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Edited Transcript of VRTS earnings conference call or presentation 31-Jan-20 3:00pm GMT

Q4 2019 Virtus Investment Partners Inc Earnings Call

HARTFORD Feb 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Virtus Investment Partners Inc earnings conference call or presentation Friday, January 31, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George Robert Aylward

Virtus Investment Partners, Inc. - President, CEO & Director

* Michael Angerthal;Executive Vice President and Chief Financial Officer

* Sean Rourke

Virtus Investment Partners, Inc. - VP of IR

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Conference Call Participants

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* Jeremy Edward Campbell

Barclays Bank PLC, Research Division - Lead Analyst

* Sameer Murukutla

BofA Merrill Lynch, Research Division - Associate

* Stephanie Ma

Morgan Stanley, Research Division - Research Associate

* Sumeet Mody

Piper Sandler & Co., Research Division - Director

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Presentation

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Operator [1]

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Good morning. My name is Joelle, 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 is also being recorded and will be available for replay on the Virtus website. (Operator Instructions)

I will now turn the conference to your host, Sean Rourke.

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Sean Rourke, Virtus Investment Partners, Inc. - VP of IR [2]

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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 fourth quarter of 2019. Our speakers today are George Aylward, President and CEO of Virtus; and Mike Angerthal, Chief Financial Officer. Following their 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 news 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 our 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 news release and financial supplement, which are available on our website.

Now I'd like to turn the call over to George. George?

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [3]

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Thank you, Sean. Good morning, everyone. Our fourth quarter results were strong across the key measures of performance and included positive net flows, our highest level of revenues and earnings per share and increased operating margin, consistently strong investment performance and increased return of capital and continued reduction in debt levels. We are especially pleased that we returned to organic growth in the fourth quarter with contributions from retail separate accounts, institutional and ETFs. And while mutual funds were in outflows due to bank loans, there were favorable underlying trends, including strong positive net flows in both domestic and international equity. These trends reflect the distinctive and differentiated nature of our investment strategies, many of which are high conviction or quality-oriented portfolios, delivering compelling investment performance, making them attractive to retail and institutional clients.

So now let me turn to the results for the quarter. Long-term assets under management reached their highest level at $107.7 billion due to market appreciation and positive net flows. Total assets, which include liquidity strategies, ended the period at $108.9 billion. Total sales of $4.8 billion were unchanged from the prior quarter as higher sales of retail separate accounts, institutional and ETFs were offset by lower open-end fund sales. As a reminder, fund sales in the third quarter benefited from model wins and reallocations, excluding which fund sales were sequentially flat. Total net flows were positive $0.3 billion, representing an annualized organic growth rate of 1.3%. Positive net flows were a significant improvement from net outflows in the third quarter, which were largely due to a single institutional client redemption.

Looking at specific products. Retail separate accounts had positive net flows in both intermediary sold and private client totaling $0.6 billion. The intermediary sold channel has now generated 16 consecutive quarters of positive net flows. Institutional net flows were positive $0.1 billion due to both higher sales and lower redemptions, a significant improvement from net outflows in the prior quarter due to the large client redemption. ETFs had positive net flows for the fourth consecutive quarter with strong sequential growth in sales and stable redemptions. Open-end fund net flows, as I indicated, were negative primarily due to loan strategies, although equity strategies continued to generate positive flows.

In terms of what we're seeing in January, mutual fund flows turned positive with broad-based positive flows in equity strategies and moderating outflows in bank loans. Of note, we've seen a marked increase in the average daily mutual fund sales over the fourth quarter, and daily net flows in the month have been consistently positive. Favorable trends also continue in retail separate accounts where flows remain positive. On the institutional side, mandates that have been won, but not funded, currently exceed known redemptions, and we are pleased with the increased traction in institutional activities. As we have noted in the past, we've been making investments in our institutional business, which is contributing to the momentum. Lastly, the CLO that we indicated was being warehoused during the fourth quarter, closed last week and contributed $0.4 billion of assets in January.

