Westwood Holdings Group Inc (WHG) 2014 Q4 法說會逐字稿

Thank you all for holding and welcome to the Westwood Holdings Group fourth-quarter 2014 earnings conference call.

(Operator Instructions)

I would like now 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.

Thank you. Good afternoon and welcome to our fourth-quarter conference call. I would 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 10-K for the year ended December 31, 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 undo reliance on forward-looking statements.

In addition, in accordance with the 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 the 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 thanks to you, everyone, for taking time to join our call today. We're really pleased to close out another great year, with assets under management of over $20 billion, the addition of a new investment team, and the recent announcement of the expansion of our trust business. Since Westwood's founding nearly 33 years ago, our Company has evolved from a single-product provider into a multi-investment team firm with a diversified stable of investment strategies and business lines.

We maintain a strong institutional product line, a thriving mutual funds group, a dependable private wealth business, and a rapidly growing non-US business. We are able to consistently diminish the impact of downturns and remain on a trajectory of positive growth. This begins with our commitments to expanding both our expertise and investment capabilities, while remaining fully focused on meeting the needs of our existing clients.

The US market environment during the fourth quarter of 2014 was defined by a sharp rise in volatility associated with falling oil prices, the end of quantitative easing, and concerns over the pace of global growth. Despite these factors, Westwood's domestic investment strategies finished 2014 on a strong note, with nearly every strategy posting a gain for the fourth quarter.

Our LargeCap Value strategy had an exceptional fourth quarter, well under the top quartile versus peers and joins AllCap Value, SmallCap Value, and Dividend Growth in the top 40% of their respected peer groups for the year. We were especially pleased with the first year of our performance of our LargeCap Value and AllCap Value Concentrated strategies, which are an expression of our highest conviction ideas and leverage Westwood's expertise in identifying undervalued securities.

Our LargeCap Concentrated strategy gained 19%, outperforming the benchmark by 560 basis points, and ranking in the top 5% of its peer group. The AllCap Concentrated strategy gained 13.5% in 2014, outperforming the index by 89 basis points, and ranking in the top 20% of its peer group. Westwood SMidCap Value strategy experienced a challenging year in terms of relative performance, but the long-term track record remains strong and the portfolio team is actively working to improve performance this year.

Reflecting the market environment during the fourth quarter, Westwood's multi-asset and MLP strategies registered a wide range of absolute returns during the period. Westwood's income opportunity strategy continued to deliver positive returns and a lower volatility profile in a challenging environment, gaining 2% in the fourth quarter, and 10.3% for 2014, ranking in the top 20% of its peer group for the year.

Westwood's MLP strategy was negatively impacted by the sharp sell-off in the energy sector in response to the dramatic decline in crude oil prices, posting a decline of 11.3% for the period compared to a decline of 12.3% for the benchmark. However, the fund still managed to register a positive gain of 8.6% for all of 2014, outperforming the Alerian benchmark by 380 basis points. While we expect commodity prices to remain volatile over the near term, we continue to view MLPs as an attractive investment over the long term.

As we've noted in the past, we expect market volatility to return to a more normal level. Along with rising dispersion and falling correlations among stock prices, we foresee an environment that has historically favored active management. In addition, periods of Fed tightening have been associated with a decline in investor risk tolerance and a greater focus on company fundamentals, such as strong balance sheets, earning visibility, and free cash flow, which is also highly supportive of a fundamental investment management process.

In Toronto, our global and emerging markets equity team was able to hit the ground running at the start of 2014. They focused on integrating new team members and on generating research for the portfolios. The team traveled extensively during the year, meeting with over 550 companies, and most recently visited Europe, South Africa, North Africa, and Eastern Europe. The team's long-term focus on fundamental research really paid off last year as emerging markets registered in the top decile for performance; however, global products underperformed as the portfolios faced continual headwinds from Europe.

With respect to growth in emerging market assets under management, it was notably a successful year for the emerging markets team, with assets increasing 50% year over year to end the year at $3.3 billion. In the fourth quarter, we opened another three accounts on behalf of an existing institutional client, and we expect a large sovereign well fund to begin funding a substantial account early next week.

