Waddell & Reed Financial Inc
Q4 2018 Earnings Call Transcript

Published: 5 Feb 2019

[Operator:]

Good morning and welcome to the Waddell & Reed Financial, Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mike Daley, Vice President, Corporate Controller & Investor Relations. Please go ahead.

[Mike Daley:]

Thank you. On behalf of our management team I would like to welcome you to our quarterly earnings conference call. Joining me on our call today are Phil Sanders, our CEO; Ben Clouse, our CFO; Brent Bloss, our COO; Shawn Mihal, President of our Retail Broker-Dealer, Waddell & Reed, Inc.; and Amy Scupham, President of Ivy Distributors Inc. Before we begin, I would like to remind you that some of our comments and responses may include forward-looking statements. While we believe these statements to be reasonable based on information that is currently available to us, actual results could materially differ from those expressed or implied due to a number of factors that we reference in our public filings with the SEC. We assume no duty to update any forward-looking statements. Materials relevant to today's call, including a copy of the Press Release and Supplemental Schedules have been posted on the Investor Relation section of our website at ir.waddell.com. I would now like to turn the call over to Phil.

[Phil Sanders:]

Good morning. Thanks for joining us. Today we reported net income of $46 million or $0.60 per share for the fourth quarter, compared to $46 million or $0.58 per share during the prior quarter. As you saw on our release this morning, the quarter included a $16.1 million gain from the revaluation of our pension liability. We also encourage severance related charges of $3.2 million. These items netted to a $0.13 benefit to earnings for the quarter. For the full year of 2018 net income improved meaningfully, but mostly due to benefits from corporate tax reform. Operating income improved for the year by $2.3 million or 1%. Despite the market volatility experienced in the fourth quarter and a challenging end to the year, we made solid progress in 2018 on delivering against the corporate initiatives we have highlighted in past calls. Due to the hard work and dedication of many individuals, we continue to lay the groundwork to improve the structural outlook of all phases of our business, with the goal of best serving clients advisors and stockholders. There is no doubt that the industry landscape remains challenging, and there is plenty more to be done, but we have made significant strides in improving our company's long term competitive positioning. Specific examples of foundational improvements across 2018 include the following

[Ben Clouse:]