Moving to the financial results. Operating income as adjusted increased 5% sequentially, and the related margin rose 150 basis points to 39%, reflecting strong revenue growth, disciplined expense management and the inherent leverageability of the business. Earnings per share as adjusted of $4.32 were up 7% from the third quarter, with the increase due to both higher investment management fees and lower employment expenses. Compared with the prior year period, fourth quarter earnings per share as adjusted increased 26%.

Turning now to capital. We continued our balanced approach to capital management across the priorities of investing in the business, returning capital to shareholders and managing our leverage. During the quarter, we repurchased approximately 86,000 common shares or about 1.2% of shares outstanding and continued the consistent paydown of our term loan, ending the quarter with net debt to bank EBITDA of 0.3x. And as Mike will discuss in detail, our mandatorily convertible preferred stock will convert to common next week, which will eliminate preferred dividends and increase the liquidity of our common stock.

With that, I'll turn the call over to Mike to provide more detail on the results. Mike?

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Michael Angerthal;Executive Vice President and Chief Financial Officer, [4]

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Thank you, George. Good morning, everyone. Starting with our results on Slide 7, assets under management. At December 31, long-term assets were $107.7 billion, up 5% from $102.8 billion at September 30 and up 19% from $90.4 billion in the prior year. The sequential increase reflected $4.9 billion of market appreciation and $0.3 billion of positive net flows. Assets continue to be diversified by product type with open-end funds, institutional and retail separate accounts representing approximately 40%, 30% and 20%, respectively. I would note that retail separate accounts continue to be a significant area of growth, up $1.6 billion or 8% sequentially and $5.4 billion or 36% over the prior year.

In terms of asset classes, market appreciation and positive flows have increased equity assets to 66% of the total, with 75% in domestic equity and 25% in international. Domestic equity assets are comprised of diverse strategies and are well balanced among large-cap, mid-cap and small-cap at approximately 40%, 20% and 40%, respectively. I would point out that mid-cap AUM continues to grow within the mix, increasing 14% sequentially to $11.1 billion and up 66% over the prior year.

Turning to Slide 8, asset flows. Net flows were positive $0.3 billion in the fourth quarter, a meaningful improvement from $1.1 billion of net outflows in the third quarter. Positive net flows were driven by retail separate accounts, institutional and ETFs partially offset by open-end fund net outflows. Total sales were $4.8 billion, flat sequentially, as higher sales of retail separate accounts, institutional and ETFs were offset by lower open-end fund sales. Fund sales of $2.3 billion declined $0.6 billion or 21% as third quarter sales included approximately $0.6 billion of model flows. Excluding those, fund sales were essentially unchanged sequentially. Retail separate account sales of $1 billion were up 24% sequentially with growth in both the intermediary sold and private client channels. Institutional sales increased by $0.4 billion or 45% from the third quarter primarily due to the funding of new mandates across multiple affiliates.

Looking at open-end fund flows by asset class. Equity funds had positive net flows of $0.2 billion compared with $0.3 billion in the third quarter. Domestic equity net flows were modestly positive. Similar to last quarter, strong net flows from mid-cap strategies were partially offset by net outflows in both small and large-cap. Mid-cap equity funds generated $0.2 billion of positive flows in the quarter, reflecting an annualized organic growth rate of 22%. This continues our strong trend for mid-cap products. International equity funds had positive net flows of $0.2 billion due to strong inflows into developed market strategies, with developed market sales up 32% sequentially. For fixed income funds, bank loan strategies were the primary driver of net outflows of $0.6 billion.

We continue to generate strong relative investment performance across our strategies. As of December 31, approximately 86% of rated fund assets had 4 or 5 stars, and 98% of rated retail fund AUM were in 3, 4 or 5 stars. We currently have 9 months (sic) [funds] with AUM of $1 billion or more and all are rated 4 or 5 stars, representing a diverse set of strategies from 5 different affiliates. In addition to this very strong fund performance, 93% of institutional assets were beating their benchmarks on a 5-year basis as of December 31, and 68% of assets were exceeding the median performance of their peer groups on the same 5-year basis.

