Ladies and gentlemen, thank you for standing by, and welcome to the Victory Capital Third Quarter 2019 Earnings Conference Call. At this time, all participants lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference maybe recorded [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Matt Dennis, Chief of Staff and Director of Investor Relations. Please go ahead, sir.

Thank you, Liz. Good morning. Before I turn the call over to David Brown, I would like to note that today's discussion contains forward-looking statements and as such includes certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on specific risk factors that could cause actual results to differ materially from those projected in the forward-looking statements. While recording of this call will be made available by us on our website, any of the 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 also report certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable, related GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call. Both can be accessed on the Investor Relations portion of our website at ir.vcm.com. Now, I will turn the call over to David Brown, Chairman and CEO.

Thanks, Matt. Good morning, and welcome to Victory Capital's third Quarter 2019 Earnings Call. I'm joined today by Michael Policarpo, Our President, Chief Financial and Administrative Officer, as well as Matt Dennis, Chief of Staff and Director of Investor Relations. I'm going to spend a few minutes discussing our business and investment results. I'll also share an update on the integration of USAA Asset Management Company. Then, I will turn it over to Mike who will review our financial results for the quarter. Following our prepared remarks, Mike, Matt, and I will be available to take questions. The business overview begins on Slide 5. The financial and operating results reported last night represent the culmination of the crisp execution of our long-term strategy to profitably grow the business. We the business. We more than doubled the adjusted earnings and expanded margins, reinforcing the power of our unique business model. The total AUM grew from $64.1 billion as of June 30, 2019 $145.8 billion as of the end of the quarter. Long-term net inflows were positive for the second consecutive quarter at $726 million and are $3.3 billion year-to-date Revenue and adjusted net income more than doubled sequentially and adjusted EBITDA margin expanded by 480 basis points to a record high of 44.8% as of the end of the quarter. This marks our third consecutive quarter of meaningful margin expansion. Turning to the deleveraging front, we paid down $63 million of debt during the quarter to end the quarter with a debt balance of $1.037 billion. Subsequent to quarter-end, we've paid down an additional $40 million, bringing our debt balance to $997 million. That's down from $1.1 billion on July 1, 2019. Our run rate net debt leverage ratio is now 2.4 times. Additionally, we've declared a second consecutive quarterly cash…

Thanks, Dave, and good morning. The financial results review begins on slide 15. Total AUM increased to $145.8 billion $145.8 billion as a September 30, 2019. Long-term net flows were positive for the quarter at $726 million. This is our second consecutive quarter of positive net flows, and we are long-term net flow positive year-to-date as a September 30 at $3.3 billion. Revenue for the quarter was $215 million, up 135% from $91.4 million in the second quarter. Revenue was positively impacted by higher average AUM following in the USAA Asset Management Company acquisition and one extra day in the quarter. Adjusted net income with tax benefit increased 139% to $0.91 per share relative to the prior quarter. Adjusted EBITDA margin grew to 44.8% from 40%, or 480 basis points from the prior quarter. We believe this meaningful growth in AUM, revenue and earnings along with the achievement of industry-leading margins demonstrates the power of our integrated multi-boutique model. Our model gives us the flexibility to scale up significantly through acquisitions such as the one that we just completed. At the same time, we have been able to deliver record financial results of driving measurable operating efficiencies. Note that we have been able to achieve these efficiencies while continuing to invest in areas to support our future growth. On the capital management front, we ended the quarter with $1.037 billion of debt outstanding. Subsequent to quarter-end, we reduced our outstanding debt $997 million, bringing our total debt pay-down $103 million since July 1st. We returned $9.1 million to shareholders during the third quarter through a combination of $4.0 million in dividends and $5.1 million of share repurchases. Finally, we have declared a second quarterly cash dividend of $0.05 per share payable on December 26, 2018 to shareholders of record on…

[Operator Instructions]. And our first question is from Chris Shutler from William Blair. Your line is now open.

Hey guys, good morning. Just talk about how much of the synergies actually hit the P&L in the third quarter, I think it was between $75 million and $105 million. It sounds like closer to a $105 million. But if you could get a little more granular there would be great.

Yes, good morning, it's Mike. Yeah, I think, the way we've looked at it is substantially all of the $105 million was out from the beginning of the quarter. So if you look at the margins of 44.8% for the quarter and think about the guidance we gave of 46% kind of fully synergized, you look at that and it's basically baked into the full amount in the third quarter.

Okay, great. And then I guess secondly on the solutions mandates, I know you've had a couple of quarters here of good flows. I know you can't give specific client names, but could you walk us through a couple of examples of how you're going to market with those strategies, why people chose Victory and how we should think about the incremental margins?

Hi, Chris, it's Dave. Good morning. First, let me address where we're winning those mandates. As I said in my prepared remarks, really in a number of different channels, it isn't concentrated into one channel. When you think about the margins on that business, again as we've said in our prepared remarks, they're typically going to be higher than our overall margins for our business. They're selecting our team and our products really because of the performance, because of our capabilities. We enhanced some of those capabilities with the USAA acquisition by bringing on additional people, some additional product set. It has been an area of growth. That being said, we have 6 of our 10 franchises plus the solutions platform is positive -- are positive year-to-date. So although we've highlighted it, although we've seen some recent success, let's not forget about these other asset classes that we're in and some of these other franchises that have really strong investment performance and then are quite competitive as well.

