot be financial-only transition, it has to be strategically beneficial to us. From a product perspective, we are looking at products that really fit in the client portfolios, products that matter to clients, where we can win. We talk about products for tomorrow, less likely to be disintermediated by passes. So from a product perspective it's really those are the characteristics and you can fit that – those characteristics in a number of different asset classes. From a geography standpoint, we are interested in opportunities outside of the U.S., and have directed some of our efforts around - around evaluating those opportunities. And I would also say, there are so many opportunities out there given where the industry is and as I said, earlier that our platform, as we speak to more people really is in demand, I think we're going to have our choice of the top opportunities, when we think about adhering to what we're really looking for.

Great. And just one follow-up on the Solutions business. How would you characterize the current environment in terms of competitive environment for smart beta ETFs, as well as client demand for smart beta ETFs? Thanks.

It is getting more competitive than it was a few years ago. That being said, with the right product, with the right track record and with the right distribution systems and servicing, I think, firms like ours can still be successful. But it is definitely gotten a little bit more competitive. I don't see the beta exposure ETFs, if you will, as the competitors, the competitors are firms that like ours and it is still early, but getting more competitive.

Got you. Very helpful. Thanks.

Thank you. And our next question comes from Ken Worthington from JPMorgan. Your line is now open.

Hi, good morning. We're seeing some larger distribution platforms, cutting manager and product list in 2018, are you still seeing a distribution cut down their list or has this stabilized. And then clearly, USAA represents expanded distribution for you, but maybe talk about, maybe where else Victory sees opportunities to expand either new distribution or increased penetration with existing relationships? Thanks.

Hi, Ken. As far as the reducing the number of partners by the larger platforms, we have not experienced that to any real material level. We’ve been pretty stable with our partners. Our strategy is to have a good number of strategic partners and go deep with those partners from our product set. That is really where we see the opportunity to grow our existing distribution is to really get deeper with some of our larger partners. And we are pretty well covered from a distribution standpoint on the retail and retirement side, as well as the institutional side. We think it's just getting deeper with our partners. The USAA acquisition is really a new distribution channel. We think of it as third distribution channel. Its direct, we think that's going to be material from expanding our distribution. It is also an opportunity to think about other direct channels outside of USAA, we’ll evaluate that as we progress through the USAA close and as that business starts to come onto our platform we'll think about are there other opportunities where we can work with direct buyers of our product in a direct model.

Okay, great. Thank you. And then just a little one on stock based comp was much slower in 1Q than we’ve seen, I think in any quarter since you've been public, was this revenue recognition real changes or was there something else driving the decline and I guess, if it's – is not revenue recognition, is this the new right run rate?

Yes, Ken. No there were some forfeiture [ph] of stock in Q1 that we reduced - stock compensation that had been taken. The run rate really is closer to what you saw in Q4 going forward.

Okay, awesome. Thank you.

Thank you. And our next question comes from Mike Carrier from Bank of America. Your line is now open.

Good morning and thanks for taking the questions. First question, just on the improved flow backdrop, I know you gave same color and in the confidence in ‘19, just any changes, in your distribution team or initiatives, no doubt that's driving this, or is it increased demand from clients and if the latter since the performance have been positive, anything else that you're seeing that's driving it. I mean, is it on the sale side, or is it on your lower redemptions?

I think it isn't anything new. We've talked about our distribution platform quite a bit. It is really the realization of some investments and some hard work by our distribution professionals. There are long lead times between working with a client and then actually working through a contact and eventually funding and that's what we have seen. Our investment performance is strong. And I think we have turned a corner as an organization from a flow perspective both Mike and I's prepared remarks I think we make that clear. And we expect that the momentum to continue going forward.

Okay. And then just second question, Mike just on the capital management, you mentioned post deal, the focus on delivering from the 2.9 times, and positioning for more capacity - which makes sense just, so we can gauge like buyback activity versus deleveraging in future deals, where do you want to manage that leverage ratio over time, whether you maybe it's now when you're closing a deal, so it's going to be on the higher end versus if there is not a lot of activity you're paying down debt, like how low could that go?

