Good morning, and welcome to the Victory Capital First Quarter 2023 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. 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'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 first quarter 2023 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 first quarter. After that, I will turn the call over to Mike to review the financial results in detail. Following our prepared remarks, Mike, Matt, and I will be available to take your questions. The quarterly business overview begins on Slide 5. We generated strong financial results to start out the 2023 year. Average AUM increased for the first time in three quarters as the markets rebounded modestly and we achieved significant improvement in long-term net flows compared with the prior quarter. The improving net flow trajectory is also continued entering the second quarter. In April, we had an institutional redemption from a single client that totaled approximately $1.1 billion. You'll see the impact of this in our April AUM release, which is scheduled for next week. This specific redemption was invested in a purely passive strategy managed by our solutions team with a fee of less than three basis points, and it was consequently not making any measurable margin contribution. After this redemption we've achieved relatively flat net long-term flows thus far in the second quarter as of today. Our margins stayed strong coming in at 49.3% this quarter, which is industry leading and demonstrates the defensibility of our margins in this challenging market environment. Our margin durability is the result of our differentiated operating platform combined with the determined daily execution by our team. Adjusted net income with tax benefit rose to $1.08 per diluted share in the quarter up from $1.05 per diluted share in the…

Thanks Dave, and good morning everyone. The financial results review begins on Slide 10. Assets under management increased 3.7% from $153 billion at the beginning of the year to $158.6 billion at quarter end. Revenue of $201.3 million was essentially flat in the first quarter compared with the $201.5 million of revenue recorded in the fourth quarter of 2022. While average AUM in the quarter was up 2% from the fourth quarter and quarter-over-quarter fee rate was flat, there were fewer days in the first quarter compared with the fourth quarter period. GAAP operating income was $74.6 million, and our adjusted EBITDA was $99.2 million. Net income was $49.3 million or $0.71 per diluted share on a GAAP basis and adjusted net income with tax benefits rose to $75.2 million or $1.08 per diluted share. We returned $66 million of capital to shareholders in the first quarter, which was ahead of last year's quarterly average. Lastly, we increased our quarterly dividend last quarter to $0.32 per share, and that same rate was declared again by our Board for the second quarter. That cash dividend will be payable on June 26th to shareholders of record on June 12th. On Slide 11, you can see total AUM of $158.6 billion at the end of the quarter remains well diversified from a distribution channel and client perspective. This diversification is deliberate and designed to mitigate volatility from any particular segments of clients. Turning to Slide 12. Long-term growth flows were $5.8 billion in the quarter. This reflects top industry-wide sales as investors have been hesitant to enter the market given heightened volatility, uncertainty, and holding cash has become a reasonable investment alternative to most asset classes in the current interest rate and risk environment. RS Global, Sophus, and Sycamore each had positive net…

[Operator Instructions]. Your first question comes from the line of Kenneth Lee from RBC Capital Markets. Your line is open.

Hi, good morning and thanks for taking my question. Just one on the positive net flows you're seeing in the U.S. midcap, small cap areas. Wondering if there's anything to call out there. What are you seeing in terms of client trends there? Thanks.

Thanks for the question, Ken. Good morning. As far as that asset class, we're seeing strength with a few of our franchises, Sycamore and some others. And then specifically in the institutional channel is where we've seen some nice pickup.

Got you. Very helpful there. And then in terms of priorities for free cash flow, you talked about being more nimble this year. Sounds like you're prioritizing a share purchase a little bit more now and there's also a new authorization. Just wondering how active could you be in terms of share repurchases potentially this year? Thanks.

Yes, good question. First I would say is our overall strategy around capital allocation has not changed. Our first and highest priority is to make sure we have a flexible balance sheet to do acquisitions. With that in mind, the ancillary part of it, whether we pay down debt or whether we buy shares really is around the current facts and circumstances. So the last two quarters, we have purchased a lot of shares and but would remind you in 2022, we did pay down $150 million of debt, which was still a sizable portion of our cash flow. As we look forward, as we said in our prepared remarks, we're going to be nimble and opportunistic. We do think that our stock today has a lot of value that isn't reflected in the share price. And then we also feel like, we have a good portion of our debt that's hedged. So we'll look at the current circumstances. I wouldn't necessarily take what we've done this quarter or last quarter from a share purchase and roll it forward. We could buy more shares, we could buy less shares. We're really going to take it as the market and as the opportunities evolve.

Got you. Very helpful there. Thanks again.

Your next question comes from the line of Mike Brown from KBW. Your line is open.

