Virtus (VRTS) Q1 2026 Earnings Transcript

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DATE

Friday, May 1, 2026 at 10 a.m. ET

CALL PARTICIPANTS

- Chairman, President, and Chief Executive Officer — George Robert Aylward

- Executive Vice President and Chief Financial Officer — Michael Aaron Angerthal

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Full Conference Call Transcript

George Robert Aylward: Thank you, Sean, and good morning, everyone. I will start today with an overview of the results we reported this morning, then Michael Aaron Angerthal will provide more detail. Although the first quarter was challenging from a net flow perspective, reflecting our meaningful exposure to quality-oriented equity strategies, which have remained out of favor, we had several areas of strength during the quarter that were overshadowed, and we also advanced key growth initiatives.

Key highlights of the quarter included an 8% increase in sales, with growth in U.S. retail funds, separate accounts, and global funds; positive net flows in several strategies, including high-conviction growth equity, multi-sector fixed income, listed real assets, and event-driven; positive net flows in ETFs and global funds; expansion into private markets with our investment in Keystone National Group; and continued return of capital, including $10 million of share repurchases. We remained active in broadening our product offerings to meet evolving client demand and expand our growth opportunities over time.

The investment in Keystone on March 1 added a differentiated asset-centric private credit capability, and our sales teams are actively focused on expanding distribution of their compelling strategies to retail and institutional clients. Keystone focuses on senior secured amortizing fixed-rate financings backed by tangible assets. We believe their approach offers attractive stability and defensive characteristics to investors seeking a private credit allocation or a broader income-oriented solution with a different risk profile than many traditional direct lending vehicles. Keystone expands our private market capabilities, which also include those of Crescent Cove, as well as our overall alternatives offering, including managed futures and event-driven strategies.

We continue to launch attractive actively managed ETFs, including an emerging markets dividend ETF from our systematic team, a real estate income ETF from Duff & Phelps, and a growth equity ETF from Silvant. We expect to continue to be active in developing and introducing new products over the upcoming quarters. Looking at our first quarter results, assets under management were $149 billion at March 31, down from $159 billion due to net outflows and market performance. Total sales increased 8% to $5.8 billion, with a 26% increase in sales of equity strategies, in large part from some of our strategies that do not have a quality orientation.

By product, we had higher sales of U.S. retail funds, retail separate accounts, and global funds. Retail separate account sales increased 19%, with higher sales in each month of the quarter, and on April 1 we reopened the SMidCap Core strategy that had been soft closed in 2024. Total net outflows were $8.4 billion, and across products the outflows were almost entirely driven by equities. I would note that the majority—over 80%—of the net outflows were in the first two months of the quarter, as net outflows improved significantly in March.

Looking at flows across asset classes, the equity net outflows largely reflected the continued style headwind for quality-oriented strategies, including a meaningful institutional global equity redemption and the previously disclosed rebalancing of a lower-fee retail separate account model-only mandate to a passive strategy. Fixed income net flows were essentially breakeven for the quarter, as positive net flows in multi-sector, convertibles, and preferreds were offset by net outflows in investment grade and leveraged finance. Multi-asset strategies were also essentially breakeven, while alternatives strategies had net outflows of $400 million, primarily driven by managed futures.

In terms of what we saw in April, as previously mentioned, overall trends improved over the course of the first quarter, and April flows were more similar to March. For U.S. retail funds, both sales and flows improved in April over March, and ETF sales and net flows were at their highest levels since September. For retail separate accounts, while we do not have as much transparency given a large portion is model-only, we do anticipate better flows in the second quarter and are pleased to have recently reopened the SMidCap Core strategy.

On the institutional side, known wins actually modestly exceeded known redemptions for the first time in a long time, though as always institutional flows can be very lumpy and hard to predict. Turning now to our financial results, the operating margin was 24% and reflected the impact of seasonally higher employment expenses. Excluding those items, the operating margin was 30.3%. Earnings per share as adjusted of $5.38 declined from the fourth quarter primarily due to $1.26 per share of seasonal employment expenses. Excluding those items, earnings per share as adjusted declined 6%. Turning to investment performance, as we have previously discussed, recent performance reflects our overweight to quality equity.