Thank you Phil and good morning everyone. As Phil noted, we reported fourth quarter net income of $46.5 million or $0.60 per share compared to $46.3 million or $0.58 per share during the prior quarter. The fourth quarter included a net $0.13 positive impact, including a gain due to the annual revaluation of our pension liability driven by the interest rate environment, which was offset partly by some severance costs of $3.2 million as we realign some of our support functions in the quarter. Operating income decreased $15.1 million on lower revenues, partially offset by a decrease in our operating costs compared to the prior quarter. The lower revenues were driven by lower assets under management as market volatility during the quarter had an outsized impact on our average asset base. Continued reductions in our share count also increased earnings per share for the quarter. For the full year 2018 we reported net income of $183.6 million or $2.28 per share compared to $141.3 million or $1.69 per share during the prior year. This represents an increase in net income of approximately 35% compared to the prior year, primarily due to the benefit from corporate tax reform. Assets under management ended the quarter at $65.8 billion, a 17% decrease compared to the prior quarter, while average assets under management of $71.6 billion decreased 12%. Despite the market volatility experienced in the fourth quarter, average assets for the full year of 2018 of $78.3 billion only decreased 3% compared to 2017. Within the broker dealer, assets under administration ended the quarter at $51.3 billion down 12% compared to the third quarter, again due to the market volatility experienced in the fourth quarter. As it relates to our Ivy products within the broker dealers assets under administration, the pace of net outflows from legacy products to newer advisory products continues to flow and an aggregate remains well within our expectations. As Phil mentioned, we recently announced an increase to the compensation payout rates for financial advisors and we are exiting broker dealer field real-estate by the end of 2020. We continue to expect that the reinvestment in our business through what we believe is the best in class compensation grid, will be fully offset by savings from a reduction in our field office footprint and the corresponding support overheads by 2021. Turning to the income statement, revenues of $272 million decreased 8% compared to the third quarter due to lower assets under management and administration, as well as the full quarter impact of the fee reductions we announced earlier in the year which were effective July 31. Operating costs declined $7.8 million sequentially, primarily due to distribution costs which moved in line with distribution revenue. Compensation decreased $400,000 due to lower incentive compensation and a reduction in stock based compensation, despite severance charges of $3.2 million. In addition, occupancy costs were notably lower by 14% as we began to realize the benefits from field office closures. We remain focused on long term controllable expenses, which include compensation, G&A, technology, occupancy and marketing. These line items totaled $106 million during the quarter and $440 million year-to-date. We've made considerable progress on this front having reduced controllable expenses nearly 8% since 2015, while continuing to invest in areas focused on strategic growth, including adding resources to our investment management team, pricing and product changes to support our distribution efforts and improving the underlying support structure and systems in our broker dealer. As we previously mentioned, we will continue to advance our investment in 2019 in improved technology, which are expected to have some incremental implementation costs. Given those investments, as well as normal inflationary increases, we expect controllable operating expenses for the full year of 2019 to be flat with the $440 million in 2018. Additionally we expect depreciation costs to decrease meaningfully to a range of $15 million to $20 million for the full year as we continue to shift our technologies toward software as a service. The effective income tax rate was 23% for both the quarter and the year. We continue to expect the tax run rate to be in the range of 23% to 25%, excluding the impact of any non-recurring or discrete items or issuance of additional guidance on tax legislation. Finally, we ended the quarter with cash and investments of $849 million. During 2018 we paid off $95 million of debt, repurchased $136 million of stock and paid $81 million in dividends, while continuing to generate positive cash flow. We continue to be opportunistic with our capital management, including taking advantage of lower prices during the quarter as we progress towards our goal of $250 million in share buybacks by the end of 2019. Our balance sheet remains the strength as we continue to execute our growth plans, while continuing to provide attractive capital returns to stockholders. That concludes my comments. Operator, we would now like to open the call for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Craig Siegenthaler with Credit Suisse. Please go ahead.

[Craig Siegenthaler:]

Thanks. Good morning Phil.

[Phil Sanders:]

Good morning.

[Craig Siegenthaler:]

First, just starting on excess capital, well Dell has about $750 million as net cash and investments less debt. I wanted the updates here in terms of what’s the level of working capital and regulatory capital within this balance.

[Phil Sanders:]

Craig, I might let Ben address the working capital requirements. Ben?

[Ben Clouse:]

Sure. Good morning Craig.

[Craig Siegenthaler:]

Hey, good morning Ben.

[Ben Clouse:]

As you know, we operate actually two broker dealers. The retail and then our distributor is a broker dealer. Both have some regulatory capital requirements, although they are not particularly significant. In regard to working capital, we are very much focused on thinking about flexibility and the long term and I’ll let Phil add to this, but clearly we are thinking about what we will do next and we focused on this every quarter with our board as we work toward concluding our repurchase program and thinking about what the future might hold after the end of ‘19.

[Phil Sanders:]

Yeah, really the only thing to add there Craig is that obviously the balance sheet as you point out is really a source of strength and provides us a lot of flexibility as we've undergone our business model transition and especially in kind of uncertain times in the market place. So as Ben indicated, we've been pretty active and persistent in terms of share repurchases. This will be something that we fully expect to complete our commitment and will readdress with the board in moving forward as we move throughout 2019. We talked in the past about the opportunity to do some incremental acquisitions or enhanced capabilities, you know if the right thing comes along and we certainly have that flexibility. So we took a lot of the tough decisions early two years ago when we started this process with the reduction of the dividend and improve the capital flexibility, and I think we're in a good spot going forward. The early part of this transition, a lot of it has been focused on self-help and a lot of things we're doing internally. As we transition into 2019 I think there's an opportunity to be more forward looking and be more growth minded and that's kind of where we are focused right now.

