Good morning. My name is Brian. I will 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, www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. [Operator Instructions]. I would now turn the conference over to your host, Jeanne Hess.

Thank you 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 third quarter of 2017. 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, and as such are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's earnings release and discussed in our annual report on Form 10-K and quarterly report on Form 10-Q and other SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. 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. Now I would like to turn the call over to our President and CEO George Aylward. George?

Thank you, Jeanne, and good morning, everyone. I will start today by providing an overview of the results which reflect the first full quarter of the combined business following the acquisition of RidgeWorth Investments that closed in June before turning it over to Mike to go into detail on the financial results. We are pleased with the results of the quarter, so let me review them. And I will begin with assets under management and flows. Long-term AUM increased 2.5% sequentially to $87.1 billion, which resulted from strong market performance and positive net flows. Total assets, which include liquidity strategies, ended the period at $90.6 billion. Total sales were $4.6 billion, an increase of 32% sequentially, reflecting the first full quarter of results of the combined business and the attractiveness of our diverse product offering. Total net flows were a positive $0.2 billion in the quarter, an improvement from net outflows of $0.2 billion in the prior quarter as positive flows in structured products, retail separate accounts, and ETFs more than offset net outflows in institutional. The positive flows in structured products reflect the August issuance of a $500 million CLO managed by Seix Investment Advisors. In retail separate accounts, the quality-oriented equity strategies offered by Kayne Anderson Rudnick added $0.3 billion of flows during the quarter. On a year-to-date basis, retail separate account flows were positive $0.8 billion, an increase of 64% over the prior-year period, reflecting the solid long-term performance of the strategies at Kayne. We believe the growth outlook in retail separate accounts remains strong. ETFs continued to generate positive flows in the quarter, reflecting sales in existing strategies. Two offerings in this category, we recently announced the introduction of a global factor opportunity, DTF, and have several differentiated products in development. Relatively flat mutual fund net…

Thank you, George. Good morning, everyone. Starting on slide 7, assets under management. We ended the quarter with long-term assets of $87.1 billion, which reflects increases of 2.5% and 87% from the prior quarter and prior-year quarter, respectively, the sequential increase for flex market appreciation of $2.1 billion, and positive net flows of $0.2 billion, partially offset by the other activity of $0.4 billion, which includes dividend distributions. The change from the prior year reflects the assets from the acquisition, market appreciation of $5.6 billion, and positive net flows. Our long-term AUM continues to be well diversified by product type, with $42.4 billion in open-end funds, $20.6 billion in institutional, $13.1 billion of retail separate accounts, $6.7 billion in closed-end funds, and $3.4 billion of structured products. In terms of diversification, I would also note that within equity, 37% is domestic with approximately 16% in small cap, 16% in large cap, and 5% in mid-cap. Non-US equity was 12%, with 9% in emerging markets and 3% in developed. Within fixed income, approximately 20% is leveraged finance, 16% is investment-grade, and 10% multisector. And alternatives were 5%. Turning to slide 8, asset flows. Total sales were $4.6 billion, an increase of $1.1 billion or 32% sequentially. Total sales increased from the prior-year quarter by 48% or $1.5 billion on higher sales in open-end funds, structured products, retail separate accounts, and ETFs. Net flows were positive $0.2 billion in the quarter, reflecting net inflows of $0.4 billion in structured products, $0.2 billion in retail separate accounts, and $0.1 billion in ETFs, partially offset by institutional net outflows of $0.5 billion. The level of redemptions we experienced in the quarter is in line with our expectations, given the larger institutional business. With respect to mutual funds, we were net flow neutral in the…

Thanks, Mike. So that concludes our prepared remarks. Now we will take your questions. Brian, can you open up the lines, please?

[Operator Instructions]. Our first question will come from the line of Ari Ghosh with Credit Suisse. Please proceed.

Thanks, good morning. It's actually Craig Siegenthaler filling in for Ari today. So first, just on the fee rate, given the new AUM mix with the RidgeWorth transaction in there and also redemptions and lower fee institutional accounts, any thoughts on the forward blended fee rate as we walk into 2018?

