Good day, ladies and gentlemen and welcome to Victory Capital's Fourth Quarter 2018 Earnings Call. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to Matt Dennis, Director of Investor Relations. Sir, you may begin.

Thank you, Sherlyn. Good morning. I would like to introduce myself. I am Matthew Dennis, the new Director of Investor Relations for Victory Capital, and I am thrilled to be joining Victory at such an exciting time. Before I turn the call over to David Brown, I would like to note that today's discussion may contain certain forward-looking statements, and as such, includes risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. While a recording of this call will be made available by us on our website, any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these forward-looking statements to reflect new information or future events that occur or circumstances that exist after the date on which they were made. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in our earnings release and the slide presentation accompanying this call, which can be accessed on the investor relations portion of our website located at ir.vcm.com. Now I would like to turn the call over to David Brown, Chairman and CEO.

Thanks, Matt. Good morning and welcome to Victory Capital's fourth quarter 2018 earnings call. I am joined today by Terry Sullivan, our Chief Financial Officer, and Mike Policarpo, our Chief Operating Officer, as well as Matt Dennis, our new Director of Investor Relations. I'm going to spend a few minutes discussing our fourth quarter results as well as some business highlights. Then I will turn it over to Terry, who will review our financial results for the quarter in more detail. Following our prepared remarks Terry, Mike, Matt and I will be available to take questions. Will start on Slide 5, I'm pleased to report that Victory Capital delivered strong investment and financial performance during the fourth quarter. The fourth quarter was a period of unprecedented volatility and we experience a significant market pull back especially during December. Strong operating margins, cash flow generation and expense control during the volatile quarter highlighted the strength and sustainability of our integrated multi-boutique business model. Our model provides diversification across asset classes, investment return streams, product types and business channels and has enabled us to build scale and operations administration and technology. As a result, we've been able to continue to reinvest efficiently in this business and allocate the resources necessary to speak to provide superior returns and service to our clients and our investment franchises. Starting with investment performance 57% of our AUM outperformed its respective benchmarks over the trailing one year, 68% over the three-year, 74% over the five-year and 88% over the 10 year periods ended December 31, 2018. Total AUM decreased to 52.8 billion as of December 31, 2018, due primarily to market depreciation. Gross flows for the quarter were strong at 4 billion while net flows were negative 1 billion as many investors retreated from higher risk asset…

Thanks David for your kind words. Mike I wish you the best of luck and I'm committed to a smooth and seamless transition. I would like to add to Dave's comments that I truly enjoyed my tenure at Victory. We have accomplished a lot strategically, organizationally and financially over the past couple of years. I am proud to have been part of an exceptionally talented team. I'd be up most confident that Victory is on path for tremendous success in the future and agree with Dave's comments that with the long-term previous relationship and what we have accomplished together that I will always be a friend of this firm. The financial results review for the fourth quarter 2018 begins on Slide 14. AUM ended the period at 52.8 billion this is a decrease of 17% in the quarter in which we experience extreme market volatility that resulted in negative market action and net outflows and thus impacted our P&L. Revenue decreased 11% to 96 million quarter over quarter and is down 9% from the fourth quarter of last year. Our EPS was $0.38 down 3%, 16% from 4Q17 and 3Q18, respectively. And our EBITDA margin was 37.9%, flat to 4Q17's measure and down 220 basis points from 3Q18's measure. Overall, we believe we did a good job of executing against our financial plan in a quarter that was preceded by record results in the third quarter and where we saw unprecedented market volatility a severe market pullback and challenging environment for the investment management sector. Though the challenging markets impacted our quarterly results we were pleased with the progress we made against our full year-over-year financial goals. Taking a longer-term viewpoint Victory Capital was demeasurable full year-over-year growth across revenue, EBITDA, adjusted net income with tax benefit and EPS. More…

[Operator Instructions] Our first question comes from Michael Carrier with Bank of America Merrill Lynch. Your line is open.

Good morning, guys. This is actually Shaun Calnan on for Mike. Just on the transition, given Terry's extensive background in M&A, should we expect less acquisition activity in the near term as Mike transitions into the new role?

No, Mike has been with us for 14 years and has been involved in really every aspect of the transactions from the sourcing perspective, from an integration perspective, from a closing perspective, I wouldn’t at all assume because Terry is moving on that we would change our acquisition philosophy or really how we're positioned in the market to grow inorganically.

And then I just had one on the management fee rate. So it's a little bit more than expected in the quarter and we're just wondering if that was mostly driven by mix and if they could potentially recover a bit going into this quarter with the strong quarter to date market?

Yes, I would say that as you think about the fee movement it is driven by asset mix shift that if you think about it was a bit magnified in the fourth quarter given the volatility. I think it's important to focus on mix shift versus erosion because this is truly what we were seeing here it's about the asset classes that we're having momentum in and I would also say that it is not a permanent movement. We have asset classes and therefore fees that range quite broadly as we've discussed in the past and we have seen and would expect to see momentum in some of those asset classes that have higher fees and therefore could move in the other direction.