[Craig Siegenthaler:]

Got it. And you know that number is important because I think a lot of it’s in our valuation exercise. Looking at your key multiple, are going to add something for us. Capital is just important for us to understand what’s sort of the true access there, but just as my follow, you know it’s nice to see actually the broker dealer AUM flows actually improving against such a tough backdrop and it looks like proprietary share of Waddell & Reed fund in the broker/dealer is more or less stabilizing here. So I just wonder if you had any kind of thought in terms of what's driving that stabilization at this point?

[Phil Sanders:]

I might let maybe Shawn address some of what's going on within the broker dealer and how he sees that playing out.

[Shawn Mihal:]

Hey, good morning Craig. Yeah, absolutely we are seeing some stabilization with respect to the affiliated funds inside the broker dealer channel. We know that we've launched a significant amount of change inside the broker dealer, including the introduction of some advisory programs, and include exposure to unaffiliated funds and over the course of that time we saw some of the ranges in which we expected and forecast of some movement from affiliated funds to those new programs to make some of those transitions of affiliated holdings into unaffiliated holdings with a launch of those programs. There was some demand initially when we launch that primarily in mid-2017 that ran its course through a portion of 2018 and we saw some stabilization there as that demand started to subside. We expect with sales as we continue to open up new products to see that stabilization across all of our product platform. So our expectations are relatively on a go-forward basis that we see, that continues stabilization on the affiliated assets under management.

[Craig Siegenthaler:]

Great. Thank you guys.

[Operator:]

The next question comes from Glenn Schorr with Evercore ISI. Please go ahead.

[Glenn Schorr:]

Hi, thanks very much. So a bright spot in a tough backdrop was I think sales were up 7% quarter-on-quarter and kind of flat year-on-year. In such a brutal market backdrop, I'm curious if you’d give a little more color on what seems to have momentum and if you can attribute any of that to the recent fee cuts or is it too early to see an impact there.

[Amy Scupham:]

Hi Glenn, this is this is Amy. I do think that we can attribute it a little bit to some of the fee cuts, although fees obviously don't drive sales in and of themselves. Over the course of the year we saw market improvement from a performance standpoint across a lot of our products and as a distribution force we really have worked to focus in on where we feel we are best position to compete and really have each of our distribution channels focus on their client base, which is starting to show some pay-off here in the short term. We saw some – we saw market increase in sales in our mid-cap franchises and in our small-cap franchises. You know we continued to – as we look into 2019 we have a broader product set that’s selling. If you look back a year ago we had a pretty high concentration of sales in our international core and emerging market equity product as those two products continue to garner gross sales and you know it's extending into some of our domestic equity and our high income franchises as well.

[Glenn Schorr:]

Okay, I appreciate that. And just to follow-up on the – you mentioned once or twice that there's a realignment of sales leadership across the channels. Can you just expand a little bit more, I’m just curious on what you guys did there and how that’s going to drive growth?

[Amy Scupham:]

Yeah sure. You know I think historically as an organization we haven't put a lot of investment into what we are today calling our professional buyer distribution channel, which is inclusive of institutional RIA fund contribution or retirement business and our insurance business and really separating out those businesses and focusing in on the unique needs of the client basis. So throughout 2018 under the leadership of Grant Cleghorn [ph] we built out all of those teams and we continue to push forward with the strong messaging and the evolutions that we’ve had as a farm, which you know – it will be a little bit of a longer term pay-off as it's a longer term sales cycle there, but we are looking forward to that. And then in September we brought in Joe Moran and he is running our broker dealer channel or what we refer to as our national channel, which is inclusive of national accounts and broker dealer wholesale and are Waddell & Reed specific channel and having all of those really working together in a more focused effort is improving and really focusing in on where we are spending our resources and where we spend our dollars is starting to pay-off as well and we think it will continue throughout 2019.

[Glenn Schorr:]

Alright, thanks very much.

[Operator:]

The next question comes from Bill Katz with Citigroup. Please go ahead.

[Bill Katz:]

Okay, thank you very much for the updated guidance and taking the questions this morning. Just on that $440 million, how much flexibility do you have around that number? Like I want you to sort of maybe [inaudible] so an upside downside scenario markets hard to cooperate or become more problematic from here?