Thank you.

Thank you. Our next question is from Ken Worthington from JPMorgan. Your line is now open.

Great, thank you. I'll try this. I was hoping to get some additional metrics on USAA. If you're opening net new accounts, at what level are you opening them? And are you generating net sales through the USAA distribution channel? I know it's early and there's integration issues. So if not, maybe how does this change as the integration continues? And I guess along these lines, you talked about the 529 plans actually a number of times. Is that where you're seeing kind of the most success, at least initially from the USAA relationship?

Good morning, Ken. It's Dave. Let me start off with the number of accounts and net sales. We have not reported our net new number of accounts, we've not reported actually net sales on the direct channel. What I can tell you is, we really look at this as a building-block approach. Our first objectives were to really lock down the service and what I mean by that is really getting to the getting to the service levels that the members of USAA have -- expect. And a couple of those metrics are average speed to answer. There's a member satisfaction score that they -- that members -- that we score based on surveys. Those are at the levels -- as I said in my prepared remarks, those are at the levels that they were prior to the acquisition. So, we have reproduced what I would say is a world-class service center and call center. That was really important to us. That's the foundation for the channel. We are now pivoting toward really gaining new accounts, gaining new net sales, gaining new members. And as we progress into this quarter, into next year, we think we're going to see the benefits of that because of the foundation we've set. I would also point out that the USAA investment franchise first quarter, which is this quarter, that we've owned that franchise, is net flow positive. So, that's been very positive in a sense that we've grown that franchise to start. We have called out the 529 plan. That is not the only area we're seeing growth. There's a tremendous opportunity to grow that channel. As we've said in the past, there's potentially 12 million members that do not have an investment in our mutual funds or in our 529 plan. We're really just getting started to market to them. And as we've mentioned in the past, it's important for the current members that actually are investing in our products to make sure that we sit down with them, either live or through digital means, to make sure that their portfolios are taken care of. And there's a real opportunity there to grow the wallet share with those existing members. So to really sum it up, we look at that channel as a tremendous growth opportunity. It's going to take some time. It is early, as you've pointed out, but there's a tremendous opportunity there to grow and we really are just starting to begin tapping into that. Okay, great. Thank you very much.

Okay, great. Thank you very much.

Thank you. Our next question is from Mike Carrier from Bank of America. Your line is now open.

Hi guys, this is actually Shaun Calnan on for Mike. Based on the performance numbers on Slide 7, it appears USAA's non-fixed income AUM is underperforming. Can you talk about some of the ways you're trying to improve this?

Good morning, Shaun. You're correct in what you have pointed out. I would say -- I wouldn't use the term underperforming. There is really some room for opportunity there. We have taken a look at those strategies and have actively made some changes to the sub-advisors. We are more actively managing those portfolios. We feel pretty confident over the long term that we'll improve upon those. And as we move through the quarters and years, I think you'll start to see some of the positive performance starting to hit.

Okay, thanks. And then on the waiving of the fulcrum fees, do you guys have a revenue or a fee rate impact that you could give us on that?

Sure, it's Mike. Yeah, the waiver of the fulcrum fees was in place really for the first year post the transaction. So beginning in July of 2020 the fulcrum fees on certain USAA mutual funds will begin to accrue. We've estimated that be between 1 basis point and 2 basis points at the firm level.

Okay, thanks guys.

Thank you. Our next question is from Alex Blostein from Goldman Sachs. Your line is now open.

Hey, good morning guys. Question around Schwab's acquisition of USAA brokerage business. I know you guys gave some overlaps on the money market funds. But I guess taking a step back, can you just kind of give us a bigger picture overlap between USAA AUM that you've acquired versus the brokerage business that Schwab's acquired and kind of help us think about any other areas of risks from AUM retention as those assets migrate over?

Good morning, Alex. It's Dave. Let me take a step back on the brokerage channel -- the USAA brokerage channel. First, that has historically and today been an open architecture environment. All of the investments we have on that channel have been self-directed into the funds, so members have actively directed into the mutual funds. I think they've placed some value on the brand, and it's really important to note that today, and when Schwab completes their acquisition of the USAA brokerage channel -- or brokerage business, that we are paying an arm's length revenue share. So, we look at that channel really as not any more risk than any other assets we have for any client that we manage. We compete every day in an open architecture environment. We have great product, great investment performance, great client service. And I'd actually say the brand really allows some of those assets potentially to be even stickier. Some of those assets potentially have tax gains. So, there is some inertia in moving those out. So, we don't look at those as any more risk. And really, there's been a lot of discussion about this. This acquisition is so much more than the brokerage channel. It's a tremendous opportunity for our business. It's transformational and it's opened up a great new channel for us. And then I would say, lastly we think Schwab's success on the brokerage side, some of that will actually accrue to us through some of the members investing in USAA mutual funds or the 529 plan. We don't look at the Schwab acquisition of the brokerage channel as a headwind. We actually look at it as a tailwind.