I'll let Mike get into the detail, but I think Mike sort of focused in on how to think about the open-end fee rate in terms of the fact we came in sort of in the midpoint of the range that we had previously given. And that with some of the activities that will be completed before the end of the fourth quarter that we would now expect that to be closer to the higher end of that range. And then with the change in the mix of some of the liquidity assets, we've given some specifics around that bucket. Mike, how would you do it in the blended?

Yes, I think we opened it up in detail to ensure you have transparency on a product-by-product basis. We also pointed out that during this quarter, there was an $800,000 incentive fee that impacted the rate by 0.4 basis points. So as George indicated, there's $42 billion of open-end fund assets and we gave the impact on that fee rate, where it was 47.9 basis points this quarter. We would expect it to move towards the higher end of the range. And then with respect to the other categories, I think the result this quarter is as good as any, all else being equal, for your models.

Yes, just one point and I think it was part of your question. In terms of right now the equity markets so far in October have moved up. Our higher fee products are the more equity products. So there could be some impact depending upon what that trajectory is, i.e. if the AUM for our higher fee products continues to go up in line with the market, that could have some implications on the fee rate. I don't believe that's in the numbers that we are sort of speaking to. We are sort of giving you all else being equal. But I think you are correct in noting that some of our inflows are in higher fee products. And some of the outflows are in lower fee products and the markets are also been moving up on our higher fee AUM products.

Got it. And then just as my follow-up on capital management, any early thoughts on 2018 as you rebuild excess capital? Kind of wanted to see if there is a preference for buyback or maybe just reducing net debt. And this may be dependent on where the stock price is next year, too.

It's a great question. And as I indicated in our remarks, we always evaluate all of those options. And at any point in time, given several factors that you mentioned -- our stock price, our alternatives for capital -- we will use any of those buckets at the right time. So we did do a stock repurchase, even though we are, to your point, still rebuilding capital after the acquisition. Mike and I and everyone here felt very strongly that we wanted to do a repurchase, given the quarter numbers. So we will always continue to balance those. So can't give you specific guidance in terms of what you might expect, other than we do evaluate all those alternatives, given the circumstances.

Thanks, George. Appreciate you taking my questions.

Our next question will come from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed.

Michael, maybe first one, just on the expenses and the margin, given that you are about through with the synergies as we head into 2018, just trying to get a sense with the new platform and the model how should we think about incremental margins going forward, particularly if we are just in a normal market backdrop, you are putting up some positive flows. Just given the scale in the business, just wanted to try to get some sense post synergies how to think about maybe potential operating leverage in the model.

Sure. And one thing that we have been trying to be very transparent on is given where we are in terms of the transaction and the integration, we are still sort of level-setting that operating and variable cost structure. So as we noted, we did the fund reorganization in July. We actually did activities related to other stuff in the fourth quarter. You saw the margin expansion from the 28.8% to -- by 500 basis points, and we are 80% of the synergies. So we are still settling into what that number would be in terms of all else being equal. But I think you can get a sense from given where we are at 33.8% where that would go. So again, that sort of just gets all of our cost structures and things in place in terms of incremental margin capture on a going-forward basis. So right now, there's been a lot of little transitionary things going on. Basically, we are halfway through the fund integration, because half of it was in July, and a lot of it was done in October. So you will see all that dust settle, which is why we are pointing towards the first quarter. Mike, do you want to drill into that?

Yes. Good morning, Michael. And the 34% margin that we achieved -- not only 500-basis-point incremental from the prior quarter, it was also up 180 basis points from the June-only result that we talked about last quarter, which was the first full month operating the combined Company. So we are pleased with that 180-basis-point expansion. And we do think a 34% margin is appropriate, given just the state of the industry and how our model is positioned. So we are pleased with that. But incremental margin, specifically to your question, it will vary depending on the nature of the AUM and revenue growth. As you know AUM growth that comes from independent subadvised type of products tends to have a higher incremental margin and will affect that as well. So George outlined it well, we are pleased with where the margin is here. And we still have additional synergies that we are layering in in the fourth quarter as we move into 2018.