[Phil Sanders:]

Good morning Bill, it’s Ben. I want to point out maybe just a couple things on the $440 million. That is inclusive of the incremental implementation investment we are making in technology, which will start next year. In regard to flexibility, you know we are constantly assessing our expense base and looking at all of the ways we do business and will continue to be prudent in our ongoing assessment of those costs. If we face some sustained headwinds in the market, we do have the ability to pull back in certain areas and manage our way through that. With at said, you won’t see us overreacting to the short term. We are very much focused on the long term and we don’t ever want to compromise or cutback on the things that we believe will position us to be competitive in the longer term.

[Bill Katz:]

Okay that’s helpful and just a follow-up question just on FA pipeline and maybe transition of systems dynamics. Could you give us a sense now that it seems like some of the core run off and repositioning of the footprint is behind you? How does the pipeline look? And then how was sort of pricing of that; is it more or less competitive given some of the changes you've been making?

[Shawn Mihal:]

Got it, Bill. Shawn Mihal, I'll take that question. We are starting to see some turnaround with respect to the pipeline and having some active recruits that we are working with today. We are also doing through our changes in November, the substantive overhaul with regard to our recruiting resources and really bringing a national recruiting model in place which we are working to stand up currently as we are seeking to fill open positions in our recruiting department. So we do have expectations of continued growth in our recruiting channels for 2019, along with that’s what’s mentioned in the call this morning, the attrition that has been slowing inside the broker dealer channel as we've made several changes in 2018. We do expect to see a little bit of a drop here at the beginning of 2019 as we typically work through our low producing advisor terminations at the close of the year. So we do have a little bit of a drop just based on the lower producing advisors that didn't meet minimum production requirements, but however we are focused through 2019 to continue our efforts and expansion of our recruiting focus more on high producing advisors. So our target advisor has really changed from what we used to recruit in the past, being very inexperienced advisors, new advisors to the industry where our targeted focus going forward will be focused on this high producing advisors typically targeting over 200,000 in annual production as we move forward in the pipeline. That’s starting to grow as we announced some of these more substantive changes and we’re continuing to explore more inside our recruiting channels, particularly as we add these additional recruiting resources in.

[Bill Katz:]

Okay, thank you for taking the questions.

[Operator:]

The next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

[Kenneth Lee:]

Hi, thanks for taking my question. Just to follow up on the incremental tech costs. Elevated expenses, it looks like for 2019 and presumably there's going to be a similar level of spend in 2020. Is that correct? Thanks.

[Phil Sanders:]

Good morning Kenneth. I would put that in those incremental costs as part of our expense base somewhere in the range of $5 million to $10 million, but with that said, we're at the very early end of the implementation of that. I think you are correct, that will span from ‘19 into ’20, although I expect it to be a bit heavier in ‘19 versus 2020; although I don't know that I have a particular break down. One other point just to reiterate some statements I made in the last quarter, in the longer term we really expect the run rate there to moderate as we are also working to sunset some older systems. At the same time we stand up some of this new, more software as a service model. So I think in the long term we'll see a bit more moderation there once we get through the next 1.5 to 2 year implementation period.

[Kenneth Lee:]

Okay, great. And just a follow up on the sales realignment; stepping back, I think a while back, there were efforts initiated to institutionalize so to speak the investment process, the risk management and obviously the sales. Just wondering, if we were to look at a higher level, is it sort of like correct to say that the restructuring process so to speak is pretty much nearly complete at this point and then we should start seeing more the benefits or just want to you know see where we are in terms of that – the whole set of efforts there. Thanks.