Turning to Slide 9. Revenues as adjusted were $128.4 million, up $1.3 million or 1% sequentially. Investment management fees as adjusted of $113 million increased $1.4 million or 1% sequentially and $10 million or 10% from the prior year period. The sequential increase in investment management fees is due to a 1% increase in long-term average assets under management and a modestly higher average fee rate. Management fees for the quarter included $1.1 million in performance-related fees, generally consistent with $1.2 million in the prior quarter. For the full year 2019, performance-related fees totaled $2.8 million. The average fee rate on long-term assets for the quarter increased to 47 basis points, up 0.1 basis point from 46.9 in the prior quarter and up 1.4 basis points from the prior year period.

With respect to open-end funds, the fee rate increased to 57.4 basis points from 56.6 in the third quarter, reflecting the impact of favorable equity returns on the level of equity assets and the ongoing positive fee rate differential between sales and redemptions. This quarter, the blended fee rate on fund sales was 61 basis points, while the rate on redemptions was 51 basis points. This marks the 15th consecutive quarter that the rate on fund sales has exceeded the rate on redemptions. One thing I would point out is that effective this quarter, we have recast investment management fees as adjusted to reflect the pass-through nature of some of the fees we earn. The change impacts individual lines within revenues as adjusted, but not total revenues as adjusted. The change is noneconomic and has no effect on our non-GAAP measures for operating income, the operating margin or earnings per share.

Slide 10 shows the 5-quarter trend in employment expenses. Total employment expenses as adjusted of $58.8 million decreased 2% sequentially. The decrease reflects lower variable incentive compensation in the quarter. Employment expenses represented 45.8% of revenues as adjusted, down 140 basis points sequentially as a significant portion of the revenue growth in the quarter was attributable to market appreciation and, therefore, had lower levels of variable compensation. For modeling purposes, we believe employment expenses at a quarterly range of 46% to 48% of revenues as adjusted is reasonable, all else being equal. Note, this range excludes the impact of first quarter seasonal items. And as a reminder, in the first quarter, we will incur higher levels of payroll taxes and other benefits, which may be approximately 10% above the $7.5 million of items recorded in the first quarter last year.

Turning to Slide 11. Other operating expenses as adjusted were $18.2 million, essentially flat compared with the prior quarter and within the range we had previously cited. As a percentage of revenues, other operating expenses were 15.1% for the full year, essentially unchanged with the prior year, reflecting a disciplined approach to expense management. Looking ahead, we believe that a reasonable range for 2020 operating expenses as adjusted is $18 million to $20 million per quarter, reflecting investments in and growth of the business. For modeling purposes, keep in mind that second quarter results are impacted by our annual equity grants to the Board of Directors.

Slide 12 illustrates the trend in earnings. Operating income as adjusted of $50.1 million increased $2.4 million or 5% sequentially primarily due to higher revenues as adjusted and lower employment expenses as adjusted compared with the third quarter. The operating margin as adjusted for the quarter was 39%, an increase of 150 basis points sequentially and 410 basis points higher than the prior year period. The effective tax rate as adjusted for the quarter was 27%, stable with the prior quarter at a reasonable run rate for modeling purposes. Net income as adjusted of $4.32 per diluted share increased $0.29 or 7% sequentially.

Regarding GAAP results, fourth quarter net income per share was $2.83 compared with $2.95 in the third quarter. Fourth quarter, net of tax, GAAP earnings per share included the following items: $0.71 due to the increase in the liability for the fair value adjustments to the affiliate minority interests in excess of carrying value; $0.31 of net realized and unrealized losses on investments; and $0.11 of other costs primarily comprised of acquisition and integration expenses.

Slide 13 shows the trend of our capital position and related liquidity metrics. Working capital at December 31 of $160 million increased $2 million or 1% sequentially primarily reflecting operating earnings partially offset by debt repayments and return of capital to shareholders. Gross debt outstanding at December 31 was $286 million as we repaid $15 million during the quarter. The net debt-to-EBITDA ratio of 0.3x at December 31 was down from 0.5x at September 30 and down from 0.7x a year ago due to EBITDA growth and a higher cash balance. Gross debt to EBITDA was 1.4x at year-end, down from 1.6x in the prior year period.

