Good morning. My name is Kevin, and 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 in the Investor Relations section of the Virtus website, www.virtus.com. This call also being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer period and instructions will follow at that time.I will now turn the conference to your host, Sean Rourke.

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 2019. Our speakers today are George Aylward, President and CEO of Virtus; and Mike Angerthal, Chief Financial Officer. Following the prepared remarks we will have a Q&A period.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 new release and discussed in our 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, we use 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 the GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today’s new release, which is available on our website.Now I would like to turn the call over to George. George?

Thank you, Sean. Good morning, everyone. We are pleased with our third quarter financial results and operating performance, which were characterized by our highest level of earnings per share as adjusted and increase in our operating margin, meaningful growth in revenue, continued excellent investment performance and consistent stock repurchases and debt reduction. And while overall net flows were negative primarily due to an institutional redemption, each of our other products delivered improved net flows on a sequential basis with positive net flows from retail separate accounts and ETFs and open-end funds improving to their best net flow results in a year.Regarding the net outflows, as I indicated, they were largely in institutional primarily due to $0.9 billion redemption by a single client phenomenally investing in bank loans. As we've said previously, institutional is an uneven business, but we like the momentum we see building and continue to invest in growing the business.So let me turn to our results for the quarter. Long-term assets under management of $102.8 billion were down modestly on a sequential basis as market depreciation was offset by net outflows. Total assets which include liquidity strategies ended the period at $104.1 billion. Total sales of $4.8 billion decreased 7% from the second quarter which included a large institutional sub advisory mandate. Excluding that win in the prior period, sales were up 13% due to higher sales of retail separate accounts and open-end funds which included the model wins and reallocations we mentioned on the second quarter call.Net outflows of $1.1 billion prepared with modestly positive flows in the prior quarter. Other than institutional, each of our product areas generated a sequential improvement and net flows with significant improvement in funds and positive net flows in retail separate accounts in ETS. Looking in each product, retail separate accounts…

Thank you, George. Good morning, everyone. Starting with our results on Slide 7, assets under management. At September 30th, long-term assets were $102.8 billion, down modestly from $103.3 billion at June 30th. The sequential decline reflected $1 billion of market appreciation that was more than offset by net outflows, primarily in institutional accounts. So total assets were relatively flat with the prior quarter. Domestic mid-cap strategies demonstrated solid growth, up $0.7 billion or 7% during the period, partially offsetting the impact of continued negative sentiment and leveraged finance strategies which declined $1.2 billion or 9%.Domestic mid-cap AUM increased 29% over the past year and now represents 20% of domestic equity AUM, up from 16% at September 30th, 2019. Despite several funds being soft closed, domestic small cap assets have grown modestly due to strong investment performance. Our asset mix by product type remains diversified and essentially stable with the prior quarter.Turning to Slide 8, asset flows. Net outflows of $1.1 billion in the third quarter were due almost entirely to the loss of one institutional client compared with modestly positive inflows in the second quarter. Open-end fund flows were negative due to bank loans, but improved meaningfully to $0.2 billion from $0.7 billion in the second quarter due to an increase in emerging market flows. Retail separate accounts and ETFs continued to generate positive flows.Total sales were $4.8 billion, a sequential decline of 7% as stronger open-end funds and retail separate account sales were more than offset by a decline in institutional. Fund sales of $3 billion increased $0.5 billion or 19% due to higher sales of emerging markets and domestic mid-cap funds, primarily due to model flows. Retail separate account sales of $0.8 billion were up 12% sequentially with growth in both the private client and intermediary sold channels.…

Thanks Mike. So now take your questions. Kevin, can you open up the lines please.

[Operator Instructions]Our first question comes from Jeremy Campbell of Barclays.

Hey, thanks. Just question about the open-end funds. I mean you guys still have nearly like $5 billion in leveraged finance funds inside the open end area. Obviously, it remains out of favor. I think you guys called it out as a key driver of your drag on your flow profile on the open end class. So I'm just hoping you could help us with the year-to-date cadence of outflows in that bucket and the bank loan. Has it kind of slowed? Is it accelerating? Anything that might help us think through how much of a drag this asset class will be on the full profile going forward be helpful.

Yes. Generally in that asset class bank loans are either, they vary greatly with expectations on interest rates and whether they're increasing or decreasing. So with the expectations that interest rates will not be going up that sector --that asset class has been out of favor since pretty much the fourth quarter of last year maybe a little before that. But in terms of the cadence, I would say generally flat in terms of the level on the open end fund side. And again, I think ultimately, they'll be inclusion by the market of sort of how it feels about that asset class. Because they shall generate very good returns and they fit well into a diversified portfolio.

