Westwood Holdings Group Inc (WHG) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Westwood Holdings Group, Inc., First Quarter 2015 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mrs. Sylvia Fry, Senior Vice President, Chief Compliance Officer. Ma'am, you begin.

Thank you. Good afternoon and welcome to our first quarter 2015 conference call. I would like to start by reading our forward-looking statement 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 in our annual report on Form 10-K for the year ended December 31, 2014, 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 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 good afternoon, everyone. Thanks for taking time today to join our call.

At Westwood, we've always placed a central emphasis on investment performance, putting our clients' interests ahead of our own, and managing the business in a shareholder-friendly way. The first quarter of 2015 is another reminder that this formula works well. We will discuss the drivers of our strong performance in more detail as we go through the call, but I wanted to start by highlighting what we view as the most significant developments.

Revenues increased 14% to $29.6 million compared to the same period last year. Assets under management, or AUM, reached a record level of $21.7 billion with positive net inflows of $1.1 billion for the quarter. This record AUM number does not include over $2 billion in AUM. Notably, the approximately $1.6 billion from the Woodway acquisition, which will be included in the AUM next quarter, and approximately $479 million of assets under advisement where we do not have full discretion.

Net inflows into the Westwood Funds mutual funds were $456 million, or an organic growth rate of over 12% during the quarter. Mutual funds now account for approximately 20% of our overall AUM.

We achieved further diversification in AUM by investment strategy with five strategies individually having assets in excess of $1 billion.

The Westwood Global and Emerging Markets team now manages AUM in excess of $4.5 billion in less than three years since joining Westwood. Non-US clients now represent approximately 20% of AUM compared to 3% in 2009.

Turning our focus to our investment teams, Westwood's US Value Strategies got off to a great start in the first quarter. Despite the numerous challenges of a sharply higher US dollar, lower crude oil prices and concerns over the pace of economic activity, and the near-term outlook for corporate earnings growth. With such a significant degree of uncertainty, it's not surprising that investors showed a preference for Westwood type companies that exhibit solid balance sheets, high-quality earnings, and long-term sustainability.

As we saw in the second half of 2014, rising dispersion and falling correlations among equity prices continue to support active management, and we anticipate that investors will continue to favor high-caliber businesses.

Because our domestic strategies are driven by our bottom-up fundamental research process, each product posted a positive absolute return and relative out-performance as every equity strategy outperformed its benchmark with many strategies ranking in the top quartile of their respective peer groups for the quarter.

Our LargeCap Value Strategy continued its recent run of strong performance, outperforming the Russell 1000 Value Index by over 230 basis points and ranking in the top quartile of the peer group. Our LargeCap Concentrated product, which is now over a year old, outperformed its benchmark by over 600 basis points.

Westwood's AllCap Value and Dividend Growth Strategies also performed very well, ranking in the top quintile for the quarter. AllCap Concentrated, also now over a year old, outperformed its benchmark by over 450 basis points. We believe these concentrated strategies position us well longer term, as there has been a move by many investors globally to higher conviction mandates.

We were also pleased with the improved performance of our SMidCap Value Team, which delivered nearly 200 basis points of outperformance and ranked in the top third of managers for the quarter. Our SMidCap Plus product had an even stronger quarter outperforming the Russell MidCap Value Index by 360 basis points ranking in the top decile for the period.

Westwood's Specialized Strategies also performed well during the period. Our MLP infrastructure renewal strategy reflecting the challenging environment in the energy sector declined 3.2% but outperformed its benchmark by 200 basis points. Despite recent volatility, we continue to view the MLP asset class as an attractive long-term opportunity.

Our income opportunity strategy delivered another quarter of positive returns with a lower volatility profile and a gain of 0.7% for the period.

The first quarter is usually a busy one for the Global and Emerging Markets team, and this year was no exception. The team logged significant travel miles with research visits to countries including Germany, Hong Kong, South Korea, Thailand, Indonesia, the Philippines, and India.

Shifting to the team's portfolios, the EM mandates experienced positive returns though slightly trailing benchmarks. The underperformance was driven in part by local currency depreciation in some emerging market countries relative to the strengthening US dollar.

We've been encouraged by recent performance in our global strategies with both Global Equity and Global Dividend Mandates outperforming their indexes in the first quarter led by strong bottom-up stock selection. The team holds a constructive view on the global economy, although the anticipation surrounding the Fed beginning to normalize its monetary policy will likely set the stage for continued market volatility.

We believe the team's focus on bottom-up long term investing in quality companies with a history of value creation for shareholders will hold it in good stead as long as the environment persists.

Moving on to our Global Convertibles team, the long-only strategic Global Convertible Strategy had a strong start to 2015, outperforming its benchmark by 200 basis points in the first quarter. We believe the team's global focus offers a broad opportunity set and positions our clients to benefit from the asset classes' asymmetrical return profile. Over time, the asset class benefits from being able to manage volatility through the hybrid nature of a convertible bond. In addition, convertibles tend to perform well during rising interest rate environments given the low duration of the asset class.

