Westwood Holdings Group Inc (WHG) 2014 Q3 法說會逐字稿

Thank you all for holding, and welcome to the Westwood Holdings Group third quarter 2014 earnings conference call. Today's call will begin with a presentation, followed by a question-and-answer session. Instructions on that feature will begin later in the program.

I would now like to turn the call over to your host for today's conference, Sylvia Fry, Senior Vice President and Chief Compliance Officer. Ms. Fry, your line is now open.

Good afternoon, and thank you. Thank you for calling into our third quarter 2014 conference call. I'd like to start by reading our forward-looking statements disclaimer.

The following discussion will include forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties, and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements.

Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today, as well as in our annual report on form 10K for the year ended December 31st, 2013, filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. You are cautioned not to place undue reliance on forward-looking statements.

In addition, in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures, is included at the end of our press release issued earlier today.

On our call today, we will have Brian Casey, our President and Chief Executive Officer, and Tiffany Kice, our Chief Financial Officer.

I will now turn the call over to Brian Casey, our CEO.

Thanks, Sylvia, and thank everyone for joining our call today. It was a strong quarter during which Westwood experienced growth in key areas. As a result, we again raised our dividend for the 12th consecutive year. For those who have been shareholders from the beginning, we want to thank you again for your support for these so many years.

Historically, dividends have comprised half of the return of the stock market going back to 1926. And a healthy, growing dividend ahead of our peers was an aspiration we had at the outset of Westwood becoming a public company. It's fun to look back at our first dividend in 2002, of $0.02 per share per quarter, and now to see it being raised to $2 per share per year.

We're very busy in the third quarter and particularly pleased to welcome a new Global Converts Team to Westwood. The team started at Westwood on October 1st, with over $500 million of sub-advised assets.

We will soon be opening an office in Boston and initially will have two strategies, a Long-Only Convertible Bond Fund and a Global Absolute Return Fund. We will offer both a mutual fund and a UCITS fund for each strategy, and have already begun running the Long-Only strategy as a commingled fund at Westwood Trust.

While this is a niche asset class, we believe we have nearly $5 billion in capacity for the Long-Only product and a billion of remaining capacity for the Global Absolute Return strategy.

The addition of the Global Converts Team broadens our skill set and allows another platform from which to grow. Longer term, we believe we have an opportunity to create new products and to draw from the extensive talent pool in the Boston area.

Performance for the third quarter was mixed, with investors reacting positively to improving economic data and a better-than-expected corporate earnings season, only to have sentiment negatively impacted by events in the Middle East, the Ukraine, and the Federal Reserve tightening its monetary policy sooner than anyone expected.

As we noted in our last earnings call, in addition to volatility returning to a more normal level, we believe fundamentals and security selection will be key drivers of returns going forward, as part of the slow transition from the unprecedented liquidity-driven environment of the past five years.

Within Westwood's US value strategies, our SmallCap value product outperformed its benchmark by over 300 basis points in the third quarter, ranking in the top 20% of its peer group, and building on its solid long-term performance, the strategy also ranks in the top quintile on a 3-, 5-, and 10-year basis.

In a quarter during which performance was marked by a cyclical selloff in July, a SmallCap growth rally in August, and a safety trade to end the quarter, our SMidCap and SMidCap Plus+ produce achieved what we would expect. The products each outperformed in the down market and largely kept pace in the up markets.

Historically, the combination of protecting in down markets and maintaining position in up markets has led to positive long-term alpha generation for all Westwood products.

LargeCap was slightly ahead of its benchmark and continues to make slow but measured progress in the short- and longer-term performance periods.

Within our specialized strategies, Income Opportunity performed well, ranking in the top decile of its peer group on a year-to-date basis.

Our MLP strategy added to its strong absolute first-half performance with a gain of 1.5% in the third quarter, and continues to outperform the Alerian Index for the year. Even with the recent selloff, the MLP strategies have produced strong, double-digit returns year to date.

On the global front, our Toronto-based Global and Emerging Markets Team, Westwood International Advisors, conducted on-the-ground research in the Europe, Middle East, and African regions of the world. The WIA team also continued to engage with clients and prospects from around the world, including Europe and Australia, through conference calls and onsite meetings.

The EM mandates extended their year-to-date outperformance relative to the benchmark, as company fundamentals continued to support the portfolio of quality bias and performance. The Global Equity and Global Dividend funds saw strong results from holdings across the portfolios, but were dampened by currency weakness from both the euro and the pound relative to an unexpected short-term rally in the US dollar.