Got it. And then I guess just one on the capital side as a follow up. I mean you guys have successfully de-levered here. You have dry powder and a flexible balance sheet at this point. Just kind of wondering what the M&A landscape looks like right now. And whether, there might be something accretive out there that might be more public share friendly than using capital to repurchase your stock when it already has kind of a pretty limited float here at this point.

Yes. No, it's a good question. I mean we continue to evaluate all sorts of opportunities. The activity in the M&A market. There is activity going on, I think our model lends itself in many ways to that type of activity while we've always said our long-term growth strategy is not contingent upon M&A. So to the extent that we identify opportunities that we think are the highest and best use of capital absolutely do consider those. We're very disciplined about how we approach it. So we haven't announced anything since SG&A transaction, but continue to look at that as one of the many opportunities we have because as you point out we're generating consistent strong cash flows. We're at a lower leverage or below one turn or a half turn of net debt in terms of that and simultaneously we've been consistently buying back our shares even though as you correctly point out the float is not optimal.It will improve in February of 2020 which we look forward to, but we certainly do consider any of those alternatives that could be accretive and helpful in terms of the return to shareholders.

Our next question comes from Michael Carrier with Bank of America.

Good morning and thanks for taking the questions. Maybe first one just on I guess from a product or flow outlook. I mean it seems like the closed end fund market has gotten a bit more active. So just more curious just given that you have some presence in that part of the market, if you are seeing more dialogs for some potential product launches.

Yes, no. What we like the product line of close end fund and as you point out, we have multiple close end funds managed with several of our affiliates. And there was a prolonged period where that product structure was sort of out of favor. We're very happy to see the increased activities. We look very closely at all of the issuances. We have several strategies that clearly lend themselves to that structure. So we do view that once again as a great opportunity and certainly will evaluate if there's an appropriate structure for us to introduce. We follow closely the evolution of what the structuring is on the newer term trust types of structures et cetera.And again, we feel between several of our affiliates we have strategies that would be attractive and we maintain a very active dialogue with the issuers and underwriters of those products.

Okay. That's helpful. And then just as a follow-up on the fee rate side. You guys have done a good job in sort of maintaining or even increasing just given some of the products that you offer. And where you're seeing the demand for inflows versus outflows. Recently you've had some of the distribution platforms change some of those pricing dynamics most recently with one of the platforms looking at SMAs and changing that pricing dynamic. So just more curious in terms of how your products are lining up. What you're seeing from the distribution platforms? Anything changing meaningfully and how you think your products stack up on the platforms?

Sure. So some background, so we have actually had a trend period of an increasing average fee rate rather than a decreasing fee rate which is much more common in industry, and really what drives that is our view is being driven a lot by just consistently strong performance and particularly in areas that are more capacity constrained and less susceptible to competition from passive types of strategies. So our fee rate is going up because some of our very strong performing product that is less challenged by passive challenges has been raising assets and includes capacity constrained products, as well as those that are a little less capacity constrained.So that has been driving and that is really where a lot of our core strengths are on some of the more capacity constrained or at least less likely to be competed with passive strategies, some more complex strategies, multi-sector strategies et cetera. And in terms of the some of the stuff you've been seeing in terms of the press in terms of where some of the intermediaries may be going with their fee levels. Again, we have a very diverse business with a lot of our managers that do make themselves available through those intermediaries.Again a lot of those strategies are some of our more capacity constrained strategies, where we currently have more demand than we actually have capacity and we feel very good about how they're priced and what the opportunity strategies for those products. So we actually feel very positive from a product positioning standpoint that our set of products and their relative performance gives us a good opportunity in this environment and the environment that may emerge.

Our next question comes from Sumeet Mody with Sandler O'Neill

Thanks. Good morning. One for me just I guess stepping back on high-level looking at the strategy medium to long term. I mean how do you feel about the kind of geographical maybe channel mix, maybe ask that class mix. Are there certain areas that look appealing that you feel you are on under penetrated maybe emerging markets alternatives? And do you have any kind of plan for the mechanism for growth within those asset classes as well.

Sure. Well, I say the area that we -- we focus a lot in terms of the diversification of our business and continue to look in opportunities to increase that diversification, right. So you've seen that manifest itself who are expansion into ETS, our expansion on the usage side. We have been over the last few years investing in building out the institutional channel and particularly the non-US institutional channel. So we continue to think that those are great opportunities for us. While there's still a lot of opportunities here in the US market, our managers have not had much penetration outside the US as they're incredibly compelling investment performance would allow.So we see that as an area, you recall from the second quarter we refer to a European sub advisory mandate, so we think there's a great opportunity. So our focus really has been on growing the institutional, growing the institutional in the non-US. We have solely built out a product suite of usages. I think we're up to five now at this point, all of whom have great performance now at the three and five-year record. So we see those as opportunities for us to leverage those strong capabilities and further diversify our business, which doesn't mean we'll spend less time and effort in the US, retail space of the US institutional space, it's just another opportunity and where we're putting our efforts in terms of future growth.

