Virtus Investment Partners, Inc.
Q4 2012 Earnings Call Transcript

Published: 30 Jan 2013

[Operator:]

Good morning, and my name is Jeff, and I'll 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 on the Investor Relations section of the Virtus website at www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. [Operator Instructions] I will now turn the conference over to your host, Joe Fazzino.

[Joe Fazzino:]

Thank you, Jeff, and good morning, everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the fourth quarter and full year of 2012. Before we begin, I direct your attention to the important disclosures on Page 2 of the slide presentation that accompanies this webcast. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance, and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements. These statements may be identified by such words as expect, anticipate, believe, outlook, may and similar terms. For a discussion of these risks and uncertainties, please see the Risk Factors and Management Discussion and Analysis sections of our periodic reports that are filed with the SEC, as well as our other recent filings, which are available in the Investor Relations section of our website, www.virtus.com. In addition to results presented on a GAAP basis, Virtus uses certain non-GAAP measures to evaluate its financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results, and should be read in conjunction with GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our earnings press release, which is available on our website. For this call, we have a presentation, including an appendix, that is accessible with the webcast through the Investor Relations section of the website. This morning, we will begin with remarks from President and Chief Executive Officer, George Aylward, who will review our accomplishments and operating results for the quarter and the full year. Mike Angerthal, Executive Vice President and Chief Financial Officer, will then discuss our financial results in further detail. George will have some closing comments before we open the call to your questions. Now, I would like to turn the call over to George Aylward.

[George R. Aylward:]

Good morning, and thank you for joining us on the call today. Virtus delivered strong financial and operating results this year with record sales, net flows and cash earnings, and this morning, I'll begin by giving you some perspective on the accomplishments that defined our success in the fourth quarter and for the full year. Mike will then provide a more detailed review of the financial results, and I'll conclude with some thoughts on how we are positioned to continue our success in 2013. As always, we'll be glad to answer your questions after the presentation. Our results for both the quarter and the year reflect the benefits of the inherent strengths of the company, in particular, the breadth of our products, the solid investment performance our managers have delivered, the effectiveness of our distribution and our ability to leverage our business model to grow. At the start of 2012, we set the following business objectives for the year

[Michael A. Angerthal:]

Thank you, George. Good morning, everyone. In the fourth quarter, we continue to deliver strong financial results across all of our key metrics. And this morning, I'm going to review our fourth quarter and full year results starting with assets under management sales and flows. Then I'll review our income statement, balance sheet and capital position. Overall, 2012 was a very good year for our clients and shareholders, and we are entering 2013 with solid momentum. Starting on Slide 9, assets under management. We ended the year with total AUM of $45.5 billion, which is up 32% from the prior year and 9% over the prior quarter. The year-over-year increase in AUM resulted from 3 primary factors

[George R. Aylward:]

Thank you, Mike. We have often been asked over the past few years whether we can maintain an above average growth rate. And when you consider the results we delivered for the fourth quarter and the year, you'll understand why our answer to that question has been yes. If you asked the question can we continue to do so going forward, we believe it is also yes. Our ability to continue to achieve this strong growth rate is fundamentally based on 3 elements

[Operator:]

[Operator Instructions] Our first question comes from the line of Michael Kim with Sandler O'Neill.

[Michael S. Kim:]

First, I'm just a bit curious to get your take on sort of the recent step up in flows into equity mutual funds that we've seen more recently. How much of that do you think is maybe more tactical in nature versus a more durable shift in allocation trends? And then, assuming investors do continue to move up the risk curve, how do you see your flow trends playing out as you look across your product capabilities and your affiliate base?

[George R. Aylward:]

Sure. I'll just answer the second part, first. Again, the delivery part of our model is that we have a diverse offering of products. So on different market cycles, we would just assume we can sell different options we have in our collections of products. So whether people are focused on fixed income, we have incredibly attractive offerings or equity, where, again, we have some of the most competitive products even in some of the noncorrelated asset classes. Again, we think we have opportunities in all of those areas. In terms of what, at least, we're seeing and I think other people are sort of seeing in the industry, everyone is sort of waiting for the shift from what is essentially been an overweight into fixed income, into more of the risk classes and particularly, equity. And as I mentioned earlier, I think we were earlier than most in really trying to push some of the equities because it's the right thing for people to do in order to maintain the balance. Again, we believe they should have great fixed income in their portfolio, but they need to have a well-diversified portfolio, which includes some more of the risk assets. I think it's been good to see in the early parts of the January that people have been -- investors have been moving more into some of the equity asset classes. And whether that is the beginning of the fundamental change into more of the risk assets or not, it's hard to tell. I think a lot of the macro environment will drive whether investors really continue their level of comfort of stepping into other asset classes other than where they've been, which is in fixed income or not. Again, we do fundamentally believe people should have very well diversified portfolios, and then they should look to balance among those different items. And again, if people continue to want to participate in fixed income, with our multi-sector strategies, our senior floating rate and our emerging market debt fund, we believe we have incredible opportunities. If they want to do risk in terms of international equity and foreign ops, or play the domestic equities in these sophisticated strategies we employ throughout the sector. Again, we believe we have competitive products in all those places. We just want to help financial advisers help their clients sort of come up with the right mix of sales for them.