[Phil Sanders:]

Okay, this is Phil. I'll take this and then maybe Amy can add if she wants to. When we refer to the institutionalization process we’re really talking about clearly articulated philosophies, processes, full risk analytics, attribution dynamics, all of those types of things that we need in today's world and portfolio management. I think you know looking back years ago there was some delineation between the institutional side of our business and retail. As we see the industry evolving today, those lines are really going away and are very blurred. Almost every distribution channel has a gatekeeper, in which case they are requiring pretty high levels of analytics and due diligence and consistency of how you deliver the product. So we've essentially completed that, you know at lease vastly completed that through the investment management division. As you know we've talked in the past about kind of fortifying our portfolio teams. We’ve transitioned over the last couple of years from a lot of single PM strategies to team managed products. We back filled with strengthening our investment research capabilities. We have a Chief Risk Officer in place now for the last 2.5 years or so. He and his team are fully embedded within our investment division. We are now – all of that is now being integrated and dealing with the distribution folks and the marketing folks on a day-to-day basis. So I think we've spanned – we worked really hard and a lot of people have contributed to kind of laying the groundwork for how we move forward and positioning the company to be successful in what's expected moving forward. So I think we're in a pretty good spot. There are always ways we can get better and we're continuing to look at resources and whether it's through technology or individuals and we’ll continue to assess that and make investments where needed. But I think we have a pretty clear understanding of what's required to be successful in this business. You know my background was in the institutional side. Their Director of Research came from the institutional side; Amy's background is from the consulting side, so I think we've got that DNA kind of pushing through the whole organization. I don’t know Amy if you have anything to add there.

[Amy Scupham:]

No, I don't think there's much. Like I said, the build out of our professional buyer distribution or more institutional like channel is complete and you know we look forward to over the course of the next 18 to 24 months really starting to see that come to fruition alongside all of the evolutions that have happened in investment management, which just help us to better service our clients across all distribution channels.

[Kenneth Lee:]

Okay, great, very helpful. Thank you very much.

[Operator:]

The next question comes from Robert Lee with KBW, please go ahead.

[Robert Lee:]

Great! Good morning, thanks for taking my questions. You know I guess my first question would be you know a little bit on the distribution, particularly the unaffiliated channel. I mean, well that's a level you know down to about $25 billion at quarter end and I'm sure they are back up somewhat now. But I mean, can you may be update us on – you know that seems to be a kind of a level that you know – is it a struggle to be relevant with allowed distributors. I mean how have you had to adopt or change your approach to unaffiliated these distributors in terms of making sure you have enough mine share in different places to be relevant to them.

[Amy Scupham:]

I'll take that question. So is it a struggle to be relevant, I'm going to go with no. We know and we recognize that we can't be everything to everyone and you know this is a trend that is going across the industry. So if you look at our unaffiliated assets under management and flow, that's inclusive today of RIA retirement, broker dealer and our insurance variable annuity fund. So that's everything, all kind of lumped into one. The steps that we've taken over the course of 2018 and as we roll into 2019 is to really say where do we want to and need to be relevant and what does that look like. So like I said earlier, where are we putting our resources from a partnership standpoint, where are we best positioned to compete from a product standpoint and ensuring that all of our sales force from national accounts to our wholesalers to our RIA investment consultant, to our retirement investment consultant, everyone is carrying the same message, talking about the same products, setting the appropriate expectations for how our product that is going to compete, and really just making sure that we address the needs of each of our partners in a unique manner. So it's – you know it's really just about becoming more focused and not trying to be all things for all people.

[Robert Lee:]

Thank you, and may be as a follow-up I want to go back to maybe the expense question and just want to make sure I understand it. I mean with the – you know the expense guidance for next year, understanding the step up in tech spending as you – among other things you've built up research and investment capabilities, but you know how much of that should we think about as we look for as kind of really kind of a new run rate expense and is really just kind of not that much. You know there's always some flexibility I guess. That's kind of your – really kind of your base expense base. So if you are looking to 2020 or maybe you know venture to even think beyond that, that there's just not a lot of room for expenses to fall off from that or you know how should we be kind of thinking of the progression over the next year or two.

[Ben Clouse:]

Good morning Rob, it’s Ben. In regard to technology in particular, I think as I stated earlier we’ll have some implementation costs which obviously won't continue in the longer term. In the base or the run rate we clearly have some run rate costs from older systems that will sunset as we stand up some of our new software and systems that are more you know cloud based are hosted solutions in the long term. Thinking about late 2020 and beyond, again, I expect those to moderate to a level that's relatively consistent with our current technology run rate. Once we get through a period of swap out so to speak, when we're standing up to some new things and sun setting some old things. In the longer term though, I don't expect that to have significant increase over our run rate today.