Our next question comes from Alex Blostein with Goldman Sachs.

Hi. This is Sheriq filling in for Alex. I had a question on the retail separate accounts. Can you give us some color as to what's driving the inflows over here and which product are you seeing like the most demand in a separate accounts business?

Sure. And we've been very happy with the retail separate accounts. As I noted in remarks, 15 consecutive quarters of positive flows in that category. And I think you're seeing that in terms of the industry is one of the opportunities for active managers to really add a lot of value in terms of a well-diversified portfolio. So we're pleased to partner with a multitude of the intermediaries that we partner with to offer a variety of strategies. A lot of our growth has been as we sort of noted in SMID and in small cap area, but we do offer other capabilities as well.And in addition to the areas that I mentioned on the previous question in terms of areas of growth, we continue-- we've seen retail separate accounts is a big area of growth and that is continues to be one where we think we have many compelling investment strategies in terms of continuing to grow in that channel.

Understood and just to follow-up on the expenses. Any color on the 2020 outlook for the expenses? I mean Mike gave good guidance for the next quarter, but if you can just provide as to how you are thinking now for the 2020 expenses?

Mike?

Yes. Thanks. We typically --we'll update you as appropriate when elements of the portfolio or the business change. We talked about the fourth quarter and both the employment expense ratio sort of tracking using the third quarter level as an appropriate position for modeling, all else being equal other operating expenses, and we've talked about the last couple of quarters 18.1 being appropriate. And certainly those levels will be dictated by market conditions. One of the things we've seen is incremental margins in the 50% type of range and that's something we continue to believe is an appropriate expectation.One thing from modeling that you'll recall first quarter does have seasonal items. You have the payroll tax items and that come through in the first quarter that'll be an expectation for modeling as well. So hopefully that's enough to kind of frame the beginnings of 2020.

The next question comes from Michael ciphers with Michael Cyprys with Morgan Stanley.

Hey, good morning. Thanks for taking the question. Just on the debt pay down, it was really nice to see another solid quarter of continual debt pay down here, also seems like it's stepped up a bit. So just curious how you're thinking about -- how you guys are approaching it? Is it sort of like a 4% pay down a quarter you guys are targeting or 7% of EBITDA? Just curious how you're approaching it? And how you're thinking about the velocity of pay down from here? What we should be expecting?

Sure. Well a couple things. We're pleased with the level of cash flow that we're currently generating. And as we always say we want to balance it amongst the various priorities of the business in terms of investing in the growth, returning the capital and managing our leverage. And as you saw again the growth in the cash generation in this quarter. So we continually balance that. We like to have a certain set of consistency as balance with those opportunities that we have to make investments. So we do view debt as something that is a tool to be used going forward.So Mike, do you want to just give a little color on --

Yes. I think you kind of framed it as we think about it and we've been consistent in our pay downs over the last four or five quarters. And certainly at 0.5x we do have financial and operating flexibility which we think is important going forward. And as we talked about there'll be a little pickup in the free cash flow that we retain in the first quarter when the mandatorily convertible preferred do convert to common. So that's another consideration for us as we think through balancing investing in the business, paying down debt and returning capital to shareholders. So we feel really well positioned as we head into 2020.

Great. Thank you. And just another question maybe just on performance fees. It looks like you had I think it was about $1.2 million or so come through in the quarter. Can you just remind us of the AUM, its earning performance fees? How that maybe changed over the past year or two? And how we should be thinking about performance fee revenues over the next 12 to 24 months?

Yes. And we did in the prepared remarks talk about experiencing approximately $2 million of annual performance fees. There have been historical levels over the last couple years and that comes through in two ways really on the CLO structured products, we experienced performance fees on there at certain periods of time. And then we have hybrid fee on certain institutional accounts that are measured with a base fee and a performance fee on actual results versus benchmark. And that's really what you saw contribute into the performance fee in the third quarter of 2019.So it will vary, but again I think about $2 million per year is good at benchmarking as any and to the extent there are more products that come through with these type of hybrid fees, we'd make you aware of them for modeling purposes and otherwise.

This concludes our question-answer session. I would like to turn the conference over back to Mr. Aylward.

Thanks. And I want to thank everyone as always for joining us today. And we certainly encourage you to call, reach out if you have any other further questions. Thank you very much.

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