Thank you. Our next question comes from Ken Worthington with JP Morgan. Your line is open.

Good morning, this is Will Cuddy signing for Ken. First Terry it's been great working with you best of luck in your next role and Mike congratulations on the role change. During the questions could you please provide USAA AUM at the end of the year and what is available and basis in the market movements how should we be thinking about we be thinking about any potential or revisions expectation for synergies. Sorry for accretion relative to what you provided in the fall?

Sure, it's Terry Will and thanks for your kind words and wishes. Let me maybe talk a little bit about or holistically about the transaction and the financial update. It's important to consider the framework that were operating in, and remember and we set forth some guidance earlier on we're more than doubling the AUM revenue and EBITDA of the business, it also is bringing significant diversification and scale, which has driven the strategic and financial thesis, and also has been transformative to our financial profile. Dave mentioned earlier that the business as well as Harvest for that matter are both performing as expected. Obviously, the market volatility has had some impact, but has not changed the long-term view and thesis that we have both strategically and financially on the acquisitions. In terms of thinking about the numbers, best way to frame it is to and the way we're thinking about it at least is really a revised starting point on AUM, and so we provided specific guidance around pro forma EBITDA of 420 million, as we look at the market at the end of the year we would estimate that that number has decreased call it 5% to 7%. However, I would note that the recovery in January has been significant and gives us comfort that we're trending well against overall goals. As it pertains to EPS guidance, we would say that our guidance that we provided remains unchanged, we’re still in the same range actually and probably the numbers have bounced up a few points just the way the math works, call it a denominator effect where Victory the core existing business has a little bit more exposure to the equity markets relative to the other businesses.

And will be possible, AUM number for the end of the year or take 5% to 7% down.

I think the 5% to 7% to clear is on EBITDA, we’re not providing guidance on AUM, we certainly will be back with that information holistically when we have more information to provide.

And then turning to some of the organizational changes, Mike and Terry could you maybe talk about how you split responsibility on both the Harvest and USAA transactions and how would you characterize the respective focuses on each transaction.

I will start it's Terry again. I would say its complete partnership as we talked about in the past we are M&A is a core driver of our business, but we are first and foremost operators of the business and if you have that foundation it really makes for group of executives that work seamlessly across the various elements that come with really sourcing, evaluating, diligent seeing and ultimately executing M&A that starts at the beginning and it carries to announcement and after that, that's where a lot of ways the operators real work begins from an integration standpoint which goes without saying needs to be seamless and fully partnered.

I would add that Terry and I have worked very closely on both the Harvest and the USAA transaction. From the beginning through now through execution and then I think it has been a very seamless partnership we worked together.

And the last part it's David I would say the organizational change has been thought about and I would say that we don’t see any issues at all and any issues impacting the closing or the integration of Harvest or USAA at all. And we feel really confident about that.

Our next question comes from Kenneth Lee with RBC Capital Markets. Your line is now open.

Just want to echo my thought, good luck Terry, it's been great working with you and congratulations again Michael. In terms of the Harvest you mentioned that there was a drawdown in the fourth quarter, which would you be able to quantify that and maybe remind us again how the flagship strategies would typically perform in terms of client demand in volatile markets. Thanks.

So let me take the two pieces of that question. Let me first say that our thesis on Harvest that it is a value added portion of a well diversified portfolio has not changed we're very excited about what Harvest's product set brings to not only our product set but to our client's product sets, potential clients' products sets, their flagship strategy and they have multiple strategies but their flagship strategies performed very similar to what the benchmark is and how they bench themselves, it did have a slight investment drawdown they did see some outflows in the fourth quarter, but have recovered very, very nicely in January, from a flow perspective as well as from a performance perspective.

And then in terms of the global non-US equity flows. You mentioned briefly about strong performance within Trivalent and Sophus. So I'm wondering whether there were any particular sizable institutional inflows that were driving the strengths in the flows in the fourth quarter?

So we've had several mandates that have been awarded to us with both of those franchises, we did see a sizable mandate one within Sophus, but we we're very excited about that asset class, we have really good investment franchises with really good investment performance over the short and long-term and we have lot of overcapacity there. And as you noted, we are seeing positive flows there and we think that those two franchises will be contributing to really our transition to the future flow leaders as we think about organic growth opportunities in the future.

Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Just wanted to see if you can elaborate a bit further on the high quality pipeline that you're seeing you mentioned some wins were pushed into 2019. If you could help quantify that, talk a little bit about the pipeline of both the institutional side and also if you could talk a little bit about the retail side so that the initiatives there with the different channels?

