Good morning, and welcome to the Victory Capital Fourth Quarter and Full Year 2022 Earnings Conference Call. All callers are in a listen-only mode. Following the company's prepared remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to 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 could 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's 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 third quarter 2022 earnings conference call. I'm joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer; as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'll start today by providing an overview of the quarter and the full year period. Then I will cover our investment performance, which continues to be very strong. Then 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 5. 2022 was a history year for the asset management industry. The disruptions in both the equity and fixed income markets drove assets levels significantly lower across most asset classes with industry wide declines in year-over-year revenue and operating margins. While we are not immune to the market backdrop, I am very pleased with the results we reported last night. At the end of each year, I like to step back and take a long range view of our company and review our progress against our long-term strategy and goals. At the start of the year, we laid out several key strategic objectives and we have achieved tangible and measurable progress in each area. As part of that, we continue to make strategic investments in hiring, technology, data, and marketing and distribution during the year and we are seeing that these investments are beginning to pay us back. A good example of this gross long-term flows in 2022 were $33.3 billion which is 20% higher than the gross long-term flows of $27.9 billion generated in 2021 and 44% higher than gross long-term flows in 2020. The $6.5 billion in gross long-term…

Thanks Dave and good morning everyone. The financial results review begins on Slide 10. Total AUM increased $5.7 billion or 4% in the quarter to $153 billion at the end of December. This was driven by more than $10 billion of positive market actions as the markets rebounded during the quarter. Revenue of $201 million in the fourth quarter was up 3% in the third quarter, which was consistent with the 3% decline in average AUM in the year's final quarter despite the higher point-to-point AUM. Full year 2022 revenue was $855 million. On a GAAP basis our operating income was $79.6 million in the fourth quarter and $399 million for the full year period. This compares with $89.8 million in the same quarter last year, and $374 million for all of 2021. The increase in year-over-year operating income is attributable to non-cash items, namely the change in value of contingent consideration for recent acquisitions. Adjusted EBITDA was $100 million in the fourth quarter and $424 million for the year. Our margins have held up better than most all companies in our sector. Adjusted EBITDA margin was 49.7% in the quarter and 49.6% in the full year. Adjusted net income with tax benefit was $74.5 million or $1.05 per diluted share in the fourth quarter and $331.2 million or $4.58 per diluted share for the full year. Looking at capital allocation, we returned a record amount of capital to shareholders during the year. In the fourth quarter, we returned $59 million to shareholders with $42 million of that through share repurchases and $17 million in dividends. Lastly, we increased our quarterly cash dividend by 28% to $0.32 per share, and that will be payable on March 27th to shareholders of record on March 10th. On Slide 11, you can see…

[Operator Instructions] Our first question comes from Craig Siegenthaler with Bank of America.

Good morning, Dave. Michael, hope you're both well.

Hi, Craig.

10b5:

Good morning. So I would think of it this way. We're opportunistic in our share buyback and really it depends on the market conditions. We talked about in our script the last six months we leaned into buying shares because of the market. When we look at the market going forward we're going to take it week by week. That's part of an overall capital allocation strategy, which really the primary purpose of our capital allocation strategy is to really have a flexible balance sheet so we can go ahead and pursue acquisitions and the buyback and the dividend is ancillary to that. So we'll take it really week by week from the way the market behaves and the way our stock behaves. I'd reiterate what I said in our script that we think that the levels we're at today, there's really good value in our stock. But we'll see how the market does over this quarter and next quarter.

And Dave, my followup is also on capital return. You know, with the dividend hike, I think your yield is now around 4%. You know, is the purpose there really to attract more of a long-term income focused shareholder based? Because I'm just thinking about where your stock valuation is today given your desire for M&A, and I know it's not a ton of capital, but why not focus more on buyback M&A versus the dividend hike going forward?