We believe both factors should result in strong risk-adjusted returns and client interest, especially given the likely economic and market environments we will face, moving forward.

Our Boston office is now up and running. In addition to housing our Global Convertibles team, this location positions us well to potentially tap into the high talent pool in the area.

Turning our attention to our sales efforts, the first quarter represented a positive start to 2015 for our institutional team with gross and net sales being well over $1 billion. On the last earnings call we discussed our expectation that we'd soon be funded by a large mandate from a well-known sovereign wealth fund. This occurred with tranches invested during February and March and has helped take assets in our Emerging Markets Plus Strategy to over $1 billion.

We also discussed our plans to launch a UCITS sub-fund for the Emerging Markets Plus Strategy that would be seeded by a Canadian institutional investor. This launch took place on April 23rd. We now have three sub-funds, 11 clients, and just understand $1 billion within our UCITS umbrella.

On the same theme of emerging markets, we've been encouraged by the expanded adoption of our approach among US investment consultants. This was particularly evident as we benefited from netflows of nearly $200 million into our Emerging Markets Mutual Fund.

We have also continued to see significant interest in our income opportunity strategy. Multi-asset investing is an area of growth for the asset management industry, and we've positioned ourselves well to benefit from this trend. As part of this and in response to requests from clients in the investment consultant community, we launched a global version of the income opportunity strategy in the first quarter, which will leverage all of Westwood's Global Research capabilities.

Initially launched as a comingled fund within Westwood Trust, we will more formally bring the strategy to the market during the coming months, including the launch of the Worldwide Income Opportunity Mutual Fund later this week.

The appetite for our SmallCap Strategy has continued to pick up. We achieved a number of small wins in the first quarter and have several late-stage prospects in the pipeline. Many of these opportunities will be decided over the next few quarters, and we're confident that assets in the strategy will see meaningful growth during the remainder of the year.

Concerning our [Strategic] Global Convertible Strategy, we gained our first external client in first quarter and have already added a second in the second quarter. We continue active discussions with interested parties and hope to see further adoption as we move through the year.

Mutual fund assets were a record $4.2 billion as of March 31, 2015, up from $3.7 billion at the end of 2014. And as I mentioned at the beginning of the call, now account for close to 20% of total firm assets under management.

While the Income Opportunity Fund has continued to be the area of most significant growth, we have also been encouraged by a significant increase in assets in our Emerging Market Strategy with significant netflows during the first quarter of the year.

Three of our 12 funds now have over $250 million in assets, and seven of our funds have assets over $100 million. We continue to invest in our mutual fund business and plan to launch three new funds on May 1st. These include Worldwide Income Opportunity, the global version of our very successful Income Opportunity Strategy we discussed earlier, and we will also launch two funds from our Global Convertible Securities team.

Strategic Global Convertibles, which is a long-only strategy, and Market Neutral Income, which is an absolute return-focused convertible strategy, which combines an income component with a convertible arbitrage component.

As for sub-advisory, we did experience negative flows of approximately $300 million within our sub-advisory client base. This was primarily driven by a reduction in equity exposure within a target date fund where we manage a portion of those assets.

As I mentioned at the beginning of the call, we signed a definitive agreement to acquire Woodway Financial Advisors in Houston, Texas, during the first quarter, but we closed the transaction in the second quarter on April the 1st. For years we've been looking for the perfect partner to expand the Westwood Trust platform in the dynamic Houston market, and we are truly thrilled to now have Woodway as part of our family. Now known as Woodway Financial Advisors, a Westwood Trust company, Woodway is the premier private wealth management company in Houston.

They manage $1.6 billion in client assets with a team of 26 employees. Key principals have all signed employment agreements to ensure continuity of client service, and we look forward to working together in the years ahead to enhance the client experience and grow our Houston presence.

With the acquisition, we now manage close to $5 billion in private wealth assets and have three offices operating under the Westwood Trust banner -- the original Dallas headquarters, Omaha, and Houston. We are very pleased with the continued expansion of our private wealth business and that talented people from outside the firm have chosen to join our company and grow with us into the future.

Taking a look at first quarter performance, AUM at Westwood Trust declined slightly. This was primarily driven by two large accounts at Westwood Trust, transitioning to separate accounts at Westwood Management. So the majority of the assets remained within the firm.

New business development activity at Westwood Trust has been strong in the first quarter with 14 new relationships and more than $72 million in new assets. Prospect and client meeting activity levels remain robust as trust officers hired in 2014 continue to increase our brand awareness in the market.

In closing, I want to report that in addition to reaffirming our directors and auditors, the proposal for additional stock for our employee stock incentive plan was approved today at our annual shareholders' meeting. We appreciate the vote of confidence from our fellow shareholders supporting our culture of employee ownership. We promise to be good stewards of the capital you've entrusted with us. We thank you for your continued interest in Westwood and especially to those of you who have invested with us as a client or shareholder.