As we hinted at the beginning of the call, an exciting and promising development for Westwood in 2014 was the official launch of our new global convertible securities team. Offering investment opportunities for clients distinct from those of our US values team and emerging markets team, the addition of the global convertible securities team significantly broadens our capabilities as a multi-investment team firm.

The team came on board in October, at which time we ceded for them two commingled funds within our Westwood trust fund structure. They continue to manage over $400 million on behalf of Aviva in a sub-advisory mandate and they recently received an award in the Relative Value Arbitrage from Mondo Alternative in Italy. We also launched the first UCITS fund for the team in December and are in active discussions about that fund with prospects in Europe.

One of the attractions to Westwood for the global converts team was the platform we have developed within our institutional business, whereby clients can access us through separate accounts, mutual funds, and a commingled fund structure. In line with this, the launch of our UCITS platform in 2013 has enabled us to increase our strategic focus on non-US markets. Our emerging market UCITS fund now has over $800 million in assets, with underlying clients from the UK, The Netherlands, and Canada.

The launch of the strategic global convertible UCITS in the fourth quarter of 2014, as we've just detailed, has put in a strong position to build assets in the platform. We're confident that we will see that particular fund grow as we move throughout the year. The first quarter of 2015 will likely also see the launch of our third UCITS fund, with a Canadian investor having agreed to [cede] it for the Emerging Markets Plus strategy.

From a broader perspective, our institutional business enjoyed strong performance in 2014. We've continued to expand our client base, and our asset base has become more diversified in terms of the strategies our clients have hired us for. In particular, during the year, emerging markets and income opportunity were the strategies where we saw the most significant interest and inflows.

We expect to see continued secular demand, and in fact, have been awarded a number of new emerging market mandates in 2015, including the new sovereign well fund I mentioned earlier. In addition, we have recently had two finals presentations for our income opportunity strategy.

The area of most disappointment for us has been our failure to add significant assets in our SmallCap Value strategy. Our investment team has done a terrific job from a performance perspective and our peer group rankings are strong across all time periods. From a sales perspective, we've added a number of consultant rating approvals for the strategy, and we've seen a significant increase in interest from European investors.

As you will know, many European investors have been [underweight] the US market and the US dollar for some time. We're hopeful that these factors will result in seeing us increase our assets in the SmallCap strategy during 2015.

Shifting our attention to the fourth-quarter mutual fund flows and subadvisory, the Westwood mutual funds netted inflows of $223 million, which proved to be the highest for any quarter in 2014. To give you context, Westwood fund's second highest quarter of net inflows was in the third quarter, which experienced $165 million inflows.

The 2014 net inflows totaled $672 million, representing an organic growth rate of 24%. By the end of the year, the Westwood funds reached a total AUM of $3.7 billion. It's important to note that we've experienced positive annual flows every year since the inception of our funds over a decade ago. Subadvisory mandates continue to be a meaningful part of our business, both in the US, Europe, and Canada, where our partnership with National Bank has reached over $600 million in total assets under management.

Turning to Westwood Trust, our asset growth has been slow, but our prospecting activity has reached new heights, as recently hired trust officers have kept their calendars full with prospective customer meetings. Westwood's Omaha office celebrated its fourth anniversary with WHG, serving the trustee and investment needs of wealthy individuals, families, and businesses in Nebraska and beyond.

The Westwood name is becoming widely recognized in the marketplace among investors and professionals who can refer business to the Omaha office. The Westwood Trust Omaha team is driven to exceed client expectations at every level and our clients have benefited from an increased level of fiduciary oversight and expanded investment capabilities, and enhanced also by help from the Dallas Westwood team.

As we continue to grow our institutional and mutual fund efforts, we are always looking to grow our private wealth management business, as well. In that vein, we were pleased to announced a definitive to acquire Woodway Financial Advisors, the premier private wealth management company in Houston, Texas. Woodway has $1.6 billion in assets under management and 27 employees.

On January 16, we released an 8-K, which includes the details of the transaction, which we expect to close in the first quarter of 2015. As the agreement with Woodway delivers on a strategic aim that we've talked about on numerous previous calls, you can imagine that we're very excited about the potential of this transaction. According to a recent study by RBC, Houston is the second fastest-growing population of high-net-worth individuals within the 12 largest metropolitan areas in the United States.