Yes, it's a good question. I think we're taking a balanced approach. The dividend increase was not done to attract a certain type of shareholder. I think it was done for the purpose of rewarding shareholders that we have grown. We're secure enough in our financial position. We have a really positive outlook to the future and we think that the balance we have between debt pay down, buyback and dividend is the right balance. For 2022, if you go ahead and look at how we allocated capital, the majority of our capital allocation did go down to debt pay down. We also have a lot of different tools on M&A. We have an undrawn revolver. We have our structuring. We generate a lot of cash and we have a portion of our debt that as you know, that is hedged out at about 3% plus. So I think all-in-all, we look at the dividend as a component. The increase is a reward. It's not really being done to attract any certain type of investor.

Great. Guys, thank you for taking my questions.

Our next question comes from Kenneth Lee with RBC Capital Markets.

Hi, good morning, and thanks for taking my question. Wondering if you could just further expand upon your prepared remarks about being well positioned to potentially capture fixed income net flows. If the industry trends inflect, wonder if you just talk about product offerings any gaps and also your current distribution reach as well? Thanks.

Yes, good morning. A great question and very timely. You know, so just to expand on what we said in the prepared remarks, we have 16 products under the USAA franchise. 15 of them I think are four or five star, which is about, it's really remarkable that we have this franchise with this excellent investment performance. We offer these products in ETF, a mutual fund, and also separate accounts. And we have intermediate, an intermediate term bond fund, a short-term bond fund, government securities fund and income fund, and then intermediate tax exempt. So we really do cover a lot of real estate from the fixed income and investors' perspective. Since the acquisition, we've spent a lot of time building out the distribution on the retail and intermediary side and also on the institutional side. We're starting to make some progress and we think as investors come back into fixed income, we hope that as we progress through the year and the Fed, what the Fed is going to do becomes much more clear, we think we're really well positioned with the investment performance. And then also this is a franchise that manages about $25 billion in assets, so it's a sizeable franchise that is deep in resources and has been doing this quite a long period of time.

Great, very helpful there. And then perhaps on a more broader level, as you look out further this year, which strategies or areas do you see as key growth opportunities in terms of net flows, potentially? Thanks.

So yeah, I'd start off not in any priority order, but I'd start off with WestEnd. You know, WestEnd Advisors was net flow positive in 2022 when a lot of their competitors weren't. They've got really solid investment performance. We like the model space. We have excellent distribution there, and it's expanding, so we're really excited about that opportunity. Mike mentioned our ETF platform Victory Shares, the consistency of flows there has been really impressive, and we're seeing that moving into 2023 and we don't see that changing, so we're excited about that part of our business.

And then lastly, we also with our New Energy Capital acquisition we expect that to make progress as well and that's around private funds, and we're excited about that opportunity.

Great. Very helpful there. Thanks again.

Our next question comes from Mike Brown with KBW.

Great. Good morning guys. How are you?

Good.

Good.

So, you know, I guess I wanted to just maybe start on the fee rate here. It's remained relatively stable here and you've had a lot of kind of mix shift in your AUM here with the kind of some of the recent acquisitions. As we think about the fee rate here as you think about your growth profile for 2023?

Good morning, Mike. Yes, I think as you mentioned, our fee rate has remained very stable. And I think as we look out in some of the areas that Dave just highlighted, we would expect that the fee rate will continue to be driven by both beta impact as well as asset mix, channel mix, product mix. As we think about opportunities for expansion of fee rate, we've talked a little bit about the fulcrum fees we have on some of our products that gives some upside. Those fulcrum fees were positive in the fourth quarter, about 0.1 basis points, and there is opportunity for upside on that. But as we think about the guidance going forward, I would say we'll be in the 52 basis point range. That will vary as we see changes in different products that have organic growth going forward. But that's kind of the level that we're looking at going forward. And the last thing I would obviously say this quite often, we're very focused on margins. So fee rates will continue to move slightly in different directions, but I think the power of our operating platform really allows us to focus on margins.

Okay, great. And Michael, you talked a lot about the platform additions for a number of your various different affiliates. When you look back historically, how did those additions start to contribute to flows? Could you give some thought on maybe the magnitude of pickups that you’ve seen in the past and then maybe speak to how quickly some of those flow benefits start to come through?