Got it. Thanks for that. And then the second question just around capital priorities, when we look at the share price today and you kind of look at the free cash flow yield conversion you guys highlighted on one of the slides, it looks like the stock is trading with over 20% free cash flow yield. So maybe talk a little bit about the appetite for buybacks from here versus the pace for deleveraging and obviously you highlighted the M&A pipeline remains quite robust. So maybe a comment on what the probability of some of the deals coming through in the next kind of, call it, 12 months or so. Thanks.

So, it's Dave. We are looking at our capital management policy really to align with our overall strategy. We want to create flexibility and right now, our priorities are to delever. About 90% of our free cash flow has gone and probably will go toward delevering. We do have a small buyback program. We do have a small dividend program. We view these as ancillary parts to our strategy. We look at the buyback as a way to manage shares -- outstanding shares. So, we are going to focus on delevering. Gets to the second part of your question around M&A as I said in my prepared remarks, it is extremely busy for us and constructive. We are getting more inbound calls than we ever have. And I think what is starting to come to us is some of the opportunities where we are solving a number of issues for smaller businesses or businesses of our size where we're able to provide a world-class operating platform, allow the sellers to keep their brands, to keep their investment philosophy, develop their own portfolios and to plug into a really effective distribution network. And I think because of that, we're getting more opportunities and we think that we're going to have the opportunity to continue to do transformational acquisitions. As far as timing, we really don't have any guidance on that. If you go back and look historically, since our MBO since our MBO we've probably averaged about one transaction a year or so. I think that's a good guidance as we've guided before, but there is really no exact way to predict on when the next transaction would occur.

Okay, thanks very much.

Thank you. Our next question is from Randy Binner from B Riley. Your line is now open.

Good morning. I have a little bit of a higher level question. And it goes back to Slide 18 and just the pace of kind of the headline feed AUM decline. Understanding that it was a solid quarter and there's a lot of scale in the business, how should we expect -- based on what you know, now that you have better visibility on the USAA, assets being in-house and how solutions in fixed income production is for progressing, how should we think about that pace of sequential fee decline? I mean is it good for people to play in on a couple of basis points a quarter, just to kind of create a level? So, I'd just be interested to think about that cadence.

Good morning, Randy. It really -- as Mike said, it really depends on asset mix, client mix and a number of other factors. If we could predict where clients were going to allocate assets in a portfolio it'd be much easier. I don't think fees are increasing in the industry, as we all know. But that being said, the issue of some of our fees declining, some of it has been around the waiver of a fulcrum fee, some of it has been around the asset mix and the channel mix. Depending on how those things play out, you could see some erosion down. But that being said, there is also another scenario which could even be just as likely, that the fees stay flat. So, we really don't have any guidance on that going forward but the fee erosion is not around discounting. But what we're focused on as an organization is really around the margins. You can see this quarter the expansion of the margins by 480 basis points in a quarter where we have some slight fee erosion. It really speaks to our model. What we are confident on is the guidance of the 46% margin. And I think when we look at new products, when we look at channels, when we look at clients, we were looking at the margin threshold and not necessarily on the fee rates.

All right, that's helpful. Thank you.

Thank you. [Operator Instructions]. Our next question is from Kenneth Lee from RBC. Your line is now open.

Thanks for taking my question. In the past, you've talked about having certain focused investment categories where you could potentially see faster growth in terms of organic growth. And obviously, with the USAA Asset Management acquisition you've certainly added a number of interesting products target day, target risk, active fixed income. Just at a high level, which categories -- which asset categories do you think will be the ones where you can see potentially the highest growth opportunities looking forward across the portfolio right now?

Good morning. As I said earlier -- it's Dave. As I said earlier, we do have 6 of our 10 franchises plus our solutions platform positive year-to-date. So, it has been in a number of different asset classes. I think what you're seeing today and what we've seen this quarter is some investors are looking at where the markets are at all-time highs and they're allocating new assets into fixed income, into solutions. Some have pulled back on some of our focused asset classes -- what we've historically classified as focused asset classes, U.S. Small Cap, Mid Cap, international emerging markets. Some of the growth is really going to come from where clients feel they want to allocate. What's important to us is that we have really competitive product in the asset classes where we're less likely to be disintermediative by passive, and that's what we think we have across our portfolio of franchises where we have great U.S. Small Cap managers, U.S. Mid Cap managers, international equity, emerging markets equity and then solutions in active fixed income. Part of the USAA transaction, one of the great benefits, was the diversification of the lineup of products that we have. We now have really competitive products and solutions in active fixed income. So when clients decide to allocate there based on where we are in the market cycle, we'll be there to gather assets and continue to be growing.

Very helpful. Thank you very much.

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

Thank you for your time this morning. Tomorrow, we will be in New York attending the Bank of America Merrill Lynch Conference and will be back in New York next month at the Goldman Sachs Financial Services Conference. We look forward to seeing some of you at those events. And as always, if you have any additional questions please don't hesitate to contact Matt. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.