Regarding return of capital to shareholders, we repurchased approximately 86,000 shares of common stock for $10 million, representing 1.2% of beginning of quarter total outstanding shares, and net settled an additional 8,000 shares for $1 million. For the full year, we repurchased 372,000 shares, representing 5.3% of beginning shares outstanding. On a net basis, common shares outstanding declined 2.7% during 2019. One additional item of economic value to note are our intangible assets that will continue to provide a cash tax benefit of approximately $10 million per year at current tax rates over the next 14 years.

Finally, as announced in the press release yesterday, our mandatorily convertible preferred stock will convert to common stock and be available to commence trading on Tuesday, February 4. Based on the final conversion rate of 0.7938 per preferred share, 912,870 common shares will be issued, modestly below the 956,000 in our fully diluted share count at year-end, making pro forma common shares outstanding as adjusted 7.722 million at December 31. Importantly, while the conversion has a small favorable impact on the shares used to calculate EPS as adjusted, it will increase the market float of our common shares by approximately 13%. The conversion will also have the effect of increasing our annual available free cash flow by approximately $6 million.

With that, let me turn the call back over to George. George?

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [5]

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Thanks, Mike. We'll now take your questions. Joelle, can you open up the lines, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sumeet Mody with Piper Sandler.

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Sumeet Mody, Piper Sandler & Co., Research Division - Director [2]

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Good to see a reversal back to inflows for the institutional product. I just wanted to get a feel for the pipeline, maybe what you're seeing with gross outflows, in particular, with this quarter being a bit lower than we've seen in the last couple of years while still including a large client redemption. How are you viewing the expected pace of gross redemption in the coming quarters?

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [3]

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Yes. I'll give you some color, and then I'll have Mike give some detail. So our institutional business, which we've spent a lot of time and effort and resources to grow, we're starting to see some of the outcomes and positives of the work and the resource that we've put behind it, but it is still, on a relatively basis, small if we see that volatility in terms of the inflows and outflows, which, again, is inherent in institutional and particularly at the smaller side. So we're happy to see the outflow rates starting to get better. And as we sort of indicated, the traction we're seeing in terms of mandates on the institutional side has been very positive, right? So if you go back to the last 2 years, we would periodically and once in every other quarter speak about one win at one manager, then you heard us starting to speak about multiple managers. And now we're seeing more consistency in terms of at least the finals and the semifinal activities, which are obviously precursors ultimately to win. So we're sort of pleased to see the traction gaining. We have still ground that we want to cover to get to more consistency, but generally, those have all been positive. Mike?

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Michael Angerthal;Executive Vice President and Chief Financial Officer, [4]

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Yes. No, I think you covered a lot. I mean as you know, redemptions on institutional do vary significantly from period to period. It's an inherently uneven business. I think the rate that we've seen over the past 4 quarters is approximately a 20% redemption rate, which is as good rate as any from a modeling perspective. As George indicated, I think the traction that we're seeing on the pipeline right now is advancing at a bit more positive perspective than known redemptions. So we're pleased that there's solid diversity across strategies and affiliates.

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Sumeet Mody, Piper Sandler & Co., Research Division - Director [5]

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Great. And then just one quick follow-up on capital deployment priorities going forward. Particularly M&A, considering net debt levels continue to march lower, what's the appetite today for maybe bringing on new affiliates? Is that something you guys are considering?

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [6]

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Sure. Well, in terms of capital, so we continue to generate very strong levels of free cash flow. And as we've always said, we're balancing the existing capital that we have on our balance sheet and our current very low levels of debt in terms of what is the best opportunity. So we've generally approached consistently paying down our debt, which was again repeated this quarter in terms of stock repurchases. Again, you could sort of look through the cycles of what we've done in terms of repurchasing stock.

In terms of alternative uses, which again include launching new products and generating future growth, one of the things that's very, very heartening to see is some of our best flows that we've been seeing in the fourth quarter as well as in -- I alluded to January are products that were seeded not too long ago. So a lot of our revenue and our growth is coming from the appropriate use of capital to generate new capabilities and new products. And you're going to see that in some of the product structures like UCITS. And obviously, you've seen it in ETFs as well.