[Robert Lee:]

Okay, thank you for the additional color.

[Operator:]

The next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

[Michael Cyprys:]

Hey, good morning. Thanks for taking the question. Just wanted a circle back on the seven portfolios that you guys are going to be introducing in model delivery. If you could just expand on that in terms of the timing, expectations there, goals around that, which particular strategies if you could comment and then what's the economics going to be on those new portfolios coming in verses in the upcoming of funds.

[Amy Scupham:]

Hi Michael, it's Amy. Yeah, I can expand on that a little bit. So the timing should be some time here in the first quarter, as far as the original implementation and rollout of it. As we work through 2019, the goal would really be to continue to have extended conversations with some of our other distribution partners around opening up model delivery capabilities on their platforms. So that’s – you know probably the first six to nine months would be about extending and expanding that capability. As far as the portfolios, we are opening them in our mid cap franchise, mid cap growth and mid cap income opportunities. We have concentrated versions of both our large cap growth and large cap value that will be being offered small cap growth and then our science and tech portfolio, as well as an energy modeled delivery portfolio. As far as the economics go, you know model delivery is a low fee option that's provided to high producing advisors on various platforms from an economic standpoint. From our position it has you know I think fairly high margins, even though the lower fee, as it's not paid out in the traditional wholesale expense model.

[Michael Cyprys:]

Okay, thanks, and just a follow up question for Phil. You mentioned some potential appetite for potential incremental acquisitions or enhanced capabilities if something comes along. I was just hoping you could flush that out a little bit there, just in terms of how you are thinking about that, approaching that, where there might be white space.

[Phil Sanders:]

Well, I think it’s really consistent with what we said in the past. I mean some extensions or capabilities that are complementary to our core competencies, I think the ability to integrate and cultural fit is. I think there's also some interest in uncorrelated asset classes or maybe that are a little bit different than from what we are doing. As you now we are probably 80% or so in equity, 20% fixed income. Half of that is in the high yield or credit side. So I think we have opportunities from the external side and also I think internal development, you know we have a strong balance sheet as we've highlighted and we have some seed capital that we can develop, maybe product extensions for existing capabilities, whether it's more concentrated versions of what we are offering, maybe broader and think more broadly in terms of international enhanced capabilities or multi asset as well. So it's kind of a wide range of things that I don't think would be too surprising to others or things that we'd be interested in.

[Michael Cyprys:]

Great. Thank you.

[Operator:]

Your next question comes from Michael Carrier with Bank of America Merrill Lynch. Please go ahead.

[Michael Carrier:]

Alright, thanks and good morning. Then maybe just one more on the expenses. You know when I look at you know just some of the pressure that we saw you know on the AUM towards year end, I just wanted to get a sense on it seems like maybe some of the comp you know should be you know a bit more variable as we're going into 2019. So if there's you know maybe some offsets there that are impacting this year, you know just kind of I guess any insight there, because it just seems like there's you know not as much variability as we would expect, and maybe if you can just give maybe an update on where AUM is, just given the rebound you know in the market, because maybe that’s you know some of the offset?

[Ben Clouse:]

Hi Mike. Good morning Michael. I might start at the end of your question then I might let Phil add on your comp question. In regard to assets, as you know we do monthly disclosure, so we'll have our monthly levels disclosed I believe on Monday and you heard Phil and Amy talk a little bit about the sales in the month and what the pipeline looks like. Clearly the markets were more positive in January and we did see some recovery to our asset levels again and we'll have disclosure on the details on Monday. In regard to compensation, some of what we have been doing internally is a bit what you describe, where clearly we are focused on aligning pay and performance as best we can and of course we have variable compensation programs for the management team as well as for the portfolio management group and I’ll let Phil finish my answer here, but we even continue to make some modifications to that as well. But as a total of our expenses base, those are not large drivers of variability to the total when we think about the incentive portion, separated from its base. Not to be repetitive of course, but all that goes along with you know my earlier answer that we are obviously constantly looking at the ways we spend money and are very focused on that. Phil, I don’t know if you want to add in regard to portfolio management.