Won but not yet funded accounts we don’t control the timing obviously the clients do. We've been notified by a number of potential clients that they are going to award us mandates, we worked through contracts and completed the contracts in a weighted, and really we are waiting for the clients to award us the dollars, there is significant there with a few franchises and we anticipate them to fund within the first half of 2019, they really are not specific to any channel. I would point out that maybe where we've seen the most momentum is in the sub-advisor channel, we feel that that's the channel where we have grown and we continue to grow and it happens to be where some of our won, but not yet funded is. On the retail side for your question on the retail side, we continue to see great progress with our ETFs with Victory shares as we've noted on -- the growth in that part of our business since we bought into the business in 2015. That is integrated into our platform from a sales perspective, from an operational perspective. So it's really part of our business, it's not a separate business, we've seen really good opportunities there and then I would say for a number of our franchises in our focused asset classes you have small cap -- we feel like our performance has really driven us to an opportunity to grow in the retail side with those products.

And then just a follow-up, I think you had mentioned the USAA board had approved some of your franchises to provide asset management services. Can you quantify how much AUM that has been approved there and how much you're baking in to your accretion guidance related to that and just how you are thinking about the opportunities at longer term for that.

So let me start off and say that any of our franchises participating in a multi-manager product and the removal of one of the sub-advisor is really net into our synergies number. So it will, it's in that $100 million synergy number that we had stated earlier, which is on track and really on time, we don't have a dollar amount and AUM amount, what was approved was the ability to be participate in the multi-manager products, but we don't have a specific dollar amount as we get closer or as we close we will share that with you but that is not final at this point.

Our next question comes from Robert Lee with KBW. Your line is now open.

This is Jeffrey Drezner on for Robert Lee. Thank you for taking my question. I was wondering if you can give us an update on flows for Victory since the quarter end.

We did update for January AUM, we don’t update for flows intra quarter, but I would go back to my prepared remarks to say that the operating environment the flow environment for us is normalized and I will go back to the comments we said about our pipeline and our won but not yet funded accounts.

And then about expected cost or savings in regards to the move to San Antonio and how we can think about that.

I would say couple of things about the relocation, first we reiterate some of the remarks that we made in January press release about the strategic nature of that development. As it pertains to financial consequences I would say a couple things, the operating costs associated with the relocation are effectively baked into 100 million synergy number that we previously disclosed. There is probably an inherent question around tax consequences there as well and what we say right there that we've done some preliminary work. We do see that there is potential positive impact but again its preliminary and likely marginal as taxes at that level our portion is driven from a revenue standpoint.

It's Dave I would add just a few things to that. Victory moving it's headquarter to San Antonio is all about the future. It really is going to allow us to cost-effectively build out our operational infrastructure while also really being able to recruit top talent and maintain our talent. The idea of having a city where we can recruit technology people, operational people is we feel really gives us a leg up on the competition to recruit top talent.

Thanks you that’s helpful. And just one more, is there anything to quantify the pipeline of won but not funded business.

We don't quantify but I would say that we feel like it impactful to our flow picture.

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

I just want to confirm, Dave I think you said which is the sub-advisory changes were already in the synergy estimates.

Correct.

Okay. And then thinking about the M&A pipeline more broadly I think you said it's still active but can you talk about how you are thinking about leverage in the current environment and just having USAA and that direct distribution channel change at all how you think about M&A in other words might you be willing to look at some even smaller managers because you could plug them into that distribution network?

Yes, let me take -- start off with your last part of your question about M&A and the direct channel. In general as I said in my prepared remarks, we are still having a lot of conversations, focused conversations. We feel like we're very well positioned if not the best position in the industry to take advantage of the consolidation that is happening and we can quantensify as we move forward in the future quarters and years. Our platform the integrated multi-boutique as we've spoken to a number of potential partners really is attractive with what as how the industry is shaping out. The direct channel will allow us to potentially look at smaller managers that could be -- maybe encaged in our structure today, we would not look at, it will open up maybe some smaller managers that we would speak to. So I would say yes on that. And as far as the leverage Terry maybe do you want to go through that.

Yes, sure. I think in summary, we would tell you that were comfortable with our overall financing plan and comparable with our leverage levels as we do think it optimize it's optimized for driving shareholder value. And there is a number of reasons that underpin that view. First of all as Dave mentioned earlier, the financing is fully committed and secured so from an execution standpoint, we are ready to go and that's important. I'd also point to the pro forma financial profile of this business, the attributes, the diversification. If you think about it then in the context of the fourth quarter, we would effectively we think performed very well in somewhat stressed environment, which also is important when you think about leverage. The pro forma financials that we will be looking at -- offer a very powerful free cash flow yield, and we combined that with our history of deleveraging and the discipline and prudence that we demonstrated there, we think that there's a nice glide path and trajectory from a deleveraging standpoint. We've been accumulating cash as we go towards the month -- through the months towards closing, which will also contribute. And if you think about some of the numbers that we're broadly giving guidance on around that 420 I mentioned earlier we don’t see a material move in the debt to EBITDA ratio that we had previously disclosed. And again, we'll see how things evolve there is obviously a positive tilt in January that bodes well for the future and as we march towards closing.

Thank you. And I'm showing no further questions at this time. I like to turn the call back over to David Brown for closing remarks.

Thank you. Thank you for taking the time today to participate in our earnings call. If you have any additional questions please don't hesitate to contact us, and we look forward to updating you on our progress in the future. Thank you.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.