However, we did see improving relative performance in the first quarter in our equity strategies. Fixed income and alternative strategies have consistently strong performance with 78% and 71%, respectively, beating benchmarks for the three-year period. Over the longer ten-year period, 54% of our equity, 73% of our fixed income, and 71% of alternative strategies beat their benchmarks. In terms of our balance sheet and capital, we ended the quarter with cash and equivalents of $137 million, other investments of $269 million, and $200 million of undrawn capacity on our revolving credit facility. Cash was lower sequentially, as the first quarter of each year is our highest period of cash utilization.

In addition to first-quarter seasonal expenses, cash usage included the $200 million closing payment for the Keystone investment and $23 million representing the majority of our remaining revenue participation obligation. During the quarter, we repurchased approximately 73 thousand shares for $10 million and paid our quarterly dividend. We continue to have financial flexibility to balance capital priorities of investing in the business, returning capital to shareholders, and maintaining appropriate leverage. And with that, I will turn the call over to Michael Aaron Angerthal to provide more detail on the financial results. Mike?

Michael Aaron Angerthal: Thank you, George. Good to be with you all this morning. Starting with our results on slide seven, assets under management: our total AUM at March 31 was $149 billion, and average assets declined 4% to $158.2 billion. Our AUM continues to be well diversified across products and asset classes. By product, institutional accounts were 33% of AUM, U.S. retail funds represented 27%, and retail separate accounts, including wealth management, represented 25%. The remaining 15% consisted of closed-end funds, global funds, and ETFs. Within open-end funds, ETF AUM increased to $5.4 billion, up $200 million sequentially on continued strong net flows and up 58% year-over-year.

We are also well diversified by asset class with broad representation across domestic and international equities, including mid-, small-, and large-cap strategies, and fixed income offerings diversified across duration, credit quality, and geography. With the addition of Keystone during the quarter, which added $2.3 billion of AUM, alternatives now represent over 12% of assets, up from 9.7% last quarter and 9% a year ago. Turning to slide eight, asset flows: total sales increased 8% to $5.8 billion, up from $5.3 billion in the fourth quarter. The increase was led by sales of equity strategies, which increased 26%, with growth broadly across domestic, international, and global equity.

Reviewing by product, institutional sales were $1.2 billion versus $1.4 billion last quarter, with higher equity and multi-asset sales offset by lower fixed income and alternatives. Retail separate account sales increased to $1.4 billion from $1.2 billion in the fourth quarter, primarily due to a 30% increase in sales in the intermediary-sold channel across strategies. Open-end fund sales increased 11% to $3.1 billion and included $600 million of ETF sales. Open-end fund sales were higher in equities, fixed income, and multi-asset strategies, with much of the increase in equity sales in style-agnostic and growth strategies.

Total net outflows were $8.4 billion compared with $8.1 billion last quarter, and, as previously mentioned, the outflows improved meaningfully in the last month of the quarter. Reviewing by product, institutional net outflows of $3.2 billion were again primarily due to redemptions of quality-oriented global equity strategies. Retail separate accounts had net outflows of $3.9 billion, which included a $1.4 billion redemption of a lower-fee model-only account that we previously disclosed. Open-end fund net outflows of $1.3 billion improved from $2.5 billion last quarter and included positive net flows in fixed income and global equity. For closed-end funds, which include Keystone's tender offer fund, we reported modestly negative net flows.

I would point out that while Keystone's fund had positive net flows for the quarter, our results reflect just one month of their sales but a full quarter of redemptions, given the fund's quarterly tenders take place in March. ETFs continued to deliver solid growth, generating $300 million of positive net flows and sustaining a strong double-digit organic growth rate. Turning to slide nine, investment management fees as adjusted were $163.5 million, down 3% due to lower average AUM, partially offset by a higher average fee rate. The average fee rate was 41.9 basis points, up from 40.6 basis points last quarter, and included approximately 0.6 basis points of incentive fees from one month of Keystone.