Yes, it’s Dave. I’d start with WestEnd. You look at WestEnd Advisors, we own that business for all of 2022, and that was net flow positive. So that’s a very fast addition. They had a really great existing distribution platform and we’re expanding that. You could go back to one that we did pre-IPO, which was our ETF platform. That was done in 2015, and that has been a consistent grower that took a little bit of time, but that has been a consistent grower. We also look at the opportunity that we have with the USAA fixed income investments and that as we see fixed income accelerate, we think that will be a grower. Today it's not, but we think that one will be a grower. The point is each one really has its own unique situation. The concept is to take really excellent investment franchises and really plug that into our distribution network and expand out their opportunity set to gain more clients. And that has lots of different perspectives on that, and that’s what ranges in the different time and the different examples.

Okay, great. Thanks David. I appreciate the color on the franchises there. Thank you.

Our next question comes from Brennan Hawken with UBS.

Good morning. Thanks for taking my questions. I’d like to start on the capital return side of things, buybacks robust again and you guys spoke to that a bit in a prior question. But one of the things that’s interesting when we speak to investors about Victory and the discount, as many point to the large private equity ownership and concern either, concern about when that ownership might end up winding down versus, or maybe that is a reason for the discount. So I’m curious about whether or not you have had any discussions with your owners. I appreciate that they probably don’t consider the current valuation levels as attractive to sell. And so it’s almost like a chicken and egg situation. What I’m trying to get at is, have you considered maybe a program with them that would allow you to allocate your buyback to chip away at their ownership, so that there could be a clear indication to the market that that ownership will grind down over time, which could allow for the private equity owners to see a path to exiting the position at an improving valuation and you could end up with a win-win situation?

Yes, great question. I think first our private equity owners have liquidated and actually reduced their position quite significantly over the last few years and the ownership has come down quite significantly through a couple programs and so we’re happy with that. We also on the other hand, have done very well with the ownership of private equity. So having them as owners has not been a hindrance on the performance of the business. The board evaluates every time, every quarter, all different kinds of programs around what we do with our buyback, how we interact with our private equity shareholders. And so all of the things that you’ve mentioned we continue to evaluate. As we look forward, what we’re focused on is really performing from a business perspective. And we think the ownership structure will take care of itself over a period of time. And we think, as you have pointed out the discount, we think that’s a tremendous opportunity, entrance point for investors. Because those challenges are not business related, they’re really more ownership related. But I would really just sum it up saying that we’re focused on the business. We’re focused on growing the business, doing smart acquisitions, taking care of our clients and we’ll evaluate every quarter what we do with our buybacks and how we interact with the private equity sponsors.

Yes. That’s all really fair. And that’s absolutely the right focus. So I really appreciate that. You spoke to getting added to some of your products added to models at LPL and many of us see the momentum behind those centralized models at that firm. Can you speak to -- do you know if there’s any typical lag or timing around when you start to see the benefits from getting added to those models and how we should think about the outlook for maybe even that lineup in those models getting expanded in the future?

Sure. There’s definitely a lag. Every platform is different. Unless you’re getting a direct allocation from a CIO office or a home office, there will be a lag in time to educate the advisors to go out and do marketing material and to have meetings, so there is a lag. I couldn’t give you a timeframe, but we do know from history that getting onto platforms, getting into models is the first step in a process of getting more clients and getting positive flows. So we know it’s the beginning. And I think it’s a really, really important first step to an end point of really seeing nice, a nice impact on flows.

Okay. Thanks for the color.

Our next question comes from Ken Worthington with JPMorgan.

Hi, good morning. Thanks for taking the questions. Maybe to follow-up on the model portfolio questions that we’ve heard throughout the call, were there an unusual number of additions this quarter or is this sort of, is there always sort of this level of additions, maybe there’s other subtractions and it’s just a normal course of business, and if there were an unusual number of additions this quarter why now? What has changed to sort of drive the interest in your products?

Hi Ken. I would say that there’s probably a little bit more than usual this quarter. I don’t know if I have a reason. I could guess that some of it has to do with, maybe the market calming down a little bit and people focusing on thinking about the future as opposed to digesting what’s happening, given the market volatility. That would be my guess, but I would say just a little bit more than normal. But I don’t have a specific trend or two other than I think it’s just market conditions.