[Phil Sanders:]

Yeah, I think the only thing to add there is that obviously some portion of the investment staff's compensation over the long term, especially in the portfolio management side would be based on the growth potential of products and assets under management and that type of thing. But really the bulk of it is driven by performance and that's really what we focus on and I think it's important. Look, the portfolio managers and our investment research staff, and our risk analytics group and these people are working hard every day to generate superior returns and investments for our clients. They are also – we also know that they are the lifeblood of the company in terms of the asset management side. So if we have strong performing portfolio managers, we're going to compensate them fairly and recognize that. So while there was some incremental flexibility with respect to a compensation, you know we are not going to short change and make things in the short term that are going to hinder us in terms of long term performance and growth.

[Michael Carrier:]

Okay that’s helpful. And then Ben I think you hit on this a little bit earlier, but just in terms of the balance sheet, if you can provide any color on how you guys think about you know kind of free cash, you know the operating cash, regulatory capital and then seed or kind of CapEx, what do you think you have in products that could produce future growth.

[Ben Clouse:]

Sure, I mentioned a little bit. Of course we have some regulatory capital requirements which are not particularly significant to our balance sheet overall, maybe a couple incremental points would be – just in the broader picture we do continue to have significant net positive cash flows from operations and we've been able to use those cash flows to execute our capital strategy which I talked about in my prepared comments earlier in regard to dividends and buy backs, of course as well as the pay down of our doubt that matured about one year ago. We continue to focus on that each quarter with our board as we think about the longer term in regard to how we manage capital and as Phil mentioned, you know we're taking a look at that M&A landscape and thinking about opportunities there as well. We are continually looking at our debt level, which as you know is minimum and the remaining $95 million comes to maturity in 2021. We have a make-whole provision on that and so it isn't particularly economically beneficial for us to repay an early. In regard to seed you know we have something in the neighborhood of $250 million of feed currently in our products; we look at that. On an ongoing basis, as Phil alluded to earlier, that's clearly a source of strength for us and we have a lot of flexibility there as we are able to develop and rollout products and help them build a track record before they go to market and we use our balance sheet to do that. I don't know that we have any planned significant changes to that. I might let Phil add to that if he has any further thoughts in the longer term.

[Phil Sanders:]

No, I think that pretty much covers it. It gives us a lot of flexibility. We are kind of using that as an opportunity to develop new products. It’s also a strong interest to our internal portfolio management group and as well as our sales and distribution group. So we’ll see how that plays out.

[Michael Carrier:]

Okay thanks a lot.

[Operator:]

The next question is from Macrae Sykes with G. Research. Please go ahead.

[Macrae Sykes:]

Good morning everyone. I actually just had three quick questions for Shawn; I’ll just ask them right in a row. I guess in terms of the broker dealer business, are there any components in terms of offerings, risk management, digital alternatives. I know you've addressed some of them today that might give you a much bigger edge in terms of being more competitive. And then is there also a level of AUM advisor count, where as you scale you might need a further step up in fixed investment that we don't have today and then my last question is, just qualitatively how does sort of your regional versus your national exposure impact growth and expectations going forward?

[Shawn Mihal:]