[Michael S. Kim:]

Got it. Maybe one from a distribution standpoint. You've built out your capabilities here in the U.S. as it relates to kind of the RIA and the independent broker-dealer channels. Just curious if you've started to maybe think about focusing more overseas. It sounds like the Kleinwort Benson partnership is kind of more about offering their strategies to U.S. investors. But is there an opportunity to maybe leverage their global client base?

[George R. Aylward:]

Yes, no. It's a great question. But yes, terms of the U.S., again, I think we've been very pleased with the success we've had for a small firm. We ranked incredibly well in some of the wire houses. We still believe that there is still great opportunities for penetration within those wire houses. As you alluded to, and as Mike mentioned, we have built out a separate force to focus exclusively on the independents and RIAs, and we've seen a lot of growth there. But we don't yet have the type of penetration in those channels that we believe we're absolutely capable of. So we still see a lot of opportunity for us in the domestic market. But we do have to think longer term about what are the opportunities outside of domestic distribution. We're very excited about our relationship with KBI. It's a wonderful firm, great managers of money and good business partners. And certainly, they participate outside of the U.S., and the relationship was structured as an investment, where we have a partnership in terms of that minority interest in one of their entities, and we'll certainly look at any opportunity. Obviously, we'll be looking to raise assets for them in the U.S., and we're certainly cognizant of and have discussions with them about some of the capabilities they have outside of the U.S.. So that is something that, longer term, we absolutely do focus in on. And KBI is an opportunity for us to partner with a great firm and look at some of the ways that they're raising assets outside the U.S..

[Michael S. Kim:]

Okay. And then maybe just one last one for Mike. In terms of capital management, it seems like the balance sheet continues to strengthen and free cash flow was ramping up. So any incremental color in terms of how you're thinking about uses for excess cash going forward? And then, more specifically, how are you thinking about the sustainability of the share repurchases?

[Michael A. Angerthal:]

Yes, it's a good question. When we went through the balance sheet metrics there during the shift, I highlighted one of the metrics that we look at, which is our working capital excluding marketable securities as a percentage of our spend, and while we've been generating and accelerating our free cash flow generation, we're continuing to look at that metric since we've been deploying capital, what we think rather successfully and we've seeded over $30 million of new funds and have capabilities that have been added that we'll look at for continuing to expand our product set as we've talked about. So we balance our capital management on, really, organic growth, where we think that presents the best opportunity. And we talked about continuing to provide flexibility in our balance sheet to that end. In terms of the share repurchase program, we've executed 245,000 share repurchases, including 55,000 in the fourth quarter. There is still capacity under the share repurchase program. We'll continue to look at that as a means to returning our capital to shareholders. We've balanced our objective of returning capital to shareholders with investing in the business, and we'll continue to look at that prudently as we go forward.

[Operator:]

[Operator Instructions] Up next, we have Steven Schwartz with Raymond James & Associates.

[Steven D. Schwartz:]

I have some follow-ups. First, I think I want to go back to the question of capital deployment, if we could. Looking at 2013, I'm wondering if you've got thoughts on what you might be using for seed capital. Obviously, you used $30 million this year.