Okay. And then for symmetry, any unusual eliminations of your products on platforms? Were there any offsets to the additions or were there largely gains this quarter?

We had one large relationship that was ended, that was a relationship with a large amount of assets which impacted our total net flows for the fourth quarter. But I would make note that that was a very low fee and extremely low margin relationship. So it was a lot of assets, but not a lot of earnings. That’s with one kind of institutional type client, but other than that, nothing of note.

Okay. And then I guess also flushing out some of the comments on New Energy and alternatives. How did things evolve throughout 2022? And you mentioned I think with regard to New Energy, a focus on privates, what is your outlook for the coming year? Again, just sort of flushing out some of your prior comments.

So for 2022 and for New Energy, I think it was a platform setting, so it was that business working in within our environment and getting themselves ready for a growth phase. We’re positive from a private market perspective and especially what they do, and especially with a team that does it, given their long track record and the space that they operate in. And when I look out, in the future in 2023 and beyond, I think for Victory New Energy was the first alternatives acquisition we’ve done. That’s a potential area of interest for us. And I think that that’s a really positive part of our business that is really just beginning and something that we’re very interested in and we’re spending a lot of time on.

Okay, great. Thank you very much.

Our final question comes from Michael Cyprys with Morgan Stanley.

Hey, good morning. Thanks for taking the question. Maybe just on M&A, you guys have been quite active over the years. Markets have been quite volatile, though financing costs have gotten a bit higher and bit that spreads have widen out. So just hoping you could maybe help update us on how you see the M&A backdrop today for Victory, how your conversations are evolving? Any color on what that pipeline looks like, size, magnitude, types of deals, and how those conversations have evolved in the past 12 months?

Hi, Mike. So as I said in the script, we are very patient and selective as we’ve always been. As a public company, we’ve done four acquisitions in five years, so we’ve been really active. I think in those four acquisitions, I think we’ve done about $1.5 billion in capital. So we have, we’ve done very sizable deals in comparison to our size. And the way we see the market today is there’s a lot of discussions. There’s a lot of things happening and -- but doesn’t mean that there are a lot of good companies that are for sale. It doesn’t mean there are a lot of companies that fit with us. So we’re just continuing to move forward. It is part of our strategy. It’s not the only part of our strategy. And as I look at the environment with pricing, with cost of, with financing costs, we’re well positioned if we find something that works to execute on it with our balance sheet, with our history of the debt that we’ve used and then also with our structure, we feel really good, but if we find something we’ll do it.

Great. And just on some of the more recent acquisitions that you’ve done with WestEnd, THB, NEC, can you maybe just help quantify how much of flows each of those three individually contributed in 2022? And could you elaborate on some of the distribution synergies you’ve been able to realize so far? So with WestEnd, I know part of the ambition was about selling to more advisors. How many more advisors are you guys selling to today? How many new platforms have you added that they’re selling onto? Thank you.

Yes, so we don’t give specific flows for each franchise as you know, but I will tell you the three that you mentioned, if you accumulated their flow profile accumulated, all three of them are net flow positive. So if you look at, combined all of their flows that group will be net flow positive, so they’ve been additive to our net flow profile. As far as WestEnd specifically, I think we had some numbers in the script. We have added advisors, we’ve added multiple platforms and we’ve had that. We’ve also launched an ETF MODL [ph] as well. So we’re really, really pleased there. THB has been added to a couple large platforms, the SMA product. And then NEC as I said this year in 2022 and 2023, we are preparing for growth there as we go out and think about how you grow and raise private funds. So we’re really pleased with them. And if I think about the numbers, as I said, you put all three of them together, it’s net flow positive for 2022.

Great. Thank you.

There are no further questions at this time. I'll now turn the call back over to Mr. David Brown for closing remarks.

Thank you for your interest in Victory Capital. Next week we will be in New York attending the BofA Securities Financial Services Conference. And in March we’ll be back in New York at the RBC Capital Markets Financial Institution’s Conference. We hope to see you there and look forward to keeping you updated on our progress as the year unfolds. Thank you for your interest in Victory.

That concludes today’s presentation. You may now disconnect.