In terms of M&A, again, our long-term success is not predicated upon continual M&A. However, we do have that as a tool available to us in those instances where there is either a capability that we believe can be additive or there is another transaction that we think can have strategic and financially compelling returns for the shareholders. So we're very disciplined as we look at it. Again, we look at as many things as anyone else is probably looking at. And if the right opportunity arose, we would absolutely evaluate it in relation to any other opportunities that we have.

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Operator [7]

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Our next question comes from Jeremy Campbell with Barclays.

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Jeremy Edward Campbell, Barclays Bank PLC, Research Division - Lead Analyst [8]

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George, just going to hop on your color just there for that last question. Can you maybe just give a little bit of color about how you're thinking about balancing M&A versus now with your increased kind of float in the public shares and maybe like the relative valuation between what you're seeing in the pipe and crossing the tape in the private markets and what acquisitions, what make sense versus just sitting here with your cash building and just buying up your stock now that you have more public float, more liquidity?

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [9]

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Yes. So great question. So in terms of -- with the conversion of the preferreds, there will be about 13%-ish lift in the shares available in the public market. Again, because of our relative size and the amount of shares trading, I do think that has had negative impacts on the efficiency of the trading of our stock and the relative valuation. So one of the things that we do obviously consider as we go through the repurchase decisions is being very sensitive to the amount of shares that are available for shareholders to take meaningful positions and then exit them in a reasonable period of time. So the increasing of that will definitely be beneficial.

And as you point out, we are generating cash. We are accumulating cash and working capital on the balance sheet. And we've -- we still haven't -- we're still in a net debt position. And we do think maintaining very manageable levels of debt is appropriate for probably at the lower end compared to others at this point, which again gives us the flexibility, protection in terms of down markets as well as flexibility in terms of looking at things.

And you're also alluding to the last one on M&A. One of the challenges is that the public multiples and the private multiples still do have a disconnect, which is sort of what I was alluding to is we really think about it. We really sort of have to think about strategically and long term and creating value for those transactions that would make sense, we would definitely think about it. Obviously, our view is that the multiples that publicly traded managers are trading at are not in line with historical multiples. So we look at it long term. We look at it what is the right way to build value for the future in terms of that. But again, we're disciplined in terms of how we assess those alternatives.

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Jeremy Edward Campbell, Barclays Bank PLC, Research Division - Lead Analyst [10]

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Great. And then I just how would you characterize the availability of companies coming up for potential transactions on the M&A side? Is it stronger so far this year? Or is it a little bit more faded, I mean, just relative to either 2018 or prior years?

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [11]

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Each year is sort of a little different. There's always a level of activity going on, and it generally will swing from either one asset class or one category to another, so there's really 2 sides of the equation. It's the supply and the demand. I do think that in an environment where fees are decreasing and costs are increasing, right, a lot of firms have to sort of think about, particularly in the smaller end, will they be better off partnering. I think the better firms are not in a situation where they have to do something, but they'll certainly consider looking at that.

And then on the demand side, there are probably fewer firms that have the financial flexibility to be in the market. So sort of ebbs and flows, but there's certainly -- activity continues in that market, even though you haven't seen a lot of press releases. I think there's a lot of dialogues going on, and we make sure we're in the flow of everything.

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Operator [12]

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(Operator Instructions) Our next question comes from Michael Cyprys with Morgan Stanley.

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Stephanie Ma, Morgan Stanley, Research Division - Research Associate [13]

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This is actually Stephanie filling in for Mike. We wanted to dig into the operating margins a bit. So the margin expansion this quarter was a positive surprise and -- for the past several quarters actually, just -- and you gave very helpful guidance for 2020 expenses, but just where do you think you can operate over the next year or 2? How do you think that trend? And then maybe more generally, how would you frame the flexibility in the cost base, if we start to see a pullback in the market?

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [14]

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I'll start. The way we look at it holistically is we try to be very disciplined in terms of managing our expenses, right? We don't have any control over the markets, and we don't have control over the investor preferences in any given point in time. And particularly, look, after the fourth quarter, we try to be very prudent in terms of how we think about investing and the timing of expenditures and all that. So -- and our biggest cost is obviously a people cost.