Yes. So I think what we have already said is the our – use of our balance sheet in kind of capital management is going to be driven to support the overall business strategy, which will include, inorganic growth opportunities. And we have used the balance sheet effectively, such as here where the leverage will go up. So I think for us we really haven't come out and set a range, but I would expect that we want to maintain flexibility with the balance sheet, with capital structure to be able to do shareholder accretive deals. We think our business model, and our integrated multi-boutique allows us the opportunity to integrate, extract cost synergies and then going forward, the margin sustainability is pretty strong. So we should be able to continue to generate a significant amount of free cash flow to use to deleverage. So I think, when we IPO-ed a year ago, we were about 2 times, and we delivered down to 1.5 times as of the end of the quarter. We'll be a much bigger organization going forward, we will be much more well-balanced than durable as Dave said with the asset mix becoming more balanced between equities and fixed income and solutions. he model itself is really very well from capital expenditure perspective where we don't have to make multiple investments across our platform to sustain to it, since it is integrated. So I think, we would want to maintain the flexibility going forward, so not trying to be evasive on answering the question, but I think, the ranges that we've operated in we we’re comfortable with and we'll use the cash to deliver very quickly post the USAA deal.

Okay. Thanks a lot.

Thank you. And your next question comes from Michael Cyprys from Morgan Stanley. Your line is now open.

Hey, good morning. Thanks for taking the question. Just wanted to dig in a little bit on the expense outlook post integration, what would be the right underlying expense growth that we should be thinking about say, if the markets are flat. And then if the markets rise, how to think about it in sort of incremental expense growth from there, post integration?

Yes. So, as we said two thirds of our expenses, plus are variable that will grow with AUM revenue and size of the overall business. So I think, as the business grows, you can think about two thirds of the expense base growing in some capacity with that business growth. And then the remaining costs that are fixed, we feel like, growth of a couple of percent is probably fair. Thinking about the low level of fixed costs that we have in the business and our ability to reinvest we think that's probably a fair way to look at it going forward post the USAA transaction.

And I would add Michael, I would add one thing to that. We've come out with a mid-40s margins kind of on a go-forward basis, inclusive of USAA. We think those margins are sustainable. And sustainable from a perspective that we're going to continue to reinvest in our platform and distribution technology and other areas. So even with the reinvestment the mid-40s margin is a good number to model of off. Going up from there is probably not - at least significantly not likely, given the environment we’re in and I think that's how you should think about expense growth.

Great. Thank you. And then just a follow-up on capital management. You mentioned the idea of potentially initiating a cash dividend at some point in the future, if it make sense. Just curious in what scenario would that make sense, if you could just talk about how you'd approach that and what factors would could consider around initiating a dividend and also the magnitude of such dividend?

First, we evaluate every quarter with our Board, our capital management policy inclusive of a dividend. It makes a lot of sense post the USAA transaction close, given that we'll be a transformed company with a totally different financial profile. So to look at our - to look at our capital management, and we will look at a dividend pretty closely. That being said, the most important thing on our capital management is flexibility to execute our strategy and really the environment we're in today, we feel like having a flexible balance sheet, with the appropriate leverage levels to execute on acquisitions. So if we were to put a dividend in place, it would have to fit within those constraints on our balance sheet and our cash flow.

Great. Thank you.

Thank you. And we now have time for one question. And our final question comes from the line of Robert Lee from KBW. Your line is now open.

Great, thanks. I just have a follow-up question on the flow. So I mean, clearly April and to May seen a sharp improvement, I am just kind of curious is hat kind of the pattern leading up to April, wasn't like April 1 also [indiscernible] turned on, is this kind of something that start to build over the course of Q1, so and you kind of hit the tipping point as we got towards April. How should we - just kind of curious about the progression of it?

I think it was realization of our won [ph] but not yet funded brokerage, had experienced some delays from what we were anticipating, we don't control when clients decide to fund. I think the fourth quarter disruption really did impact us in the fourth quarter in a lot of our strategies and the asset classes we manage. And I also think the realization of our investment performance, there has been a little bit of a comeback of active - at least from the things, the people that we have spoken too. And I think you put all that together and April, and then now through May and kind of what we see in – on over the horizon, we feel pretty good about the flow picture.

Thank you. And that concludes our question-and-answer session for today. I’d like to turn the conference back over to David Brown for closing remarks.

Thank you. We appreciate your interest in Victory Capital, and hope to see many of you in person over the next several weeks. Next week, we'll be meeting with investors in Los Angeles and attending the B. Riley Institutional Investor Conference. On May 30, we'll be in New York at the KBW Asset Management Conference. On June 6, we'll be in Chicago, William Blair's Annual Growth Stock Conference. And the following week on June 10 – June 12, we'll be back in New York attending the Morgan Stanley Financials Conference. Thank you, again, for taking the time to participate in our call. This is really an exciting year for Victory Capital, and we look forward to keeping you updated on our progress. As always, if you have any additional questions, please don't hesitate to contact Matt. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all now disconnect. Everyone, have a great day.