Okay, great. Thanks, operator. So Dave, clearly a lot of money in motion right now, and I just wanted to dig into some of your flow trends here. And you touched on fixed income in your prepared remarks. So this past quarter we saw that you had net outflows and I noticed that your money markets, which is not as big of a business here, but also had some outflows. It's a bit divergent from what we're seeing in the industry trends. So can you just touch on why the money markets saw some net outflows and then specifically on the fixed income side, it looks like the gross sales haven't really picked up yet. Redemptions are still running at a little bit of a higher pace there. So what do you think really causes those trends to improve as we progress through the year?

Good morning. Thanks for the question. Specifically on the money markets, our money market is offered really in our captive channel, in our direct business. So we have not participated in some of the inflows for the industry because it's not readily available outside of our direct channel. So I would say from there, it's really an accommodation for those direct investors. Some have brought dollars to us from some of the banks but many don't really utilize our money market in ways that other money markets are utilized in the industry. So that's a little bit of a, a unique situation to us. As far as the fixed income side, we have spent the last few years really building the distribution pipes. With our team Victory Income Investors, we've seen quite a pickup in our net flows from where we were. We're not at the point now where that has really turned the corner. We think going forward with the distribution pipes being having been built and then new ones also being built, and then also what's happening in the market. We think as we look forward, that trajectory will change. They've got excellent investment performance, which we highlighted in our script, long-term track record, sizeable amount of assets, and we think we're going to participate in the future with the team.

Okay, great. Thanks for the thoughts there. And then just to change gears, it looks like you guys are launching, you announced that you're launching a digital investing platform later this year. Can you just expand on that offering and how you expect Victory to really stand out in a crowded field? And then if I heard you right, it sounds like there isn't really any incremental investment. It sounds like investment there is already baked into the expense space. Did I hear that correct or should we expect maybe a little bit of incremental marketing expense to come through later this year?

Let me take the last part of the question first. Our guidance going forward at 49% factors in the investment we're making and have made. So it isn't that we're not making the investment, it's that the 49% is net of the investment. And I think that just gives you the power of our platform and the way we're structured. So we will be investing, but it is in our guidance going forward. As far as our direct business, which is where we're expanding the product set, we launched at the end of last month, we launched a new platform, really an open architecture brokerage platform, and Victory Capital Invest. We call, it's what we branded it and that platform will continue to expand products there. We're centering around a few different points around service, around product choice. And it's really today will be an expansion of product choice for our existing clients, and we're just beginning to go out and market it. We expect longer-term that this will be a growing part of our business and we're pretty excited to really make that next step in an evolution in this product offering down the road, we will have a digital investing platform equivalent of what you would call a Robot. And that's something that we're going to -- we're going to go out and market and see what kind of progress we can make there.

Okay. Very exciting. Thanks for sharing those thoughts.

Your next question comes from the line of Ken Worthington from JPMorgan. Your line is open.

Hey, good morning, David and Mike. This is Michael Cho actually for Ken. I just wanted to just touch on Sycamore again. You mentioned the positive flows in the slide and I think you called back. You're just continuing to see strength there. I guess it's just one how big of a driver were those flows into Sycamore. And then two, if I recall, Sycamore had been somewhat capacity constrained for some time, but it continues to be a strong driver of the flow. So, at some point, do you have to close the fund to investment or can you continue it kind of at the space indefinitely? Thanks.

It was an input to our flows. I wouldn't say it was significant or material, it's one that we called out. And so I wouldn't, we don't break it out franchise-by-franchise, but I wouldn't call it material or significant. As far as Sycamore, it is closed to new investors. It is on platforms and then selectively with existing clients, we are accepting new dollars, but effectively today it is closed primarily to new investment, new investors and platforms.

Okay, understood. Thank you. And then just to change gears just quickly, you talked about the Victory Investment and marketplace and kind of expansion of product choice. I guess just curious kind of where you're headed in terms of the types of products you're kind of looking to roll out first or and kind of the cadence of that going forward as well once with the new platform? Thanks.

So the new platform today offers, almost all offers all of the Victory's products. And then in addition to that, it offers almost all third-party ETFs and mutual funds, and then the ability to trade stocks as well commission free. So if you think about it, it very much looks like an open architecture brokerage platform. So you could buy the Victory shares, ETFs, you could buy any Victory mutual funds. You can buy it for the most part, any third-party mutual funds or any third-party ETFs, and then the ability to buy and sell stocks.

Okay. Thank you.

And there are no further questions. At this time, Mr. David Brown, I will turn the call back over to you for some final closing remarks.

Thank you. And thank you for your interest in Victory Capital. Later this month, we will be attending the 23rd Annual B. Riley Institutional Investor Conference in Los Angeles. And we hope to see some of you there.

This concludes today's conference call. Thank you for your participation. You may now disconnect.