I'll now turn it over to Tiffany Kice, our CFO.

Thanks, Brian, and good afternoon, everyone. For the first quarter of 2015 we are reporting total revenues of $29.6 million, up 14%, or $3.7 million from the same period in 2014 with advisory fees up 17%, or $3.5 million. Net income of $5.6 million was flat with the first quarter of 2014, diluted earnings per share of $0.71 declined slightly from $0.72 in the same period of 2014.

Net income included $500,000 of Woodway transaction costs, net of tax, which negatively impacted diluted earnings per share by approximately $0.06.

Economic earnings on a non-GAAP metric was $9.4 million, or $1.20 per share as compared to $9.2 million, or $1.18 per share in the first quarter of 2014. Economic earnings included $500, 000 of Woodway transaction costs net of tax, which negatively impacted economic earnings per share by approximately $0.06 as well.

Firm-wide assets under management increased to a record $21.7 billion with positive quarterly net inflows of $1.1 billion and consisted of institutional assets of $13.5 billion, or 62% of the total. Private wealth assets of $4 billion or 19% of the total, and mutual fund assets of $4.2 billion or 19% of the total.

Included in these amounts are Westwood Global and Emerging Market Strategies of $4.6 billion, a 38% increase from year-end.

Net inflows for the quarter were concentrated principally in our Emerging Markets and Income Opportunity Strategies while our LargeCap Strategy experienced outflows.

Our balance sheet continues to be very solid with cash and investments at year-end of $84 million and a debt-free balance sheet. This has given us flexibility to opportunistically expand private wealth platform via the Woodway acquisition, which closed on April 1st. We will begin to report Woodway's financial results and AUM and consolidated results and firmwide AUM in the second quarter.

Our Board of Directors approved a quarterly cash dividend of $0.50 per share payable on July 1, 2015, to stockholders of record on June 12, 2015. This represents an annualized dividend yield of 3.2% at yesterday's closing price.

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

I'll now turn the call back over to Brian to conclude.

Thanks, Tiffany. If anybody has any questions I'll be happy to answer them now.

(Operator Instructions) Mac Sykes, Gabelli.

Good afternoon, Brian and Tiffany.

Hi, Mac.

Hi.

Just two quick questions and then one more [thematic] question. The tax rate, I saw, dipped to 33%. How should we think about that on a normalized rate, going forward?

That's pretty much what we expect from an effective tax rate for the year. You'll see that it's starting to dip because our taxes in Canada are lower than our taxes here in the US, and as the earnings go up and our international advisor entity up in Canada, then that tax rate will just slightly start to decrease from what you've seen in the past.

And for the Woodway close, I think you issued some stock. Could you just remind me of the amount?

She's looking. Go to your next question, and we'll be looking for that.

Thank you, Brian, thank you. I guess you highlighted the Global Opportunity, you have the convertibles and then, of course, Income Opportunity. Maybe you could just rank the three at this point in terms of greatest opportunity over the next couple of quarters in terms of where you think flows might come.

Well, as you know, that question in the past is a tough one to gauge. But, yes, just in terms of appetite right now, appetite continues to be strong for EM. We had a huge win that funded in the first quarter in our EM Plus Strategy, which takes that over $1 billion. The pipeline is still very strong there.

SmallCap is an area that has picked up considerably for us. We have reached that critical stage of $0.5 billion under management where larger institutions can begin to consider giving us (inaudible) sized mandates. So I feel really good about SmallCap.

Worldwide Income Opportunity will be interesting to watch. It is designed to be a global version of an already highly successful existing strategy. How investors will react to that is -- I think it's just too early to tell. I could tell you that from meetings that I've done over the last several years, the questions have been consistently when are you going to come out with a global version of the strategy?

So I think the take will be good but you just never know.

Going back to your question, we issued 109,712 shares of Westwood common stock of that transaction.

I'm sorry, one just follow-up -- these three new products that you're launching on May 1st, should we think about the fee rate on those being in line or above or below the current mutual fund rate?

They are mutual funds, so they are stated in the prospectus and I would say, as with most mutual funds, the stated management fee is a really good fee. Obviously, in the early years until you attract assets, you don't get to realize that fee. So we'll just have to see what the takeup is on the flows and we've got some seed money that we're putting in as a company, we've got some seed money from our trust company investors, but we'll just have to see what transpires. But we're certainly excited about it. This will take our mutual fund product line up to 15 different funds and give our guys a real wide array of products to talk to investors about.

Thank you. I'll get back in the queue.

Thanks, Mac.

Thank you. (Operator Instructions) And at this time, I am showing there are no further participants in the queue. I would like to turn the call back to management for any closing remarks.

Okay, great. Well, once again, I want to thank everybody for their support of Westwood and especially for those of you I've talked to in the last few months as we've given you an update on the business. It was great to see you, and I appreciate very much your being a shareholder. If you have any questions, feel free to give us a call or go to our website, WestwoodGroup.com. Thanks again.

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