Okay, thanks. Then George, maybe just as a follow-up. I know there's a ton of different trends out there in the industry that are impacting the flow profile for every firm. But now with the two firms combined, just want to get some sense. When you are looking at the distribution platforms, the number of products that you have on, what kind of Virtus did well versus RidgeWorth, just maybe where are you in that? Maybe like the potential opportunity. And then you mentioned on the institutional side some of the issues around when you integrate and you go through a merger, settling down. So any maybe update on like the pipeline or the amount of competitions that you are in to see if that could potentially shift over the next couple quarters.

Sure. So on the first part, I mean, what I would always start with is we are very happy that we have a very diverse set of product offerings and that we are not highly dependent on any one single strategy or one single approach to investing. So as we highlighted in our remarks, we had strength in small cap, core and growth equities, in multisector short-term bond funds, in emerging market debt, and in loan funds. So with the RidgeWorth acquisition, we were diverse before the RidgeWorth transaction. With the RidgeWorth transaction and the new affiliates, we have a nice diversity so that we sort of feel comfortable that even as preferences come and go that we will still have those opportunities. Where we did have some weakness is in the mutual funds. As we pointed out, it was really in domestic equity. And if you think through the quarter, it wasn't a great quarter for active management on large cap domestic equity. But luckily we had all those other strategies. So I would really start out with the fundamental point of our model is to have that diversity of strategies for different cycles and different preferences. So as we see changes in that, we do see that we have very other stronger products that may be more attractive in a very different market environment. We generally have more risk-averse strategies. We have high-quality equity managers. We have some risk management strategies. So in negative markets, we actually generally would feel that we would have some additional opportunities. Going outside of the strategies and the asset classes, we continue to think that retail separate accounts is an opportunity. We do think that intermediaries are still interested in using those strategies and some of the efficiencies on the tax side…

Our next question will come from the line of Andrew Disdier with Sandler O'Neill. Please proceed.

So first, on the buyback, so looked like you said 66,000-plus this quarter. Looks like there's about 130,000 left in the current authorization. So first, what was the timing during the quarter and how did you think about it? Was it opportunistic, George? I know you mentioned something on quarterly numbers. And then two, is it safe to presume that we will see some type of reauthorization going forward, similar to the past?

Yes, on the second piece, as I said earlier and as I have said over many years and Mike has said as well, returning capital to shareholders is one of the fundamental elements of our strategy. So we would make sure that we are not precluded from doing that. So I would sort of start with that. And I struggle with using the word opportunistic. The way I would describe it is Mike and I spend a considerable amount of time thinking about our capital, thinking about the various and alternative uses of that capital. And we closely watch the stock price. So we think about it. We have a philosophy towards it. I think we have communicated with transparency in terms of that we do believe we need to have adequate capital to protect the business. We need to continue to grow and invest in the business. But returning capital is one of the ways that we can deliver value to shareholders. And as we have shown, I think, as you know, a lot over the last few years, at a point in time where we think that is something we will do, we will do it. So I don't know if that is helpful, but hopefully that gives you a little bit more color.

No, it does. Absolutely, thanks. On the institutional side, just a little point of clarification. Understand that now this is kind of a fair run rate to look at on the gross redemption side. So is it more of the actual gross redemption rate? I'm calculating something in 17%. Or is it more an absolute dollar amount?

Yes, I think the rate is appropriate, the way to calculate it.

Yes, I mean, rates are usually more helpful so you don't -- getting caught up in in dollars. It can get confusing as the book of business grows in size. So this is the first quarter that we have a full quarter of the combined business, so it's a much larger asset base and really thinking about it in terms of the rate. So that is the rate that we think is sort of reasonable, given the nature of our strategies and the level of the strategies. It is a sales rate that is a little lower than we would like to see, but fully understandable, given the fact that we just went through a change control transaction for some of our new affiliates.