Acquisition opportunities in the private wealth business that meet our criteria for purchase are few and far between. They have a long lead time to develop into a merger stage, and we will work diligently over the next year to integrate Woodway into our Company, while also continuing our efforts to further expand the Westwood Trust footprint with intelligent acquisitions and dynamic wealth management markets as they arise.

As a final and very meaningful note to us at Westwood concerning 2014, we are deeply honored to be recognized for the strength of our Company's culture and the active role we play within our community. Westwood was awarded first place for best places to work among companies of our size by Pensions and Investments [Age], our industry's leading trade magazine.

The award recognizes those companies who most exhibit an alignment of interest across their people and who also make a significant contribution to society. The award is particularly meaningful as it is voted on anonymously in surveys of employees across the industry.

In addition, we were recognized as the Dallas Corporate Citizen of the Year in the SMidCap category for our contributions to the surrounding community. Thanks as always for your support and your interest in Westwood. I will now turn the call over to our CFO, Tiffany Kice, and I will be available for questions at the conclusion of her remarks.

Thanks, Brian, and good afternoon, everyone. For the fourth quarter of 2014, we are reporting total revenues of $28.3 million, net income of $6 million and diluted earnings per share of $0.77. Economic earnings, a non-GAAP metric, was $9.7 million, or $1.24 per share. Assets under management increased to a record $20.3 billion at quarter end with positive inflows during the quarter.

Total revenues were up 12%, or $3 million, from the same period in 2013, with advisory fees up 15%, or $3.1 million, and trust fees up 3%, or $0.2 million. Diluted earnings per share of $0.77 and economic earnings per share of $1.24, were up 3% and 4% from the prior year, respectively.

For FY14, total revenues were $113.2 million, up 23%, or $21.4 million from 2013. Net income increased 53% to $27.2 million, compared to $17.8 million in 2013. Economic earnings increased 38% to $41.4 million compared to $30 million in 2013. Diluted earnings per share of $3.45 and economic earnings per share of $5.24 were up 49% and 34% respectively from the prior year, demonstrating strong operating leverage through the increase in revenues.

Firm-wide assets under management of $20.3 billion consisted of institutional assets of $12.5 billion, or 62% of the total; private wealth assets of $4.1 billion, of 20% of the total; and mutual fund assets of $3.7 billion, or 18% of the total. Included in these amounts are Westwood International strategies of $3.3 billion, a 34% increase from the prior year. 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, with cash and investments at year end of $98 million, up $22 million from fiscal year end 2013 and a debt-free balance sheet. This has given us the flexibility to opportunistically expand our private wealth platform via the Woodway acquisition into a market that's very strategic to us.

Our Board of Directors approved a quarterly cash dividend of $0.50 per share, payable on April 1, 2015, to stockholders of record on March 13, 2015. This represents an annualized dividend yield of 3.3% at yesterday's closing price. We encourage you to review the presentation we've posted on our website, reflecting fourth-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. If anybody has any questions, you can let the operator know.

(Operator Instructions)

John Fox, Fenimore Asset Management.

Hello, everyone.

Hi, John.

Congratulations on a great year and on the local awards. That sounds terrific. I just had a couple of minor questions. The Global Convertible product, which was [$500 million] when you announced it, number one, where is that reported? I assume it's in institutional, but if you could just confirm that? And how is that doing, in terms of growing at this point?

Sure. The assets were not included because we have not finished the sub-delegation agreement, but they will be at some point here soon. The growth of the assets is like you would expect with any new product. You have the challenge of the chicken-and-egg problem where you've got to get to $100 million before people want to put a lot of money in there.

One of the things we've just approved in our UCITS structure is a founder's share class, whereby for the first group of prospects that sign up, they will receive a reduced fee to incentivize them to participate. Our group was just in Europe a week and a half ago. They spent a week doing meetings. They've got several prospects that look promising and I would expect we'll see some funds coming in to that fund pretty soon.

Okay. So just to confirm, there's nothing in there today in your $20 billion AUM for that product at all?

That's correct.