We believe an average fee rate of 43 to 45 basis points is reasonable for the second quarter, reflecting a full quarter of Keystone. As always, the fee rate will vary with market levels and asset mix. Slide 10 shows the five-quarter trend in employment expenses. Total employment expenses as adjusted of $116.2 million increased 11% sequentially, reflecting $11.4 million of seasonal employment expenses related to the timing of annual incentives, primarily incremental payroll taxes and benefits. On the more comparable year-over-year basis, employment expenses declined 3%. Excluding the seasonal items, employment expenses also decreased on a sequential basis. Employment expenses were 58.3% of revenues as adjusted, with a sequential increase primarily due to the seasonal expenses.

Excluding those items, employment expenses were 52% of revenues, higher than the fourth quarter largely due to lower revenues. For modeling purposes, it is reasonable to assume employment expenses as adjusted will be in the 51% to 53% range as a percentage of revenues, and at the high end of that range in the second quarter, primarily due to the decline in equity assets under management. And as always, results will vary with flows and market performance. Turning to slide 11, other operating expenses as adjusted were $30.6 million, up modestly from $30.2 million, in part due to the addition of Keystone during the quarter.

For modeling purposes, a quarterly range of $31 million to $33 million is reasonable going forward to reflect the full-quarter impact of Keystone. In addition, keep in mind that our annual Board of Directors’ equity grant occurs in the second quarter and is incremental to the outlook. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $43.8 million decreased from $61.1 million in large part due to seasonal expenses. Excluding those items, operating income decreased 10%, primarily due to lower average assets under management. The operating margin as adjusted of 24% compared with 32.4% in the fourth quarter. Excluding the seasonal employment expenses, the operating margin was 30.3%.

With respect to nonoperating items, interest and dividend income declined by $1.4 million due to a lower cash balance reflecting the timing of the Keystone investment and seasonal cash obligations. Noncontrolling interests of $1.4 million were modestly lower than the prior quarter. Looking ahead, for modeling purposes, we believe that a reasonable range for noncontrolling interests will be $4 million to $5 million, which factors in a full quarter of Keystone. Turning to income taxes, as we recently announced, beginning with this quarter’s results, we updated how we reflect income taxes in our non-GAAP presentation and have recast the relevant line items in prior quarters.

Over time, through acquisitions, we have built a significant intangible tax asset that generates meaningful economic tax benefits. Given the size of this attribute and our expectation of realizing the benefit, we believe it is appropriate to reflect it in earnings. For context, the tax benefit represented about $2.64 per share of earnings in 2025. For the first quarter, our effective tax rate of 14% was lower sequentially by approximately 400 basis points due to the impact of the amortization tax benefit on a seasonally lower level of pretax income. Beginning with the second quarter, an effective tax rate of 14% to 15% would be reasonable to expect.

Net income as adjusted was $5.38 per diluted share, which included $1.26 per share of seasonal expenses, compared with $7.16 in the fourth quarter, and declined 16% from the prior year primarily due to lower average AUM. Slide 13 shows the trend of our capital, liquidity, and select balance sheet items. On March 1, we completed the 56% investment in Keystone for $200 million. As a reminder, there is up to $170 million of additional consideration over two years, a meaningful portion of which is subject to achievement of revenue targets. The estimated fair value of the deferred payments is recorded on the balance sheet as contingent consideration.

Contingent consideration at March 31 totaled $126 million, with a sequential increase reflecting the addition of the Keystone deferred payments, partially offset by the payment of the majority of our remaining revenue participation obligation, which was $23 million. As previously discussed, our transaction with Keystone includes increasing our ownership to 75%, with the equity purchases taking place during years three through six after closing. The estimated value of those purchases is recorded in redeemable noncontrolling interest, which increased to $131 million at March 31. The remaining 25% of Keystone is reflected i