Our next question will come from the line of Jeremy Campbell with Barclays. Please proceed.

Just a quick follow-up on the institutional side again. When you talk about the impact on the quarter, it seems like more of a lack of wins than anything else. But you mentioned the pipeline was a pretty robust. When you look at the pipeline, was there stuff in there that just got paused because of the deal and maybe a little bit elongated in the timeline of the due diligence process? Or is it more filling up from new contacts and starting more at square one?

Yes, and I don't want to overcomplicate it. And again, I'm going to start with the basic that institutional is always generally very lumpy. And while our institutional business has gotten significantly larger as a result of the transaction with RidgeWorth, it still not a fully mature and large institutional book of business. So you really have to think about it in that context. And that sort of influences how we look at the reasonableness of a redemption rate or a sales rate. It's really in the context of the size of the book and the nature of the strategies within the book and then what's going on in the market for those strategies. What we really were trying to signal in terms of the sales rate and the fact that it's not yet at the level of sales rate that we would expect is really just the very traditional impact of when you are doing work in the institutional business and you are communicating with potential clients anywhere along the continuum of the pipeline, when you are in that process of closing on a transaction, particularly that is a change of control, that does create a pause in certain activities. And it happens in every transaction. This is nothing to do with us specifically. And that also it's very important that your resources are very focused on your existing clients. So that again is what occurred a few months ago as we were closing on the transaction. So now I think what we are seeing and I alluded to as well is we are introducing some of our new resources to some of our new strategies. They are starting to make those introductions in different opportunities. So it's really the beginnings of building up of additional opportunities as a result of the transaction.

Got it. And then just another one. I know you guys want to return capital to shareholders and you think about that a lot. You talked about looking at the stock price. But I guess bigger picture, how do you evaluate wanting to look and buy back stock when you think it is cheap versus given the size and the relatively limited number of shares outstanding not wanting to reduce liquidity in the stock out there?

It's an excellent point. I didn't get into that piece of it, but as we think through stock repurchases, we are fully aware of the level of activity and the volume in our stock. And that is a factor that we believe has had an impact. So we do weigh that because at a certain level, there is just not enough shares in the market other than adjusting the price. So we do try to weigh all of those factors. So that will absolutely influence at any point in time whether we decide either to do the repurchases or not. Or what level to do the repurchases is the other way to think about it.

Our next question will come from the line of Surinder Thind with Jefferies. Please proceed.

Just kind of a bigger picture question related to capital return. How are you guys thinking about the trade-off between maybe being more aggressive with the debt paydown than your covenants versus the share repurchase activity? In the sense that maybe there could be a future benefit to being less levered from an M&A perspective?

Well, I mean, again, I think that's one of the factors that we think about, the alternative uses of capital for us. We are obviously paying down debt, launching new or seeding new products or the return of -- returning capital either in the form of a repurchase or dividends. So we look through all of those and the different alternatives at any point in time. So with the debt, we look at the cost of debt and all that. Mike, do you want to?

Yes, I mean, we talked about the net debt to EBITDA level at the end of the quarter at 0.9 times, which we think is a reasonable level of debt, given the strength and diversity of the AUM and cash flows that we talked about. So we will continue to monitor appropriate uses of capital, servicing the debt being one of them. And certainly there are specific terms in the financing arrangement around the excess cash flow suite that will require debt paydowns. But it is just one of the various things we will evaluate in terms of prioritizing our capital.

I guess maybe I can ask another way. Why not be more aggressive with debt paydown in the sense that we are maybe towards the later stages of a bull market. So being less levered might actually be beneficial? Help me through that thinking.

Well, again, it's a capital allocation analysis. I think the level of debt and the rate of the debt financing is very reasonable. And just a simple evaluation of the $7.5 million used to buy back stock this period we felt was a better use of capital dollars to shareholders than paying down 6.3% debt. So when you have a specific allocation of capital decision, it certainly sometimes comes down to what's the better return for your shareholders. And certainly we felt in this instance it was to buy back certain stock. But again, there are other capital priorities. As we indicated, we have the flexibility to continue to invest in the business. You saw that we closed on the CLO issuance during this quarter, so there's capital allocated to that. We will balance our capital, and servicing debt is only one of several priorities and assessments we make.