Okay. Do you have the sales and redemptions by the three segments like you normally have in the Qs or do I have to wait for the K?

Yes, you'll have to wait for the K. Sorry, John. I know it's exciting reading.

It is. I was anxious, but okay. Do you have employee headcount at the end of the year?

130.

Okay. Thank you.

Thank you, John. We appreciate your support.

Mac Sykes, Gabelli.

Good afternoon, gentlemen. I'd echo John's comments about the great year. Congrats on the Woodway announcement.

Thanks, Mac.

In terms of that announcement in the headlines, that would [reverberate] through the Trust business. Does that deal accelerate the potential for other transactions or do you feel that you're going to be more focused on the integrations and organic goals internally?

I think it will accelerate interest from others who might want to talk to us. This transaction is one that took place after many years of talking to the folks at Woodway. We first met them over a decade ago. Just like you're prospecting for new institutional accounts, we're always prospecting for great companies that might want to be a part of us.

In this case, it just all came together in a way that made sense for everybody and we decided to move forward. We've got lots of those prospects that we've talked to over the years. If nothing else, it shows that we're very serious about it. We're very selective. It's important that any of these acquisition opportunities meet our criteria. Culturally, they have to be a good fit, and we expect them to be just that, in terms of Woodway.

My follow-up, you've certainly generated significant growth the last year. Can you highlight any specific areas where you plan to increase headcount, and given all the geographic changes, are there any places where you don't necessarily feel you have the right resources in place?

We have worked really hard the last couple of years to build out the sales part of our business. We have opportunistically added investment talent where we felt like they could help us. So we've added both -- in terms of talent, on the investment side, we've added both veteran analysts, as well as additions to our research associate program, which I've talked about in previous calls, where we hire kids directly out of school. We hire some of the best and brightest. We've put them through the CFA program. We pair them with senior analysts and they work over a period of many years to develop into an analyst.

But beyond that, with the addition of all the sales folks that we've hired, really the next phase is to build the marketing support behind the sales people. You hire a lot of sales people, they need brochures, they need thought leadership pieces, they need information to take out to the market. So that's really another area that we're going to start to add people is in the marketing support area. Tiffany, you may comment on a couple of other areas where we've got some open positions but from my perspective those are the two most important.

I would agree with Brian. We're building out our infrastructure, as well, so there's certain positions that are open and available there that we're expanding on.

And then on the sovereign wealth mandate that you mentioned, congratulations on that, by the way.

Thank you.

Should we think of this as of a one-time allocation or the potential for additional allocations over time and also the potential for other products in the platform? Maybe a little more color on that would be great. Thank you.

Sure. I would expect this to be funded over a period of months. It will go into our Emerging Markets Plus strategy. It is one of the premier sovereign wealth funds. While they're interested in that strategy, as with all our institutional customers, we hope to introduce them to other strategies that they might benefit from.

Great. Thank you. And really nice quarter, gentlemen.

Thank you, Mac. Appreciate it.

(Operator instructions)

Robert Mitchell, Conestoga Capital Advisors.

Good afternoon.

Hi, Bob.

How are you doing?

Good, how are you.

Good. Great year, again. It's good to be the third questioner on the call, but wanted to ask you about the expenses in terms of, particularly, fourth quarter, year over year. It looks like there's been a little bit of a step-up in terms of some of the expenses, particularly at the professional services line -- you mentioned your investment in sales and marketing, so that adds some color to that. But maybe just talk a little bit about the increase in expenses. Were there any one-time items in the quarter or how should we think about that going forward?

Yes, the professional service line is probably the biggest one that you're looking at. It's got a lot of legal costs for the Woodway acquisitions that are in that. Those I would consider one-time type costs. The Boston team came onboard in the last quarter, obviously, so there was a lift there from that. We hired a number of new people in the last quarter and the onboarding cost, as well, for bringing on the Boston team, certain research tools, software licenses, that kind of thing.

Okay. Thank you.

(Operator Instructions)

I'm showing no further questions on the phone lines at this time.

Very good. If you have any additional questions, please call us directly, either Tiffany or myself. Visit our website at westwoodgroup.com and thanks again for being a shareholder. We appreciate your interest in Westwood.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.