Our marketing department has been busy telling the Westwood story, as our focus on protecting downside risk resonates well in periods of market volatility. During the third quarter, we released a thought leadership piece on the US media industry and produced a video on our Income Opportunity strategy.

Westwood professionals also made several appearances on CNBC during the third quarter and continue to be quoted often in national business publications. In addition, the marketing team is in the process of upgrading the firm's investor relations site, as well as creating materials for several new strategies we'll be launching over the next three to six months.

For the remainder of the year and into 2015, the marketing team is focused on enhancing the overall investment messaging of Westwood's US value team products and the branding and look of all of our marketing materials.

Within our institutional sales team, Income Opportunity and Emerging Market strategies remain the areas of most interest to investors. Investors are attracted to the risk reward profile and the yield that the Income Opportunity strategy has generated over both the short and long term.

Our ability to gain assets has also been helped by our willingness to offer the strategy in different vehicles, whether it be separate accounts, mutual funds, or commingled funds, to help meet the needs of our clients.

Within our suite of Emerging Market strategies, a well-known Canadian institution invested close to $500 million in a separate new account in our core EM strategy. Search activity continues to be quite high in emerging markets and our pipeline today is as robust as we've seen it at any time this year.

As evidence of the continued globalization of our business, the interest in our EM strategies comes from investors in North America, Europe, the Middle East, Asia, and Australia. We expect this globalization to continue, in part due to the addition of our new Global Convertible Securities Team as the team's client base at their previous firm was predominantly outside the US.

As we discussed last quarter, we would like to see more meaningful search activity in the SmallCap Value and MLP spaces. Our SmallCap product produced very strong risk-adjusted returns in the most recent downturn, and we're confident that we will participate in a meaningful way when SmallCap search activity picks up.

Last year we started a new MLP commingled fund, which has become a go-to option for small municipal pension plans in Florida and Texas. While the allocations have been small, it allows us to continue to build assets in our MLP strategies and puts us in a stronger position when we see larger institutional investors increase or initiate their MLP exposure.

The third quarter continued on an already strong 2014, for the Westwood Funds. With $165 million of net inflows for the quarter and nearly $450 million of net inflows year to date, we are tracking at a slightly better than 20% annualized organic growth rate. Our most popular funds continue to be the Income Opportunity Fund and the Short Duration High-Yield Fund.

Income Opportunity has been an attractive option for clients, given the strategy's use of MLPs. And it has been interesting to note that in recent market declines, we see increased flows as investors are reminded of the strategy's outperformance on the downside.

The UCITS umbrella structure that we built for the Emerging Market strategy is enabling us to quickly launch sub funds for our recently added Global Convertible Securities Team, likely providing at least a nine month time-to-market advantage.

We have filed for two additional sub funds, subject to Central Bank of Ireland review and approval that will be managed by our new Global Convertibles Team.

Westwood Trust continues to benefit from the expanding economies and demographics of Texas and Omaha. With so many businesses flocking to both Texas and Omaha in recent years, we've never been in a better position to benefit from the wealth that's come into these areas that we call home.

The recent market declines have heightened investor anxiety and will eventually lead to investors seeking new wealth management options. The great challenge we have today is to help our clients properly understand how to make wise investments and to stay the course in a volatile market.

With the growth of the Dallas market, the Dallas team is excited to announce the addition of two new members. And with wins from both Omaha and Dallas offices, Westwood Trust flows were positive for the third quarter.

Our teams remain very active in meeting with current clients to help frame expectations, as well as continuing to prospect for additional sources of new business.

The Corporate Development Team continues to actively evaluate opportunities to expand the Westwood Trust brand through the acquisition of companies in attractive and high-growth, private wealth markets. We maintain the highest standards for those companies we consider. Our priority is on finding established, private wealth firms with strong reputations and client bases, who would expand our reach into geographies where we currently do not have a presence.

The acquisition marketplace is a competitive one, but we feel that we are the ideal partner for business owners who want to continue to grow their business, while partnering with a company with a trusted reputation, a long history of customer satisfaction, and a liquid, publicly traded stock.

Attractive private wealth firm acquisitions require a long lead time in order to develop into opportunities. We continue to look for ways to improve and grow our private wealth management business, as we remain convinced of its value and profitability for our overall company.

We will remain patient and thoughtful in locating opportunities to grow our company. And as fellow shareholders, we will always use our corporate capital in a shareholder-friendly way. We have recently had very positive discussions with two firms that we've known for many years, and hope to continue to advance those discussions in the year ahead.