[George R. Aylward:]

Yes, and so I'll just build on a couple of things that Mike said. I think we've been very pleased that we have -- we've had great opportunities to use our capital to generate significant organic growth and that will be something we always look at. And the amount of seed capital you need is really a function not of how much you have in assets under management, but really what you have in terms of opportunity. And again, with the diversity of our model and our partners, we have a much larger opportunity. So I would continue -- we continue to believe that the ability for us to seed investments in new strategies, which, in the long term, will generate flows is a great use. The other thing I'll just point out when we seed, there's really 2 levels of seeding of new funds. Our larger competitors basically can seed at the level -- the threshold level of having assets that you can get on a lot of the platforms. The lower level, which is what we do, which is basically, what is the amount of the money you need to execute the investment strategy. So for us, we have to seed a fund at the level of which to execute the investment management strategy, and then we have to gather enough assets, so we'd reach certain thresholds for access. I sort of do look at what other firms or larger can do in terms of getting more immediate access. And as our balance sheet grows, that would be something that we would consider. But with the growth that we've had, I do believe that we have a sufficient ability to generate enough capital to, one, make sure we take advantage of the opportunity that we sort of develop over the next year but still continue to do what we've done over the last few years, which is look for ways to return capital in the form of stock repurchases and obviously, in the future, consider other alternatives of ways to address that.

[Steven D. Schwartz:]

Okay. And Mike, when you're -- I'll just work out the numbers later, but when you're think of working capital x marketable securities, you are including the value of the seeding capital?

[Michael A. Angerthal:]

That's correct, the marketable securities, and the consolidated sponsored products. So that's net working capital number that we use in that calculation. Because again, the goal there is that we don't expect to have access to that capital for 3 years or so when would start to see flows accumulate in those funds that we've seeded.

[Steven D. Schwartz:]

Okay. That makes sense. What will you -- you said you wanted to move closer to the average just quickly looking at models, I would think that would be in somewhere in the 30% to 40% range of annual spend. Would you agree with that?

[Michael A. Angerthal:]

We've actually seen it closer to 50% to 75% depending on the nature of the firm. So we are below industry -- and you saw when -- 2 quarters ago, before we started deploying capital into seed late in 2012, we were up into the mid-20s. So we're starting to see the pickup of that, but we're certainly at the low end of the range. We focus on that, and it is one of our objectives to building that flexibility that we talked about.

[Steven D. Schwartz:]

Okay. And then, if I may, just a couple more. On 2013, your revenue capture rate, 53%, I think, for this quarter, north of 65% for the year. Is there a reason to think about that changing significantly in 2013?

[Michael A. Angerthal:]

Yes, I mean we've talked about a range of between 50% and 60% and historically, we've been largely within that range. So I think that's an appropriate thing to think about into 2013.

[Steven D. Schwartz:]

Okay, great. And then one more thing for modeling purposes. You have a payroll tax hit in the first quarter of every year, if I remember correctly?

[George R. Aylward:]

That's correct.

[Steven D. Schwartz:]

Any idea how much should that be, just so we can get the quarter right?

[George R. Aylward:]

What was it last?

[Michael A. Angerthal:]

We typically don't give -- we don't give guidance on that.

[George R. Aylward:]

Last year, I believe it was, Mike correct me, like 7 or?

[Michael A. Angerthal:]

Close to $2 million, I'd say, from last year.

[George R. Aylward:]

So last year was close to $2 million. So again, this is basically people maxing out on FICA. And we obviously have grown a little bit since then and payroll taxes have gone up in certain limited circumstances. So I think that's a good number from last year. Probably, you should expect that, that would be similar to slightly more than that, all right?

[Michael A. Angerthal:]

I think that's right.

[Operator:]

[Operator Instructions] All right, ladies and gentlemen, this concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. Aylward for closing remarks. My apologies, gentlemen, it looks like we just got a follow-up from the line of Michael Kim with Sandler O'Neill.

[Michael S. Kim:]

Just one quick follow-up. In terms of product development initiatives that you are currently thinking about and trying to stay ahead of the future demand trends. Just curious, as you look out over the next 3 to 5 years, do you think you'll see somewhat of a return to kind of more style box investing? Or do you think the demand for this multi-asset and alternative strategies is sustainable and just kind out of how you're thinking about product development going forward?

[George R. Aylward:]

Sure. For us, our focus is less on the more traditional style boxes. We don't think that those things that were the focus of the investing community in the '90s and early 2000s are going to remain the same. We think they'll be more focused on noncorrelated and "liquid alt" types of strategies. Again, we -- I think we have very good coverage of a lot of the fundamental traditional asset strategies and asset classes. But we do think that they'll be -- investors will be increasingly looking for other differentiated ways to play the traditional style boxes, but really looking to build around those traditional style boxes. So again, I think we already have a good diversity of those products and our focus is really looking on things that will be different and additive to that in the future.

[Operator:]

All right, Mr. Aylward?

[George R. Aylward:]

Okay, I just want to thank everyone for joining us this morning, and we certainly encourage anyone to call if they have any additional questions.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.