Good morning. Yeah, let me go back to the first one. So I was trying to write them down, so if I – so to keep me honest here on the questions in case I can't quite remember the detail that you are looking for there Mac. But on the on the digital side, as we announced this morning and through a press release yesterday, we've entered into an agreement with Thompson ONE, which is the, the bulk solution to advisor desktop, which we’re really excited to enter into that arrangement to collectively focus together the connections of the systems that we use on a day-to-day basis to support our advisors. As you are likely aware, that program supports well over 100,000 advisors in the marketplace today. It’s a highly competitive platform which allows you to aggregate or consolidate down your technology offerings to advisors. So really utilizing the systems that we use on a day-to-day basis to better connect those and create an overall better experience for our advisors, allowing us to scale better in support of our advisors by consolidating things down into one platform in which they access to do business and support clients. So we feel that that gives us a strong competitive advantage in moving us forward with regard to the other technology packages that we rolled out. We’ve gone through significant initiatives throughout the course of the last three or so years and enhancements and technology and this is just another step in that direction to collectively pull all those things together. We have other technology goals for the 2019 time frame in which we’ll be doing some data consolidation and aggregation to allows us for better overall access to data as well as reporting capabilities. So that is another project of ours that is under way for 2019 and we'll be looking forward to making some additional announcements about that. Again, producing a more scalable and more agile environment for the broker dealer and allowing us to grow the broker dealer in a meaningful way without significantly increasing costs associated with supporting that business, as well as working on the consolidation of our work flow processes to support our advisors. So as we continue to converge our advisors in the product offerings and technology, having single processes in which they engage in to better overall support their, account opening and maintenance processes. So again, we feel that we're moving this in the right direction from an overall technology standpoint, from a digital environment. We feel as we continue to aggregate and consolidate data into a single environment for the connection and places in which we both integrate in, our core technology packages will allow us to further enhance that advisory experience and allow us to further deliver new innovative solutions to advisors as we continue to grow out the broker dealer business. On the AUM advisor account perspective, we are continuing to focus on the growth of our overall assets under administration inside the broker dealer and focusing the broker dealer and positioning it for growth over the next several years. It’s an important component for us in the business to invest back into the broker dealer and we are making those investments from a digital side as we believe it will help us as we continue to grow that advisor count and AUA. I do want to make it clear that our intent is not to grow in the way that we did in the past but recruiting in hundreds of advisors per year that were inexperienced. We are more focused on recruiting higher quality, higher producing advisors as we move forward. So our expectation is not to see the same type of recruiting numbers that we saw in the past rather seeing highly productive advisors as we focus our recruiting efforts on those types of advisors in the industry so those experienced advisors. So that'll be a direction for us as we continue into 2019. 2018 saw us work through a lot of the stabilization inside the broker dealer with regard to a lot of the initiatives that we made announcements on in the fourth quarter and as we made some additional announcements here early in January and into February of this year, that will provide us – my belief is with the platform and support structure to better grow that overall AUA and advisor account, as well as just in general inside the broker dealers as we focus on continuing to put those investments into the broker dealer. The last question you had I believe was related to the overall regional versus national model. I'm not sure I quite picked up on all that all the way, so do you mind just repeating that one.

[Macrae Sykes:]

Yeah so, just trying to get at you to where you think you are in terms of the different markets on the national exposure and how that impacts growth, still trying to compete in perhaps faster growing markets versus some of your traditional stronger footprint.

[Shawn Mihal:]

So we have aligned from an overall regional structure of really developing out our regional from two regions to three regions led by three regional Vice Presidents and then also our markets in making adjustments across those three regions to six markets per region. We’ve also focused on establishing a national based recruiting effort in which we are aligning with those particular regions. We’ve seen strong growth with respect to the broker dealer business through our more central region, but we are focused on the east and west quite a bit for growth opportunity in those particular regions and as we have made changes in November of last year to really centralized our core support efforts for our advisors with respect to practice development, advance sales, as well as a higher levels service structure in a Diamond Service Group. We believe that's putting the structure in place to better support that overall existing advisors, plus the growth of new advisors into the organization. We will continue to focus those efforts across a national channel of advisors and looking for opportunities, particularly as we continue to expand in that overall support model to our advisors. So we are certainly focused on those areas in which we see is presenting opportunity, where in the past we've had overall exposure and concentration with respect to the potential markets, but really focusing across all three for future growth.

[Macrae Sykes:]

Great. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Phil Sanders for any closing remarks.

[Phil Sanders:]

Okay, thank you. Listen, I appreciate everybody joining in and tuning in today, and we will catch up with you here in a few months. Have a great day, thank you!

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.