We're excited about the future as we continue to grow globally, while maintaining firmly planted here in the heart of Texas and Omaha and some of the most strategic areas in the country.

Thanks for taking the time to join our call. I'd like to welcome Tiffany Kice to her first WHG earnings call. While she's only been here for a few months, she's already making a positive impact on our business, and, more importantly, is a great cultural fit within our firm. I look forward to introducing her in person to our shareholders, and will now turn the call over to her to review the financials.

Thanks, Brian, and good afternoon everyone. For the third quarter of 2014, we're pleased to report strong financial results with total revenues of $28.1 million, net income of $7.1 million, and diluted earnings per share of $0.92.

Economic earnings and non-GAAP metrics was $10.9 million, or $1.41 per share. Assets under management were $19.8 billion at quarter end, with positive inflows during the quarter.

Total revenues were up 22%, or $5.1 million, from the same period in 2013, with advisory fees up 27%, or $4.9 million, and trust fees up 13%, or $0.6 million.

Diluted earnings per share of $0.92 and economic earnings per share of $1.41, were up 61% and 45% from the prior year, respectively, demonstrating strong operating leverage through the increase in revenue.

(Technical difficulty)

Firm-wide assets under management of $19.8 billion, consisted of institutional assets of $12.3 billion or 62% of the total, private wealth assets of $4.0 billion or 20% of the total, and mutual fund assets of $3.4 billion or 18% of the total.

Included in these amounts are Westwood International Strategies, which now comprise approximately 17% of our total AUM.

Net inflows for the quarter were concentrated principally in our Emerging Markets and Income Opportunity strategies, while LargeCap continued to experience outflows.

Our balance sheet continues to be very solid, allowing us opportunities to continue to invest in our business and provide attractive yields to our shareholders through our dividend program.

Cash and investments at quarter end were $90 million, up $14 million from fiscal yearend 2013, and we continue to maintain a debt-free balance sheet.

Our Board of Directors approved a quarterly cash dividend of $0.50 per share, an increase of 14%, payable on January 2nd, 2015, to stockholders of record on December 15th, 2014. This represents an annualized dividend yield of 3.4% at yesterday's closing price.

We encourage you to review the presentation we posted on our website reflecting third-quarter highlights, as well as longer term trends in the growth of our assets under management, revenues, earnings, and dividends.

I will now turn the call back over to Brian to conclude.

Thanks, Tiffany. Great job. And anybody have any questions?

(Operator Instructions) Mac Sykes of Gabelli.

I had just two quick questions. On the accounting item, I guess what prompted the discovery on this? I know it [wasn't] material, but just curious as to a little more background on it and whether the auditor should have found it as well. And then I had a follow-up. Thank you.

Sure. We discovered an understatement of non-cash stock-based compensation expense for our restricted awards that had performance metrics attached to them. The error went back to FY06. Therefore, we had to [re-cash] the expense, and we determined that the misstatement was not material to any of our prior period financial statements.

In accordance with the guidance, we basically revised our prior period financial statements in the Q that we'll be filing and in the press release that you've seen. So it was found during a review of certain things in the accounting and that's [where we] (inaudible).

Okay. Great. And congratulations on the Boston team. I imagine it'll be very -- it'll be an interesting group outing when the Cowboys play the Patriots.

But on a more serious note, maybe you can just give us a little background on the lift-out, just how it came together? What was the process around it? Was this opportunistic? Maybe what was the timing? And should we expect anything in the future on this level?

Well, sure. Well, we're actively looking for ways to grow our business at all times, and we had heard of these guys and heard they were looking for a home. And we thought what they did and what they do bring a completely new set of skills to Westwood. And they're, as I said in my formal remarks, it is a niche asset class. But it's also one to us that's very interesting. It offers low correlation other asset classes, the intellectual challenge of managing global converts is one that we find fun to both think about and to offer to our existing clients.

So we're excited about them. It's four people, so it's a small team. We'll open an office in Boston after the first of the year. They'll be officing here in Dallas until then. And we think we have a pretty good shot of growing those assets over the next few years and we're excited about it.

Great. Thank you very much. Appreciate [it].

(Operator Instructions)

Have any questions?

I'm showing no questions at this time.

Okay. Well, thank you all for taking the time to visit our call today. And if you have any further questions, please follow up with either myself or Tiffany. And we look forward to seeing you again soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.