So with a different set of opportunities, we may have made a different decision. But again, I think Mike articulated, as we look at those various alternatives, the repurchase of the stock was the one that we were comfortable was the right for the $7.5 million that we used for that.

Fair enough. And then maybe turning towards just talking about investing back in the business. If we were to look out a few years, can you talk a little bit about the ETF strategy and how you see that evolving maybe relative to growth in the other parts of the business? Is there the potential to be maybe more aggressive within the ETF space? Or are we at a point where the way that maybe you guys are positioned at, it is much more of a pick a product here, pick a product there type of environment?

Yes, the way I would think about the ETF business, we have spent a lot of time on that. Because if you look through the product introductions we have had over the last year or two, you will see very little in terms of open-end traditional mutual funds and more really in terms of ETFs and other -- CLOs and other types of structures. And that whole product strategy there has been really refined and enhanced and you saw that with some of the recent product that we recently announced and launched. So a lot of the activity since we closed on that transaction, whatever it was, four years ago or whatever has been really to refine that product set and that opportunity. How do we differentiate ourselves in the ETF space, in a space that's dominated by certain very large successful low-cost beta providers. So we sort of feel good about the different products we have created and the access that we are now being able to achieve on that. So that is why I sort of indicated that we continue to have a lot of interesting products in development that we are working on and feel really good about that part of the business. Then separate from that, I also -- non-US is an area where we have a couple of UCITS. And that is an area where we have been building out track records and opportunities. And I think as I mentioned on a previous call, the RidgeWorth transaction gave us a little bit of non-US distribution capabilities. So we see great growth opportunities are possible in ETFs, in offshore. And we continue to see it in the areas like the retail separate accounts as well as even in open-end mutual funds. As an active manager, it's been a tough environment. Ultimately, that will change. We feel pretty good about where we are relative in that space, but there's a lot of opportunities there. But no, there is really a strategy behind each of those product categories and distribution plans. We feel pretty good about where we are.

Got it. And maybe can you clarify or better define when you say you have a lot of products in development, are we -- or is that like a 5 to 10 number? How should we be thinking about that?

I wouldn't give a specific number. And I don't mean to say a lot. We have very interesting differentiated products in development. And the way -- in a lot of these areas, you come up with product ideas and some of them of fully vet out and they get launched. And then some of them you determine aren't competitive. But I feel -- again, we announced a recent product just a week ago, week and a half ago. And I feel pretty good about some of the stuff that we are continuing to work on it. Again, for us, it's how do we differentiate ourselves in that space and create opportunities. So more to come on that as we introduce product.

And then maybe one quick follow-up modeling question. Earlier, Michael, I missed the guidance around other operating expenses. Could you please reiterate that?

I don't know if it was necessarily guidance. We just indicated that the $16.1 million of other operating expenses was a reasonable level going forward.

Our next question will come from the line of Andrew Disdier with Sandler O'Neill. Please proceed.

Thanks for taking the follow-up. Just another modeling question. On the synergies, I know most of the synergies should have been incurred more on the operational side of the business. But just wanted to see if there were any comp-related items or -- I know we talked about it last time. Just want to make sure it held consistent this quarter.

Yes, Andrew, if you recall, we indicated all the employment-related synergies were realized by the end of the second quarter. So the remainings are coming from areas other than employment, which are the other operating expense ROE and the expenses on the fund service consolidation that we alluded to. So again, by the end of the year, we do expect to have the synergies fully implemented and will be in the run rate moving into 2018.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Aylward.

Thank you. I just want to thank everyone for joining us today and we certainly encourage you to give us a call if you have any other further questions. Thank you very much.

That concludes today's teleconference. Thank you for participating. You may now disconnect.