So I'd like to think we are very, very prudent in terms of managing those expenses to the extent that we have levels of control. But at the same time, the most important thing for us to do is to create value and ultimately make investments. So we do sort of look at our margin and make sure that we think it's reasonable given the environment that we're operating in and the growth we're trying to create. So Mike, do you want to...

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Michael Angerthal;Executive Vice President and Chief Financial Officer, [15]

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Yes. I think that's a good segue. Certainly, market conditions will be a driving factor in incremental profitability. If you look at the incremental margins over the last 12 months or so generally in line with the 50% to 55% incremental margin level that we've been talking about historically. We gave some insight into how we're thinking about 2020, and certainly, different market environments can have an impact on that as well as other variables like levels of commissionable sales and some of the investments on the other operating expense line item that we alluded to that we continue to make in the business to address the growth in the business and continued investments in areas to drive efficiency on the cost side.

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Operator [16]

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

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Sean Rourke, Virtus Investment Partners, Inc. - VP of IR [17]

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Joelle, looks like we have one more question.

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Operator [18]

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And our next question will come from Michael Carrier with Bank of America.

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Sameer Murukutla, BofA Merrill Lynch, Research Division - Associate [19]

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This is actually Sameer Murukutla on for Michael. Sorry, I thought I was in the queue. I want to piggyback on Sumeet and Jeremy's question just a little bit. How are you guys allocating your time and resources, I guess, in terms of products and distribution channels? And any additional color you can give on maybe current gaps of growth opportunities that might be addressed organically or via M&A?

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [20]

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Sure. A lot of our focus is continuously working on organic opportunities, right? So if you look at the landscape of the stuff where we're really focusing on the last 3 or 4 years, it's all -- it's been all about expanding the number of product structures we have available to access other potential markets of clients, so the UCITS, the ETFs, commingled investment trusts. We've been investing in -- selectively in resources to help support growth of our strong strategies in the institutional marketplace.

So we always focus on that organic growth of our current affiliates and the support that we can currently bring to them. So we're spending a lot of time in that area. And if you sort of look at the -- more of our activity over the last 2 or 3 years has been outside of mutual funds. It's been in the offshore funds. It's been in the institutional. So that continues to be a great focus.

But at any point in time, we are always actively evaluating any kinds of inorganic opportunities to see how they fit, right? So is it something that can be additive from a capability that we can then put through the various product structures and distribution channels? Is it a diversification? We think it's important to continue to look to ways to diversify our business away from traditional asset classes or for places where we currently have that.

So they're always both part and parcel of the process from where we spend our time and where Mike and I personally spend our time, but there's always a huge amount of that time spent on making sure that we have plans in place and our investments are being made to continually organically grow the business. And then to us, the M&A piece is the complement, right, that you can sort of add to that. We don't want to bet our future on the level of M&A and the success of M&A. It's all about having a strategy to grow that which we have.

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Sameer Murukutla, BofA Merrill Lynch, Research Division - Associate [21]

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Perfect. And just one follow-up. I understand that there is a balance between being prudent on expenses and investing in the business. But assuming the current environment, do you guys have an overall long-term expense growth that you guys look at that you're comfortable with?

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [22]

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Well, we look at -- well, a couple of ways. I mean going back to the margin question, I speak for all of us probably, we really think a lot about what is the appropriate level of margin that we think that we should be generating for the shareholders, right? And within that, how much of that should be earmarked for the necessary investments in future growth. So we sort of try to, hopefully, balance all of those things together to make sure that we're making the right investments in the future of the business and the growth. But at the same time, having a margin that we think is appropriate given what the expectations would be. Mike, do you want to add anything to that?

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Michael Angerthal;Executive Vice President and Chief Financial Officer, [23]

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Yes. I think it's -- again, just supporting the earlier discussion around incremental margins and balancing, investing in the business with achieving appropriate levels of growth and profitability and having the margin expansion, both sequentially and year-over-year, we think, is reflective of that.

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Operator [24]

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

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George Robert Aylward, Virtus Investment Partners, Inc. - President, CEO & Director [25]

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Thanks, Joelle. I want to thank everyone today for joining us and encourage you to call if you have any further questions. Thank you very much.

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Operator [26]

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